<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 2000
REGISTRATION NO. 333-22681
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SEQUOIA MORTGAGE FUNDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 91-1771827
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
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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. [ ]
------------------------
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.
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<PAGE> 2
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY , 2000)
$
[LOGO] SEQUOIA MORTGAGE TRUST
BOND ISSUER
Consider carefully the
risk factors beginning on
page S-8 of this
prospectus supplement
which include:
- Yield, Prepayment and
Maturity Risks;
- Cash Flow
Considerations;
- Limited Recourse;
- Bankruptcy and
Insolvency Risks;
- Risks associated with
Book-Entry Bonds; and
- Limited Liquidity of
Investments.
The Bonds are redeemable
only under circumstances
described in this
prospectus supplement.
The Bonds represent
obligations of the Trust
only and do not represent
an interest in or
obligation of the Bond
Issuer, Sequoia Mortgage
Funding Corporation or any
of their affiliates.
Bonds of each Series will be characterized for federal income tax purposes as
debt instruments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Collateralized Mortgage Bonds
$ Class A-1 Bonds
$ Class B-1 Bonds
THE BOND ISSUER WILL ISSUE:
- - One class of senior A-1 Bonds; and
- - Two classes of subordinated Class B Bonds: Class B-1 and Class B-2.
- - Only the Class A-1 and Class B-1 Bonds are offered by this prospectus
supplement.
THE BONDS:
- - Will be collateralized by primarily year, [fixed, adjustable] rate,
conventional mortgage loans secured by first liens on one- to four-family
residential properties;
- - Pay all holders of Bonds the amounts of principal and interest due thereon on
the th day of each month, or if such day is not a business day, the next
succeeding business day, commencing on , 200 . Interest
payments are described more fully under the heading "Description of the
Bonds-Interest" in this prospectus supplement; and
- - Pay the holders of Subordinated Bonds payments of interest and principal
solely from the collateral pledged to secure the Bonds as described more fully
under the heading "Description of Bonds-Priority of Payments and Allocation of
Shortfalls" in this prospectus supplement.
S-1
<PAGE> 3
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We tell you about the bonds in two separate documents that progressively
provide more detail: (1) the accompanying prospectus, which provides general
information, some of which may not apply to your series of bonds, and (2) this
prospectus supplement, which describes the specific terms of your series of
bonds and may be different from the information in the prospectus.
IF THE TERMS OF YOUR SERIES OF BONDS AND ANY OTHER INFORMATION CONTAINED
HEREIN VARY BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,
YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under "Index of Certain Definitions" beginning
on page S-37 in this prospectus supplement.
The underwriter may engage in transactions that stabilize, maintain, or in
some way affect the price of the bonds. These types of transactions may include
stabilizing the purchase of bonds to cover syndicate short positions and the
imposition of penalty bids. For a description of these activities, please read
the section entitled "Underwriting" in this prospectus supplement.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Incorporation of Certain Documents by Reference............. S-2
Available Information....................................... S-2
Summary..................................................... S-4
Risk Factors................................................ S-8
The Issuer.................................................. S-10
Description of the Bonds.................................... S-10
Credit Enhancement.......................................... S-22
Security for the Bonds...................................... S-22
Servicing of the Pledged Mortgages.......................... S-31
Use of Proceeds............................................. S-34
Federal Income Tax Consequences............................. S-34
ERISA Matters............................................... S-34
Method of Distribution...................................... S-35
Legal Matters............................................... S-36
Ratings..................................................... S-36
Index of Certain Definitions................................ S-37
</TABLE>
S-2
<PAGE> 4
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, proxy statements and other information. You can read and copy
these documents at the public reference facility maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can
also copy and inspect such reports, proxy statements and other information at
the following regional offices of the SEC:
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<S> <C>
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. SEC filings are also available to the public on the SEC's web
site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information that we incorporate by
reference is considered to be part of this prospectus supplement, and later
information that we file with the SEC will automatically update and supersede
this information.
This prospectus supplement and the accompanying prospectus are part of a
registration statement filed by the Depositor with the SEC (Registration No.
333-22681). You may request a free copy of any of the above filings by writing
or calling:
SEQUOIA MORTGAGE FUNDING CORPORATION
591 REDWOOD HIGHWAY, SUITE 3120
MILL VALLEY, CA 94941
(415) 389-7373
You should rely only on the information provided in this prospectus
supplement or the accompanying prospectus or incorporated by reference herein.
We have not authorized anyone else to provide you with different information.
You should not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus or that
the information incorporated by reference herein is accurate as of any date
other than the date stated therein.
S-3
<PAGE> 5
SUMMARY
This summary highlights selected information from this prospectus
supplement and does not contain all the information that you need to consider in
making your investment decision. Please read this entire prospectus supplement
and the accompanying prospectus carefully for additional information about the
Offered Bonds.
OFFERED BONDS
Sequoia Mortgage Trust , collateralized mortgage bonds,
Class A-1 Bonds and Class B-1 Bonds are the bonds being offered in this
prospectus supplement.
SECURITIES OTHER THAN THE OFFERED BONDS
The Class B-2 Bonds and the investor certificate will be issued, but are
not offered by this prospectus supplement. The Class B-2 Bonds and the investor
certificate will provide limited credit support for the offered bonds.
We refer you to "--" in this prospectus supplement for more detail.
DESIGNATIONS
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<S> <C>
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
</TABLE>
BOND ISSUER
The Bond 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 in this prospectus supplement, 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 "Depositor" or the "Company"), and a wholly owned subsidiary of
Redwood Trust, Inc., a Maryland corporation ("Redwood Trust"). Redwood Trust
will be the manager of the issuer pursuant to a management agreement
("Management Agreement") entered into with the issuer. None of the Depositor,
Redwood Trust or the Bond Trustee has guaranteed or is otherwise obligated with
respect to payment of the bonds, and no other person or entity other than the
issuer is obligated to pay the bonds.
BOND TRUSTEE
, a banking corporation organized under the laws of
.
OWNER TRUSTEE
, a banking company organized under the laws of the state of
Delaware.
MASTER SERVICING AGREEMENT
The pledged mortgages will be serviced pursuant to a Master Servicing
Agreement dated as of , 200 ,among the issuer, the master
servicer and the bond trustee
MASTER SERVICER
will act as master servicer for the pledged mortgages.
We refer you to "Servicing of the Pledged Mortgages" in this prospectus
supplement for more detail.
DEPOSIT TRUST AGREEMENT
The Deposit Trust Agreement dated as of , 200 , among the
depositor and the owner trustee.
INDENTURE
The bonds and the investor certificate will be issued pursuant to an
indenture dated as of , 200 , among the issuer and the bond
trustee.
CUT-OFF DATE
, 200 .
S-4
<PAGE> 6
CLOSING DATE
On or about , 200 .
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
next business day thereafter, commencing in , 200 . Payments on each
payment date will be made to bondholders of record as of the related record
date, except that 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 last business day preceding a payment date unless the bonds are no
longer book-entry bonds in which case the record date is the last business day
of the month preceding the month of a payment date.
PRIORITY OF PAYMENTS
Payments will be made on the payment date in the following order of
priority:
1. To interest on the senior bonds;
2. To principal of the senior bonds;
3. To interest on the Class B-1 Bonds;
4. To principal of the Class B-1 Bonds;
5. To interest on the Class B-2 Bonds;
6. To principal of the Class B-2 Bonds;
7. To interest on the investor certificate;
8. To principal of the investor certificate; and
9. To the holder of the investor certificate, all remaining funds.
We refer you to "Description of the Bonds -- Priority of Payments and
Allocation of Shortfalls" in this prospectus supplement and in the prospectus
for more information.
PAYMENTS OF INTEREST
To the extent funds are available, each class of bonds will be entitled to
receive interest in the amount of the interest payment amount. The interest
accrual period for each class of bonds will be the calendar month preceding the
month of the respective payment date.
We refer you to "Description of the Bonds -- Interest" in this prospectus
supplement and in the prospectus for more information.
PAYMENTS OF PRINCIPAL
To the extent funds are available, principal payments in reduction of the
class principal amount of each class of bonds will be made on each payment date.
We refer you to "Description of the Bonds -- Principal" in this prospectus
supplement and in the prospectus for more information.
STATED MATURITY
The stated maturity for each class of bonds is the date determined by the
Depositor which is years after the payment date immediately following the last
maturity date of any pledged mortgage.
We refer you to "Description of the Bonds -- Stated Maturity" and
"-- Weighted Average Lives of the Offered Bonds" in this prospectus supplement
and in the prospectus for more information.
OPTIONAL REDEMPTION OF THE BONDS
The bonds may be redeemed at a redemption price equal to 100% of the unpaid
principal amount of such bonds, plus accrued and unpaid interest thereon at the
applicable bond interest rate. The bonds are not otherwise subject to redemption
or call at the option of the issuer nor are they subject to special redemption.
We refer you to "Description of the Bonds -- Optional Redemption at the
Option of the Issuer" in this prospectus supplement and in the prospectus for
more information.
CREDIT ENHANCEMENT SUBORDINATION
The subordinated bonds and the investor certificate will provide credit
enhancement for the senior
S-5
<PAGE> 7
bonds. The Class B-2 Bonds and the investor certificate will provide credit
enhancement for the Class B-1 Bonds. The investor certificate will provide
credit enhancement for the Class B-2 Bonds.
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 further
subordinated to such rights 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.
We refer you to "Description of the Bonds -- Priority of Payments and
Allocation of Shortfalls" and "Credit Enhancement" in this prospectus supplement
and in the prospectus for more information.
ADVANCES
The master servicer is obligated to make advances of cash which will be
included with mortgage collections, in an amount equal to the delinquent monthly
payments due on the immediately preceding monthly payment date. The master
servicer is under no obligation to make advances to the extent it determines
such advances are not recoverable from future payments or collections on the
related mortgage loans or to guarantee or insure against losses.
We refer you to "Servicing of the Pledged Mortgages" in this prospectus
supplement and in the prospectus for more information.
SECURITY FOR THE BONDS
The bonds will be secured by collateral consisting of the following:
- pledged mortgages;
- bond account;
- distribution account; or
- any combination of the above.
We refer you to "Security for the Bonds--the Pledged Mortgages",
"Description of the Bonds--Payments on Pledged Mortgages; Accounts", and
"Servicing of the Pledged Mortgages".
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 nonexempt
bondholders.
We refer you to "Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus for more information.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended, or section 4975 of the Internal Revenue
Code of 1986, as amended, should carefully review with its legal advisors
whether the purchase or holding of Class A Bonds could give rise to a
transaction prohibited or not otherwise permissible under applicable law.
We refer you to "ERISA Considerations" in this prospectus supplement and in
the prospectus for more information.
LEGAL INVESTMENT
So long as the Class A Bonds are rated in one of the two highest ratings
categories by at least one nationally recognized statistical rating agency, the
Class A Bonds will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA").
We refer you to "Legal Investment" in this prospectus supplement and in the
prospectus for more information.
BOND RATING
It is a condition to the issuance of the Class A Bonds that the Class A
Bonds be rated "AAAr" by Standard & Poor's Ratings Services and "Aaa" by Moody's
Investors Service, Inc. Standard & Poor's assigns the additional symbol of "r"
to highlight classes of securities that Standard & Poor's believes may
experience high volatility or high variability in expected returns due to
non-credit risks; however, the absence of an "r" symbol should not be taken as
an indication that a class will exhibit volatility or variability in total
return.
S-6
<PAGE> 8
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
agency. A security rating does not address the frequency of prepayments on the
mortgage loans or the corresponding effect on yield to investors.
We refer you to "Bond Rating" in this prospectus supplement and in the
prospectus for more information.
USE OF PROCEEDS
The issuer intends to distribute all of the net proceeds of the issuance of
the bonds to the Depositor which will apply such proceeds to the purchase of the
pledged mortgages.
We refer you to "Method of Payment" in this prospectus supplement and in
the prospectus for more information.
S-7
<PAGE> 9
RISK FACTORS
INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE
PURCHASE OF BONDS. YOU SHOULD ALSO CONSIDER THE RISK FACTORS DESCRIBED IN THE
ACCOMPANYING PROSPECTUS.
PREPAYMENTS ARE UNPREDICTABLE AND AFFECT YIELD
The rate of principal distributions and yield to maturity on the bonds will
be directly related to the rate of principal payments on the trust assets. For
example, the rate of principal payments on the loans will be affected by the
following:
- the amortization schedules of the loans;
- the rate of principal prepayments, including partial prepayments and
prepayments resulting from refinancing, by borrowers;
- liquidations of defaulted loans by the master servicer; and
- repurchases of loans by the seller as a result of defective documentation
or breaches of representations and warranties.
The rate of principal payments on loans is influenced by a variety of
economic, geographic, social and other factors. For example, if interest rates
for similar loans fall below the interest rates on the loans, the rate of
prepayment would generally be expected to increase. Conversely, if interest
rates on similar loans rise above the interest rates on the loans, the rate of
prepayment would generally be expected to decrease. We cannot predict the rate
at which borrowers will repay their loans. Please consider the following:
- If you are purchasing a bond at a discount, in particular, a
principal-only bond, your yield may be lower than expected if principal
payments on the loans occur at a slower rate than you expected;
- If you are purchasing a bond at a premium, in particular, an
interest-only bond, your yield may be lower than expected if principal
payments on the loans occur at a faster rate than you expected and you
could lose your initial investment; and
- The earlier a payment of principal occurs, the greater the impact on your
yield. For example, if you purchase a bond at a premium, although the
average rate of principal payments is consistent with your expectations,
if the rate of principal payments occurs initially at a rate higher than
expected, which would adversely impact your yield, a subsequent reduction
in the rate of principal payments will not offset any adverse yield
effect.
We refer you to "Security for the Bonds -- the Pledged Mortgages" in this
prospectus supplement for more detail.
CASH FLOW CONSIDERATIONS AND RISKS
The mortgaged property assets of the trust are the sole source of
distributions for the bonds. Even if the mortgaged properties provide adequate
security for the pledged mortgages, you could encounter substantial delays in
connection with the liquidation of pledged mortgages that are delinquent. This
could result in shortfalls in payments on the bonds if the credit enhancement
created by the overcollateralization of the bonds is insufficient and if
payments under the bond insurance policy were unavailable. 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 bondholders. If any of the mortgaged
properties fail to provide adequate security for the related pledged mortgages,
bondholders could experience a loss if the credit enhancement created by the
overcollateralization of the bonds has been exhausted and if payments under the
bond insurance policy were unavailable.
S-8
<PAGE> 10
YOU WILL HAVE LIMITED RECOURSE
The assets of the trust are the sole source of distributions for the bonds.
The bonds represent obligations solely of the issuer and neither the bonds nor
the trust assets will be guaranteed by or insured by any governmental agency or
instrumentality, the sponsor, the seller, the master servicer, the trustee or
any of their affiliates, unless otherwise specified. Consequently, if payments
on the trust assets are insufficient to make all payments required on the
certificates you may incur a loss on your investment.
CONCENTRATION OF PLEDGED MORTGAGES COULD ADVERSELY AFFECT YOUR INVESTMENT
Most of the pledged mortgages are secured by mortgaged properties located
in California and Maryland. 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
by the occurrence of natural disasters, such as earthquakes, hurricanes,
tornadoes, tidal waves, mud slides, fires and floods, in these areas.
ABILITY TO RESELL SECURITIES MAY BE LIMITED
There is currently no market for any of the bonds. We cannot assure you
that a secondary market will develop, or if it does develop, that it will
continue to exist for the term of the bonds. Consequently, you may not be able
to sell your bonds readily or at prices that will enable you to realize your
desired yield. The market values of the bonds are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary market for asset backed bonds have experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity can have a
severely adverse effect on the prices of bonds that are especially sensitive to
prepayment, credit, or interest rate risk, or that have been structured to meet
the investment requirements of limited categories of investors.
YOUR PAYMENTS AND RIGHTS MAY BE ADVERSELY AFFECTED BY INSOLVENCY OF SELLER
Redwood Trust, Sequoia Mortgage Funding Corporation and the issuer will
treat the transfer of the loans from Redwood Trust to Sequoia Mortgage Funding
Corporation and from Sequoia Mortgage Funding Corporation to the issuer as a
sale for accounting purposes. If these characterizations are correct, then if
Redwood Trust were to become bankrupt, the loans would not be part of Redwood
Trust's bankruptcy estate and would not be available to Redwood Trust's
creditors. On the other hand, if Redwood Trust becomes bankrupt, its bankruptcy
trustee or one of its creditors may argue that the transfer of the loans is a
pledge of the loans for a borrowing rather than a sale. Such an attempt, even if
unsuccessful, could result in delays in payments to you.
In the event of a bankruptcy of the master servicer, the bankruptcy trustee
or receiver may have the power to prevent the trustee or the bondholders from
appointing a successor master servicer, which could result in a delay in
payments to you. 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 master servicer to liquidate the
property, which could result in a delay in payments to you.
CONSEQUENCES OF OWNING BOOK-ENTRY SECURITIES
LIMIT ON LIQUIDITY OF SECURITIES. Issuance of the bonds in book-entry form
may reduce their liquidity in the secondary trading market because investors may
be unwilling to purchase certificates for which they cannot obtain physical
bonds.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
book-entry bonds can be effected only though the DTC, participating
organizations, indirect participants and certain banks, your ability to transfer
or pledge a book-entry bond to persons or entities that do not participate in
the DTC system or otherwise to take actions in respect of such bonds, may be
limited due to lack of a physical bond.
S-9
<PAGE> 11
DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt of
distributions on book-entry bonds because the distributions will be forwarded by
the trustee to DTC for DTC to credit the accounts of its participants which will
thereafter credit them to your account either directly or indirectly through
indirect participants, as applicable.
We refer you to "Description of the Bonds" in this prospectus supplement
for more detail.
RATING OF THE SECURITIES DOES NOT ASSURE PAYMENT
It will be a condition to the issuance of the bonds offered hereby that
they be rated in one of the four highest rating categories by the rating agency
identified in this supplement. The ratings of the bonds will be based on, among
other things, the adequacy of the value of the trust assets and any credit
enhancement. The rating should not be deemed a recommendation to purchase, hold
or sell the bonds, particularly since the ratings do not address market price or
suitability for an investor. There is no assurance that the ratings will remain
in effect over the life of the bond, and may be lowered or withdrawn.
We refer you to "Rating" in this prospectus supplement for more detail.
THE ISSUER
The Issuer is a statutory business trust established under the laws of the
State of Delaware by an amended and restated deposit trust agreement, dated as
of , 199 . The Issuer was formed for the sole purpose of issuing the
Bonds and the Investor Certificate. The Company is the settlor and sole
beneficiary of the Issuer and is the Owner Trustee of the Issuer.
The Company is a limited purpose finance corporation the capital stock of which
is wholly owned by Redwood Trust, Inc., a Maryland corporation ("Redwood
Trust"). Redwood Trust will be the manager of the Issuer pursuant to a
management agreement entered into with the Issuer. None of the Company, Redwood
Trust, or any of their respective affiliates has guaranteed or is
otherwise obligated with respect to payment of the Bonds and no person or entity
other than the Issuer is obligated to pay the Bonds.
The Issuer's assets will consist almost entirely of the Pledged Mortgages
which will be pledged to secure the Bonds. If the Pledged Mortgages and other
collateral securing the Bonds are insufficient for payment of the Offered Bonds,
it is unlikely that significant other assets of the Issuer will be available for
payment of the Offered Bonds. The amount of funds available to pay the Offered
Bonds may be affected by, among other things, Realized Losses incurred on
defaulted Pledged Mortgages. See "RISK FACTORS" herein and in the Prospectus and
"THE ISSUER" in the Prospectus.
The Indenture prohibits the Issuer from incurring any indebtedness other
than the Bonds, or assuming or guaranteeing the indebtedness of any other
person.
DESCRIPTION OF THE BONDS
GENERAL
The Bonds will be issued pursuant to the Indenture. Set forth below are
summaries of the specific terms and provisions pursuant to which the Bonds will
be issued. The following summaries are subject to, and are qualified in their
entirety by reference to, the provisions of the Indenture. When particular
provisions or terms used in the Indenture are referred to, the actual provisions
(including definitions of terms) are incorporated by reference.
The Sequoia Mortgage Trust , Collateralized Mortgage Bonds (the
"Bonds"), will consist of the Class A-1 Bonds (the "Senior Bonds") and the Class
B-1 and Class B-2 Bonds (collectively, the "Subordinated Bonds"). The Issuer
will also issue the Investor Certificate (the "Investor Certificate") as
described herein. The Senior Bonds and the Class B-1 Bonds are collectively
referred to herein as the "Offered Bonds." Only the Offered Bonds are offered
hereby. The Classes of Offered Bonds will have the respective
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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").
BOOK-ENTRY BONDS
The Offered Bonds will be book-entry Bonds (each, a Class of "Book-Entry
Bonds"). Persons acquiring beneficial ownership interests in the Offered Bonds
("Bond Owners") may elect to hold their Offered Bonds through the Depository
Trust Company ("DTC") in the United States, or CEDEL or Euroclear (in Europe) if
they are participants of such systems, or indirectly through organizations which
are participants in such systems. The Book-Entry Bonds will be issued in one or
more certificates which equal the aggregate principal amount of the Offered
Bonds and will initially be registered in the name of Cede & Co., the nominee of
DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank, N.A., will act as depositary for CEDEL and The Chase
Manhattan Bank will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Bonds in minimum denominations representing Class Principal Amounts of
$ and in multiples of $1,000 in excess thereof. Except as described
below, no person acquiring a Book-Entry Bond (each, a "beneficial owner") will
be entitled to receive a physical certificate representing such Offered Bond (a
"Definitive Bond"). Unless and until Definitive Bonds are issued, it is
anticipated that the only "Bondholders" of the Offered Bonds will be Cede & Co.,
as nominee of DTC. Bond Owners will not be Bondholders as that term is used in
the Indenture. Bond Owners are only permitted to exercise their rights
indirectly through the participating organizations that utilize the services of
DTC, including securities brokers and dealers, banks and trust companies and
clearing corporations and certain other organizations ("Participants") and DTC.
The beneficial owner's ownership of a Book-Entry Bond will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Bond will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant, and on the records of
CEDEL or Euroclear, as appropriate).
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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 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
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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
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.
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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.
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.
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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 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
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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 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
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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 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"
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<PAGE> 19
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.
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;
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<PAGE> 20
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 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
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<PAGE> 21
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>
REMAINING
ORIGINAL TERM TERM
MORTGAGE NET MORTGAGE IN MATURITY TO MATURITY
PRINCIPAL BALANCE RATE RATE (IN MONTHS) (IN MONTHS)
--------------------- ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
$ % %
</TABLE>
(ii) the Pledged Mortgages prepay at the specified constant Prepayment
Assumptions, (iii) no defaults in the payment by Mortgagors of principal of and
interest on the Pledged Mortgages are experienced, (iv) scheduled payments on
the Pledged Mortgages are received on the first day of each month commencing in
the calendar month following the Closing Date and are computed prior to giving
effect to prepayments received on the last day of the prior month, (v)
prepayments are allocated as described herein without giving effect to loss and
delinquency tests, (vi) there are no Net Interest Shortfalls and prepayments
represent prepayments in full of individual Pledged Mortgages and are received
on the last day of each month, commencing in the calendar month of the Closing
Date, (vii) the scheduled monthly payment for each Pledged Mortgage has been
calculated based on the assumed mortgage loan characteristics described in item
(i) above such that each such mortgage loan will amortize in amounts sufficient
to repay the principal balance of such assumed mortgage loan by its remaining
term to maturity, (viii) the initial Class Principal Amount or Invested Amount,
as applicable, of each Class of Bonds and the Investor Certificate,
respectively, is as set forth on the cover page hereof and under
"SUMMARY -- Securities other than the Offered Bonds" herein, (ix) interest
accrues on each Class of Bonds and the Investor Certificate at the applicable
interest rate described on the cover hereof or described herein, (x) payments in
respect of the Bonds and the Investor Certificate are received in cash on the
th day of each month commencing in the calendar month following the Closing
Date, (xi) the closing date of the sale of the Offered Bonds is ,
199 , (xii) Redwood Trust is not required to purchase or substitute for any
Pledged Mortgage and (xiii) [the Master Servicer or the Company does not
exercise any option to purchase any Pledged Mortgages described herein under
"-- Optional Purchase of Defaulted Loans"] and the Issuer does not exercise any
option to redeem the Bonds as described herein under " -- Redemption at the
Option of the Issuer." While it is assumed that each of the Pledged Mortgages
prepays at the specified constant Prepayment Assumptions, this is not likely to
be the case. Moreover, discrepancies exist between the characteristics of the
actual Pledged Mortgages which will be delivered to the Bond Trustee and
characteristics of the Pledged Mortgages assumed in preparing the tables herein.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") represents an assumed rate of prepayment each month
relevant to the then outstanding principal balance of a pool of mortgage loans.
The Prepayment Assumption does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Pledged Mortgages. A 100% Prepayment Assumption assumes a Constant
Prepayment Rate ("CPR") of % per annum of the then outstanding principal
balance of such mortgage loans in the first month of the life of the mortgage
loans and an additional % per annum in each month thereafter until the
month. Beginning in the month and in each month thereafter during the
life of such mortgage loans, a 100% Prepayment Assumption assumes a CPR of
% per annum each month. As used in the tables below, a % Prepayment
Assumption assumes a prepayment rate equal to % of the Prepayment
Assumption. Correspondingly, a % Prepayment Assumption assumes a prepayment
rate equal to % of the Prepayment Assumption, and so forth.
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<PAGE> 22
OPTIONAL PURCHASE OF DEFAULTED LOANS
The Master Servicer or the Company may, at its option, purchase from the
Issuer any Pledged Mortgage which is delinquent in payment by days or more.
Any such purchase will be at a price equal to 100% of the Stated Principal
Balance of such Pledged Mortgage plus accrued interest thereon at the applicable
Mortgage Rate from the date through which interest was last paid by the related
Mortgagor or advanced to the first day of the month in which such amount is to
be distributed.
WEIGHTED AVERAGE LIVES OF THE OFFERED BONDS
The weighted average life of an Offered Bond is determined by (a)
multiplying the amount of the reduction, if any, of the Class Principal Amount
of such Bond on each Payment Date by the number of years from the date of
issuance to such Payment Date, (b) summing the results and (c) dividing the sum
by the aggregate amount of the reductions in Class Principal Amount of such Bond
referred to in clause (a).
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Pledged Mortgages, see "RISK FACTORS -- Yield,
Prepayment and Maturity Risks" herein and "RISK FACTORS -- Prepayment and Yield
Considerations" in the Prospectus.
In general, the weighted average lives of the Offered Bonds will be
shortened if the level of prepayments of principal of the Pledged Mortgages
increases. However, the weighted average lives of the Offered Bonds will depend
upon a variety of other factors, including the timing of changes in such rate of
principal payments and the priority sequence of distributions of principal of
the Classes of Bonds. See "DESCRIPTION OF THE BONDS -- Principal" herein.
The interaction of the foregoing factors may have different effects on the
Senior Bonds and the Class B-1 Bonds and the effects on any Class may vary at
different times during the life of such Class. Accordingly, no assurance can be
given as to the weighted average life of any Class of Offered Bonds. Further, to
the extent the prices of the Offered Bonds represent discounts or premiums to
their respective original Class Principal Amounts, variability in the weighted
average lives of such Classes of Bonds will result in variability in the related
yields to maturity. For an example of how the weighted average lives of the
Classes of Offered Bonds may be affected at various constant Prepayment
Assumptions, see the Decrement Tables below.
DECREMENT TABLES
The following tables indicate the percentages of the initial Class
Principal Amounts of the Classes of Offered Bonds that would be outstanding
after each of the dates shown at various constant Prepayment Assumptions and the
corresponding weighted average lives of such Classes. The tables have been
prepared on the basis of the Structuring Assumptions. It is not likely that (i)
all of the Pledged Mortgages will have the characteristics assumed, (ii) all of
the Pledged Mortgages will prepay at the constant Prepayment Assumptions
specified in the tables or at any constant Prepayment Assumption or (iii) all of
the Pledged Mortgages will prepay at the same rate. Moreover, the diverse
remaining terms to maturity of the Pledged Mortgages could produce slower or
faster principal payments than indicated in the tables at the specified constant
Prepayment Assumptions, even if the weighted average remaining term to maturity
of the Pledged Mortgages is consistent with the remaining terms to maturity of
the Pledged Mortgages specified in the Structuring Assumptions.
PERCENT OF INITIAL CLASS PRINCIPAL AMOUNTS OUTSTANDING
[Decrement Tables]
REDEMPTION AT THE OPTION OF THE ISSUER
The Bonds may be redeemed in whole, but not in part, at the Issuer's
option, on any Payment Date on or after the earlier of (a) years after the
initial issuance of the Bonds and (b) the Payment Date on which the sum of (i)
the Senior Class Principal Amount (ii) the Class B-1 Principal Amount, (iii) the
Class B-2
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<PAGE> 23
Principal Amount and (iv) the Invested Amount, after giving effect to payments
to be made on such Payment Date, is or less of the aggregate of the Stated
Principal Balances of the Pledged Mortgages as of the Cut-off Date, at a
redemption price equal to 100% of the unpaid principal amount of such Bonds
(including, in the case of the Class B-1 or Class B-2 Bonds, any unpaid Class
B-1 or Class B-2 Principal Carryover Shortfall), plus accrued and unpaid
interest at the applicable Bond Interest Rate through the month preceding the
month in which such optional redemption date occurs. The Bonds are not otherwise
subject to call or redemption at the option of the Issuer nor are they subject
to special redemption. See "DESCRIPTION OF THE BONDS -- Redemption at the Option
of the Issuer" in the Prospectus.
Notice of any redemption to be made at the option of the Issuer must be
given by the Issuer to the Bond Trustee not less than 30 days prior to the
redemption date and must be mailed by the Issuer or the Bond Trustee to affected
Bondholders at least ten days prior to the redemption date.
CONTROLLING CLASS UNDER THE INDENTURE
For the purposes described in the Prospectus under the headings "The
Indenture -- Modification of Indenture," "-- Events of Default" and "Rights Upon
Event of Default," the "Controlling Class" shall be the Class A-1 Bondholders
or, if the Class A-1 Bonds are no longer outstanding, the holders of the most
senior Class of Subordinated Bonds then outstanding.
CREDIT ENHANCEMENT
Credit enhancement for the Senior Bonds will be provided by the
Subordinated Bonds and by the Investor Certificate. Credit enhancement for the
Class B-1 Bonds will be provided by the Class B-2 Bonds and by the Investor
Certificate. Credit Enhancement for the Class B-2 Bonds will be provided by the
Investor Certificate. The rights of holders of the Subordinated Bonds and the
Investor Certificate to receive payments with respect to the Pledged Mortgages
will be subordinated to such rights of the holders of the Senior Bonds, the
rights of the holders of the Class B-2 Bonds and the Investor Certificate will
be subordinated to such rights of the holders of the Class B-1 Bonds, and the
rights of the holder of the Investor Certificate will be subordinated to such
rights of the holders of the Class B-2 Bonds, in each case only to the extent
described herein.
The subordination of (i) the Subordinated Bonds and the Investor
Certificate to the Senior Bonds, (ii) the Class B-2 Bonds and the Investor
Certificate to the Class B-1 Bonds and (iii) the Investor Certificate to the
Class B-2 Bonds are each intended to increase the likelihood of timely receipt
by the holders of Bonds with higher relative payment priority of the maximum
amount to which they are entitled on any Payment Date and to provide such
holders protection against losses resulting from defaults on Pledged Mortgages
to the extent described herein. However, the amount of protection afforded by
subordination may be exhausted and Shortfalls in payments on the Offered Bonds
could result. Any losses realized on the Pledged Mortgages in excess of the
related available subordination amount will result in losses on the Offered
Bonds. See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of
Shortfalls" herein.
SECURITY FOR THE BONDS
GENERAL
The Bonds will be secured by assignments to the Bond Trustee of collateral
consisting of (i) the Pledged Mortgages, (ii) funds on deposit in the Bond
Account and the Distribution Account, (iii) the Issuer's rights under the Master
Servicing Agreement, (iv) [the Issuer's rights under any Servicing Agreement,]
(v) the Issuer's rights under the Mortgage Loan Purchase Agreement (as defined
herein), and (vi) the proceeds of all of the foregoing.
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<PAGE> 24
THE PLEDGED MORTGAGES
The Bonds will be secured by a pool (the "Pledged Mortgage Pool") of
-year conventional mortgage loans secured by first liens on one- to
four-family residential properties (each, a "Mortgaged Property"). None of the
Pledged Mortgages will be guaranteed by any governmental agency. All of the
Pledged Mortgages will have been deposited with the Issuer by the Company which,
in turn, will have acquired them from Redwood Trust pursuant to an agreement
(the "Mortgage Loan Purchase Agreement") between the Company and Redwood Trust.
All of the Pledged Mortgages will have been acquired by Redwood Trust in the
ordinary course of its business and substantially in accordance with the
underwriting criteria specified herein.
GENERAL. Under the Mortgage Loan Purchase Agreement, Redwood Trust will
make certain representations, warranties and covenants to the Company relating
to, among other things, the due execution and enforceability of the Mortgage
Loan Purchase Agreement and certain characteristics of the Pledged Mortgages
and, subject to the limitations described below under "-- Assignment of Pledged
Mortgages," will be obligated to purchase or substitute a similar mortgage loan
for any Pledged Mortgage as to which there exists deficient documentation or an
uncured material breach of any such representation, warranty or covenant. See
"MORTGAGE LOAN PROGRAM -- Representations by Sellers; Repurchases" in the
Prospectus. Under the Deposit Trust Agreement, the Company will assign all of
its rights under the Mortgage Loan Purchase Agreement to the Issuer. Under the
Indenture, the Issuer will pledge all its right, title and interest in and to
such representations, warranties and covenants (including Redwood Trust's
purchase obligation) to the Bond Trustee for the benefit of the Bondholders. The
Issuer will make no representations or warranties with respect to the Pledged
Mortgages and will have no obligation to repurchase or substitute Pledged
Mortgages with deficient documentation or which are otherwise defective. The
obligations of Redwood Trust with respect to the Bonds are limited to Redwood
Trust's obligation to purchase or substitute Pledged Mortgages with deficient
documentation or which are otherwise defective under the Mortgage Loan Purchase
Agreement.
Certain information with respect to the Pledged Mortgage Pool is set forth
below. Prior to the Closing Date, Pledged Mortgages may be removed from the
collateral and other Pledged Mortgages may be substituted therefor. The Issuer
believes that the information set forth herein with respect to the Pledged
Mortgages as presently constituted is representative of the characteristics of
the Pledged Mortgages as they will be constituted at the Closing Date, although
certain characteristics of the Pledged Mortgages in the Pledged Mortgage Pool
may vary. Unless otherwise indicated, information presented below expressed as a
percentage (other than rates of interest) are approximate percentages based on
the Stated Principal Balances of the Pledged Mortgages as of the Cut-off Date.
As of the Cut-off Date, the aggregate of the Stated Principal Balances of
the Pledged Mortgages is expected to be approximately $ (the "Cut-off
Date Pool Principal Balance"). [The Pledged Mortgages provide for the
amortization of the amount financed over a series of substantially equal monthly
payments.] All of the Pledged Mortgages provide for payments due on the first
day of each month (the "Due Date"). At origination, substantially all of the
Pledged Mortgages had stated terms to maturity of years. Scheduled monthly
payments made by the Mortgagors on the Pledged Mortgages ("Scheduled Payments")
either earlier or later than the scheduled Due Dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest. [Mortgagors may prepay their Pledged Mortgages at any time without
penalty.]
Each Pledged Mortgage will bear interest at a [fixed][adjustable] Mortgage
Rate. [Each Pledged Mortgage will bear interest at a Mortgage Rate, subject to
annual adjustment on the first day of the month specified in the related
Mortgage Note (each such date, an "Adjustment Date"), equal to the sum, rounded
to the nearest of one percentage point ( %), of (i)
(the "Index") as made available by the
and most recently available as of days prior to the
Adjustment Date and (ii) a fixed percentage amount specified in the related
Mortgage Note (the "Margin") provided, however, that the Mortgage Rate will not
increase or decrease by more than percentage points ( %), except for
Pledged Mortgages, representing approximately % of the Cut-off Date
Pool Principal Balance which will not increase or decrease by more than
percentage points ( %),
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<PAGE> 25
on the first Adjustment Date or more than percentage points ( %) on
any Adjustment Date thereafter (the "Periodic Rate Cap"). The Index with respect
to any Bond Interest Rate and any Payment Date shall be the Index in effect as
of the first day of the month preceding the month in which such Payment Date
occurs.]
[All of the Pledged Mortgages provide that over the life of the Pledged
Mortgage the Mortgage Rate will in no event increase by more than the Mortgage
Rate fixed at origination plus a fixed number of percentage points specified in
the related Mortgage Note (such rate, the "Maximum Rate"). None of the Pledged
Mortgages are subject to minimum Mortgage Rates. Effective with the first
payment due on a Pledged Mortgage after each related Adjustment Date, the
Scheduled Payment will be adjusted to an amount which will pay interest at the
adjusted rate and fully amortize the then-outstanding principal balance of the
Pledged Mortgage over its remaining term. If the Index ceases to be published or
is otherwise unavailable, the Master Servicer will select an alternative index
based upon comparable information.]
Each Pledged Mortgage is, by its terms, assumable in connection with a
transfer of the related Mortgaged Property if the proposed transferee submits
certain information to the Master Servicer required to enable it to evaluate the
transferee's ability to repay the Pledged Mortgage and if the Master Servicer
reasonably determines that the security for the Pledged Mortgage would not be
impaired by the assumption. See "RISK FACTORS" herein and in the Prospectus.
Each Pledged Mortgage was originated on or after , 19 .
The latest stated maturity date of any Pledged Mortgage is ,
20 . The earliest stated maturity date of any Pledged Mortgage is ,
20 .
[As of the Cut-off Date, no Pledged Mortgage was delinquent more than
days.]
[None of the Pledged Mortgages are subject to buydown agreements.] [No
Pledged Mortgage provides for deferred interest or negative amortization.]
No Pledged Mortgage had a Loan-to-Value Ratio at origination of more than
%. [Except for Pledged Mortgages, representing approximately %
of the Cut-off Date Pool Principal Balance,] each Pledged Mortgage with a
Loan-to-Value Ratio at origination of greater than 80% is covered by a primary
mortgage insurance policy (each a "Primary Mortgage Insurance Policy") issued by
a mortgage insurance company acceptable to the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
any nationally recognized statistical rating organization, which policy provides
coverage of a portion of the original principal balance of the related Pledged
Mortgage equal to the product of the original principal balance thereof and a
fraction, the numerator of which is the excess of the original principal balance
of the related Pledged Mortgage over 75% of the lesser of the appraised value
and selling price of the related Mortgage Property and the denominator of which
is the original principal balance of the related Pledged Mortgage, plus accrued
interest thereon and related foreclosure expenses. No such Primary Mortgage
Insurance Policy will be required with respect to any such Pledged Mortgage
after the date on which the related Loan-to-Value Ratio is 80% or less or, based
on a new appraisal, the principal balance of such Pledged Mortgage represents
80% or less of the new appraised value. See "-- Underwriting Standards" herein.
The "Loan-to-Value Ratio" of a Pledged Mortgage at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Pledged Mortgage at the date of determination and the
denominator of which is (a) in the case of a purchase, the lesser of the selling
price of the Mortgaged Property and its appraised value determined in an
appraisal obtained by the originator at origination of such Pledged Mortgage, or
(b) in the case of a refinance, the appraised value of the Mortgaged Property at
the time of such refinance. No assurance can be given that the value of any
Mortgaged Property has remained or will remain at the level that existed on the
appraisal or sales date. If residential real estate values generally or in a
particular geographic area decline, the Loan-to-Value Ratios might not be a
reliable indicator of the rates of delinquencies, foreclosures and losses that
could occur with respect to such Pledged Mortgages.
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<PAGE> 26
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
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-25
<PAGE> 27
CURRENT PLEDGED MORTGAGE PRINCIPAL BALANCES(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE
RANGE OF CURRENT NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-26
<PAGE> 28
PURPOSE OF PLEDGED MORTGAGES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT OF
PLEDGED BALANCE MORTGAGE
TYPE OF PROGRAM MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- ----------
<S> <C> <C> <C>
Full................................................... $ %
Alternative............................................
Reduced................................................
--- ---- ----
Total............................................. $ %
=== ==== ====
</TABLE>
S-27
<PAGE> 29
OCCUPANCY TYPES(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-28
<PAGE> 30
MARGIN(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-29
<PAGE> 31
In connection with such transfer and assignment, the Issuer will deliver or
cause to be delivered to the Bond Trustee, or a custodian for the Bond Trustee,
among other things, the original promissory note (the "Mortgage Note") (and any
modification or amendment thereto) endorsed in blank without recourse, the
original instrument creating a first lien on the related Mortgaged Property (the
"Mortgage") with evidence of recording indicated thereon, an assignment in
recordable form of the Mortgage, the title policy with respect to the related
Mortgaged Property and, if applicable, all recorded intervening assignments of
the Mortgage and any riders or modifications to such Mortgage Note and Mortgage
(except for any such document not returned from the public recording office,
which will be delivered to the Bond Trustee as soon as the same is available to
the Issuer) (collectively, the "Mortgage File"). [Assignments of the Pledged
Mortgages to the Bond Trustee (or its nominee) will be recorded in the
appropriate public office for real property records, except in states such as
California where, in the opinion of counsel, such recording is not required to
protect the Bond Trustee's interest in the Pledged Mortgages against the claim
of any subsequent transferee or any successor to or creditor of the Issuer.]
The Bond Trustee will review each Mortgage File within days of the
Closing Date (or promptly after the Bond Trustee's receipt of any document
permitted to be delivered after the Closing Date) and if any document in a
Mortgage File is found to be missing or defective in a material respect and the
Issuer does not cure such defect within days of notice thereof from the
Bond Trustee (or within such longer period not to exceed days after the
Closing Date as provided in the Mortgage Loan Purchase Agreement in the case of
missing documents not returned from the public recording office), Redwood Trust
will be obligated to purchase the related Pledged Mortgage. Rather than purchase
the Pledged Mortgage as provided above, Redwood Trust may remove such Pledged
Mortgage (a "Deleted Pledged Mortgage") from the Collateral and substitute in
its place another mortgage loan (a "Replacement Pledged Mortgage"). Any
Replacement Pledged Mortgage generally will, on the date of substitution, among
other characteristics set forth in the Mortgage Loan Purchase Agreement, (i)
have a principal balance, after deduction of all Scheduled Payments due in the
month of substitution, not in excess of, and not more than % less than, the
Stated Principal Balance of the Deleted Pledged Mortgage (the amount of any
shortfall to be deposited in the Bond Account by Redwood and held for
distribution to the Bondholders on the related Payment Date (a "Substitution
Adjustment Amount")), (ii) have a Mortgage Rate not lower than, and not more
than % per annum higher than, that of the Deleted Pledged Mortgage, (iii)
have a Loan-to-Value Ratio not higher than that of the Deleted Pledged Mortgage,
(iv) have a remaining term to maturity not greater than (and not more than
less than) that of the Deleted Pledged Mortgage, and (v) comply with all of the
representations and warranties set forth in the Mortgage Loan Purchase Agreement
as of the date of substitution. This cure, purchase or substitution obligation
constitutes the sole remedy available to Bondholders or the Bond Trustee for
omission of, or a material defect in, a Pledged Mortgage document.
UNDERWRITING STANDARDS
All of the Pledged Mortgages have been purchased by Redwood Trust in the
ordinary course of business directly from banks, savings and loan associations,
mortgage bankers and other mortgage loan originators (each, an "Originator"), or
in the secondary mortgage market. Redwood Trust approves individual institutions
as eligible Originators after an evaluation of certain criteria, including the
Originator's mortgage origination and servicing experience and financial
stability. Each Originator and/or the entity from which Redwood Trust purchased
the Pledged Mortgages will represent and warrant that all Pledged Mortgages
originated and/or sold by it will have been underwritten in accordance with
standards consistent with those utilized by mortgage lenders generally during
the period of origination.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expense, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In most cases, an employment
S-30
<PAGE> 32
verification is obtained from an independent source (typically the borrower's
employer) which verification reports, among other things, the length of
employment with that organization, the current salary, and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts. See "MORTGAGE LOAN PROGRAM -- Underwriting Standards" in
the Prospectus.
SERVICING OF THE PLEDGED MORTGAGES
THE MASTER SERVICER
will act as Master Servicer. The principal executive offices of
are located at .
The Master Servicer will be responsible for servicing the Pledged Mortgages
in accordance with the terms set forth in the Master Servicing Agreement. The
Master Servicer intends to perform its servicing obligations under the Master
Servicing Agreement through one or more servicers (each, a "Servicer"). On or
prior to the Closing Date, the Master Servicer will enter into or be assigned a
mortgage servicing agreement (each, a "Servicing Agreement") with each Servicer
pursuant to which such Servicer will perform certain servicing functions with
respect to the Pledged Mortgages. The Master Servicer will administer and
supervise the performance of each Servicer, who may in turn be administering and
supervising the performance of the subservicers of the Pledged Mortgages.
Notwithstanding any such servicing arrangements, the Master Servicer will remain
liable for its servicing duties and obligations under the Master Servicing
Agreement.
SERVICING AND COLLECTION PROCEDURES
On or prior to the Closing Date, the Master Servicer will enter into a
separate Servicing Agreement with each Servicer to perform, as independent
contractor, servicing functions for the Master Servicer subject to its
supervision. Such servicing functions include collection and remittance of
principal and interest payments, administration of mortgage escrow accounts,
collection of certain insurance claims and, if necessary, foreclosure. The
Master Servicer may permit Servicers to contract with subservicers to perform
some or all of the Servicer's servicing duties, but the Servicers will not
thereby be released from their obligations under the Servicing Agreement. The
Master Servicer also may enter into subservicing agreements directly with an
affiliate of a Servicer or permit a Servicer to transfer its servicing rights
and obligations to a third party. In such instances, the affiliate or third
party, as the case may be, will perform servicing functions comparable to those
normally performed by the Servicer as described above, and the Servicer will not
be obligated to perform such servicing functions. When used herein with respect
to servicing obligations, the term Servicer includes any such affiliate or third
party. The Master Servicer may perform certain supervisory functions with
respect to servicing by the Servicer directly or through an agent or independent
contractor and the Master Servicer will be responsible for administering and
servicing the Pledged Mortgages pursuant to the Master Servicing Agreement.
On or before the Closing Date, the Master Servicer will establish one or
more accounts (the "Bond Account") into which each Servicer will remit
collections on the mortgage loans serviced by it (net of its related servicing
compensation). For purposes of the Master Servicing Agreement, , as
Master Servicer, will be deemed to have received any amounts with respect to the
Pledged Mortgages that are received by a Servicer regardless of whether such
amounts are remitted by the Servicer to the Master Servicer. The Master Servicer
has reserved the right to remove the Servicer servicing any Pledged Mortgage at
any time and will exercise that right if it considers such removal to be in the
best interest of the Bondholders. In the event that the Master Servicer removes
a Servicer, the Master Servicer will continue to be responsible for servicing
the related Pledged Mortgages.
S-31
<PAGE> 33
FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE
The following table summarizes the delinquency, foreclosure and loss
experience, respectively, as of December 31, 199 , December 31, 199 and
December 31, 199 on approximately $ , $ and $ ,
respectively, in outstanding principal balance of conventional mortgage loans
master serviced by commenced master servicing
conventional mortgage loans during . The delinquency and foreclosure
percentages and the loss experience may be affected by the size and relative
lack of seasoning of the servicing portfolio because many of such mortgage loans
were not outstanding long enough to give rise to some or all of the indicated
periods of delinquency. Accordingly, the information should not be considered as
a basis for assessing the likelihood, amount or severity of delinquency or
losses on the Pledged Mortgages, and no assurances can be given that the
foreclosure, delinquency and loss experience presented in the table below will
be indicative of such experience on the Pledged Mortgages in the future:
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31,
199 199 199
------------ ------------ ------------
<S> <C> <C> <C>
Total Number of Conventional Mortgage Loans in
Portfolio...........................................
Delinquent Mortgage Loans and Pending Foreclosures at
Period End(1):......................................
30-59 days..........................................
60-89 days..........................................
90 days or more (excluding foreclosures)............
Total Delinquencies.................................
Foreclosures pending................................
Total delinquencies and foreclosures pending........
Net Loss(2).........................................
</TABLE>
- ---------------
(1) As a percentage of the total number of loans master serviced.
(2) There is no material difference between gross loss and net loss.
There can be no assurance that factors beyond the Master Servicer's
control, such as national or local economic conditions or downturns in the real
estate markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future. [For example, over the last
several years there has been a general deterioration of the real estate market
and weakening of the economy in many regions of the country, including
California. The general deterioration of the real estate market has been
reflected in increases in delinquencies of loans secured by real estate, slower
absorption rates of real estate into the market and lower sales prices for real
estate. The general weakening of the economy has been reflected in decreases in
the financial strength of borrowers and decreases in the value of collateral
serving as collateral for loans. If the real estate market and economy continue
to decline, the Master Servicer may experience an increase in delinquencies on
the loans it services and higher net losses on liquidated loans.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Pledged Mortgages are payable out of
the interest payments on each Pledged Mortgage. The Expense Fees will vary from
Pledged Mortgage to Pledged Mortgage. The rate at which the Expense Fees accrue
(the "Expense Fee Rate") will range from % to % per annum, in each
case of the Stated Principal Balance of the related Pledged Mortgage. As of the
Cut-off Date, the weighted average Expense Fee Rate equaled approximately
%. The Expense Fees consist of (a) master servicing compensation payable to
the Master Servicer in respect of its master servicing activities (the "Master
Servicing Fee"), (b) servicing compensation payable to the Servicers in respect
of their servicing activities (the "Servicing Fee") and (c) fees payable to the
Bond Trustee in respect of its activities as trustee under the Indenture. The
Master Servicing Fee will be % per annum of the Stated Principal Balance of
each Pledged Mortgage. The Servicing Fee payable to each Servicer will vary from
Pledged Mortgage to Pledged Mortgage and will range from % to % per
annum, in each case of the Stated Principal
S-32
<PAGE> 34
Balance of the related Pledged Mortgage serviced by such Servicer. The Master
Servicer is obligated to pay certain ongoing expenses associated with the
Pledged Mortgages and incurred by the Master Servicer in connection with its
responsibilities under the Master Servicing Agreement and such amounts will be
paid by the Master Servicer out of the Master Servicing Fee. The amount of the
Master Servicing Fee is subject to adjustment with respect to prepaid Pledged
Mortgages, as described herein under "-- Adjustment to Master Servicing Fee and
Invested Amount in Connection with Certain Prepaid Pledged Mortgages." The
Master Servicer or the related Servicer will also be entitled to receive late
payment fees, assumption fees and other similar charges. The Master Servicer
will be entitled to receive all reinvestment income earned on amounts on deposit
in the Bond Account and the Distribution Account. The Net Mortgage Rate of a
Pledged Mortgage is the Mortgage Rate thereof minus the related Expense Fee
Rate.
ADJUSTMENT TO MASTER SERVICING FEE AND INVESTED AMOUNT IN CONNECTION WITH
CERTAIN PREPAID PLEDGED MORTGAGES
When a borrower prepays a Pledged Mortgage between Due Dates, the borrower
is required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Principal prepayments by borrowers received during a
calendar month will be distributed to Bondholders on the Payment Date in the
month following the month of receipt. Pursuant to the Master Servicing
Agreement, the Master Servicing Fee for any month may be reduced by an amount
with respect to each such prepaid Pledged Mortgage sufficient to pay to
Bondholders the full amount of interest to which they would be entitled in
respect of such Pledged Mortgage on the related Payment Date. If shortfalls in
interest as a result of prepayments in any month exceed the sum of (i) amount of
the Master Servicing Fee for such month and (ii) the amounts otherwise payable
on such Payment Date to the holder of the Investor Certificate as described in
clauses "seventh", "eighth" and "ninth" under "DESCRIPTION OF THE
BONDS -- Priority of Payments and Allocation of Shortfalls" herein, the amount
of funds available to be paid to Bondholders in respect of interest on such
Payment Date will be reduced by the amount of such excess. See "DESCRIPTION OF
THE BONDS -- Interest" herein.
ADVANCES
Subject to the following limitations, the Master Servicer will be required
to advance prior to each Payment Date, from its own funds, funds advanced by the
related Servicer or amounts received with respect to the Pledged Mortgages that
do not constitute Available Funds for such Payment Date, an amount equal to the
aggregate of payments of principal of and interest on the Pledged Mortgages (net
of the Master Servicing Fee and the applicable Servicing Fee with respect to the
related Pledged Mortgages) which were due on the related Due Date and which were
delinquent on the related Determination Date, together with an amount equivalent
to interest on each Pledged Mortgage as to which the related Mortgaged Property
has been acquired by the Bond Trustee through foreclosure or deed-in-lieu of
foreclosure ("REO Property") (any such advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Bonds and the Investor Certificate rather than to
guarantee or insure against losses. The Master Servicer is obligated to make
Advances with respect to delinquent payments of principal of or interest on each
Pledged Mortgage to the extent that such Advances are, in its reasonable
judgment, recoverable from future payments and collections or insurance payments
or proceeds of liquidation of the related Pledged Mortgage. If the Master
Servicer determines on any Determination Date to make an Advance, such Advance
will be included with the payment to Bondholders and the holder of the Investor
Certificate on the related Payment Date. [Any failure by a Servicer to advance
funds as required under the related Servicing Agreement will constitute a
default thereunder, in which case the Master Servicer will be obligated to make
any such advance in accordance with the terms of the Master Servicing
Agreement.] Any failure by the Master Servicer to make an Advance as required
under the Master Servicing Agreement with respect to the Bonds and the Investor
Certificate will constitute a Servicing Default thereunder, in which case the
Bond Trustee or the successor master servicer will be obligated to make any such
Advance, in accordance with the terms of the Master Servicing Agreement.
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<PAGE> 35
USE OF PROCEEDS
The Issuer intends to distribute all of the net proceeds of the issuance of
the Offered Bonds to the Company which will use such proceeds to pay certain
indebtedness incurred by Redwood Trust in connection with the acquisition of the
Pledged Mortgages. See "USE OF PROCEEDS" in the Prospectus and "UNDERWRITING"
herein.
FEDERAL INCOME TAX CONSEQUENCES
Giancarlo & Gnazzo, A Professional Corporation, has advised the Company
that, in its opinion the Bonds will be treated as debt for federal income tax
purposes, and not as an ownership interest in the Mortgage Collateral, the
Issuer or a separate association taxable as a corporation. Interest, including
original issue discount with respect to any Class of Offered Bonds issued with
original issue discount, will be taxable to non-exempt Bondholders. The Tax
Prepayment Assumption (as defined in the Prospectus under "FEDERAL INCOME TAX
CONSEQUENCES -- Original Issue Discount") for the purposes of determining the
amount and rate of accrual of original issue discount on the Bonds assumes that
the Pledged Mortgages are prepaid at a rate of % of the Prepayment
Assumption. Based upon (i) [the assumed prepayment rate] and (ii) the expected
price to the public of each Class of the Offered Bonds as of the date hereof
(including interest accrued before the issue date, if any), the Class A-1 Bonds
will not be issued with original issue discount and the Class B-1 Bonds will be
treated as issued with original issue discount. [Although it is unclear, the
Issuer intends to treat the Offered Bonds as "Variable Rate Debt Instruments"
and the stated interest on the Bonds as "qualified stated interest payments" (as
each term is defined in the Prospectus under "FEDERAL INCOME TAX
CONSEQUENCES")].
Notwithstanding the use of in pricing the Offered
Bonds, no representation is made that the Pledged Mortgages will actually prepay
at or at any other rate. The amount of original issue
discount and certain other information with respect to each Offered Bond will be
set forth on the face of such Bond as required by applicable regulations and as
described in the Prospectus. See "DESCRIPTION OF THE BONDS -- Weighted Average
Life of the Offered Bonds" herein and "FEDERAL TAX CONSEQUENCES" in the
Prospectus.
The Issuer will not elect to treat the segregated pool of assets securing
the Bonds as a real estate mortgage investment conduit ("REMIC") for federal
income tax purposes. Giancarlo & Gnazzo, A Professional Corporation, has further
advised the Company that, in its opinion, the Issuer will not be classified as a
taxable mortgage pool.
ERISA MATTERS
Fiduciaries of employee benefit plans and certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans, and collective investment funds in which such plans, accounts, annuities
or arrangements are invested, that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or corresponding provisions of the
Internal Revenue Code of 1986, as amended (the "Code") (any of the foregoing a
"Plan"), persons acting on behalf of a Plan, or persons using the assets of a
Plan ("Plan Investors"), should carefully review with their legal advisors
whether the purchase or holding of the Offered Bonds could give rise to a
transaction that is prohibited under ERISA or the Code or cause the Pledged
Mortgages securing the Offered Bonds to be treated as "plan assets" for purposes
of regulations of the Department of Labor set forth in 29 C.F.R. 2510.3-101 (the
"Plan Asset Regulations"). Prospective investors should be aware that, although
certain exceptions from the application of the prohibited transaction rules and
the Plan Asset Regulations exist, there can be no assurance that any such
exception will apply with respect to the acquisition of the Offered Bonds. See
"ERISA MATTERS" in the Prospectus.
If the Offered Bonds are treated as equity for purposes of ERISA, the
purchaser of the Offered Bonds could be treated as having acquired a direct
interest in the Pledged Mortgages securing the Offered Bonds. In that event, the
purchase, holding, or resale of the Offered Bonds could result in a transaction
that is prohibited under ERISA or the Code. Furthermore, regardless of whether
the Offered Bonds are treated as equity for
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<PAGE> 36
purposes of ERISA, the acquisition or holding of the Offered Bonds by or on
behalf of a Plan could still be considered to give rise to a prohibited
transaction if the Issuer, the Bond Trustee, the Master Servicer, any Servicer
or any of their respective Affiliates is or becomes a party in interest or a
disqualified person with respect to such Plan. However, one or more alternative
exemptions may be available with respect to certain prohibited transaction rules
of ERISA that might apply in connection with the initial purchase, holding and
resale of the Offered Bonds, depending in part upon the type of Plan fiduciary
making the decision to acquire the Offered Bonds and the circumstances under
which such decision is made. Those exemptions include, but are not limited to:
(i) Prohibited Transaction Class Exemption ("PTCE") 95-60, regarding investments
by insurance company general accounts; (ii) PTCE 91-38, regarding investments by
bank collective investment funds; (iii) PTCE 90-1, regarding investments by
insurance company pooled separate accounts; (iv) PTCE 84-14, regarding
transactions negotiated by qualified professional asset managers; or (v) PTCE
96-23 regarding transactions effected by an in-house asset manager. Before
purchasing the Offered Bonds, a Plan subject to the fiduciary responsibility
provisions of ERISA or described in Section 4975(e)(1) (and not exempt under
Section 4975(g)) of the Code should consult with its counsel to determine
whether the conditions of any exemption would be met. A purchaser of the Offered
Bonds should be aware, however, that even if the conditions specified in one or
more exemptions are met, the scope of the relief provided by an exemption might
not cover all acts that might be construed as prohibited transactions. See
"ERISA MATTERS" in the Prospectus.
Although not entirely free from doubt, the Issuer believes that the Offered
Bonds will be treated as debt obligations without significant equity features
for purposes of the Plan Asset Regulations. Accordingly, a Plan that acquires
the Offered Bonds should not be treated as having acquired a direct interest in
the assets of the Issuer. However, there can be no complete assurance that the
Offered Bonds will be treated as debt obligations without significant equity
features for purposes of the Plan Asset Regulations.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Company, Redwood Trust and the Underwriter, the Company has agreed
to cause the Issuer to sell to the Underwriter, and the Underwriter has agreed
to purchase from the Issuer, the Underwriter's Bonds. Distribution of the
Underwriter's 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 Underwriter's Bonds, the
Underwriter may be deemed to have received compensation from the Issuer in the
form of underwriting discounts.
The Issuer proposes to sell Class A-1 Bonds with original principal balance
of $ to Redwood Trust in a privately negotiated transaction. Redwood
Trust will initially pledge its Class A-1 Bonds to [name of lender] to secure
indebtedness. Redwood Trust or its pledgees, donees, transferees or other
successors in interest may, from time to time, offer such Class A-1 Bonds for
sale to the public in negotiated transactions or otherwise at varying prices to
be determined at the time of sale.
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.
S-35
<PAGE> 37
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 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-36
<PAGE> 38
INDEX OF CERTAIN DEFINITIONS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adjustment Date............................................. S-15
Advance..................................................... S-33
Available Funds............................................. S-15
Belgian Cooperative......................................... S-13
Beneficial owner............................................ S-11
Bond Account............................................S-15, S-31
Bond Distribution Amount.................................... S-15
Bond Interest Rate.......................................... S-16
Bond Owners................................................. S-11
Bond Trustee................................................ S-4
Bonds.........................................................S-10
Book-Entry Bonds............................................ S-11
CEDEL Participants.......................................... S-13
Certificate Interest Payment Amount......................... S-16
Class B-1 Interest Carryover Shortfall...................... S-16
Class B-1 Interest Payment Amount........................... S-16
Class B-1 Percentage........................................ S-17
Class B-1 Principal Amount.................................. S-11
Class B-1 Principal Carryover Shortfall..................... S-18
Class B-1 Principal Payment Amount.......................... S-17
Class B-2 Interest Carryover Shortfall...................... S-16
Class B-2 Interest Payment Amount........................... S-16
Class B-2 Percentage........................................ S-17
Class B-2 Principal Amount.................................. S-11
Class B-2 Principal Carryover Shortfall..................... S-18
Class B-2 Principal Payment Amount.......................... S-18
Class Principal Amount...................................... S-11
Code........................................................ S-34
Company..................................................... S-4
Controlling Class........................................... S-22
CPR......................................................... S-20
Cut-off Date Pool Principal Balance......................... S-23
Definitive Bond............................................. S-11
Deleted Pledged Mortgage.................................... S-30
Deposit Trust Agreement..................................... S-4
Distribution Account........................................ S-15
DTC......................................................... S-11
Due Date.................................................... S-23
ERISA....................................................S-8, S-34
Euroclear Operator.......................................... S-13
Euroclear Participants...................................... S-13
European Depositaries....................................... S-11
Expense Fee Rate............................................ S-32
FHLMC....................................................... S-24
Financial Intermediary...................................... S-11
FNMA........................................................ S-24
</TABLE>
S-37
<PAGE> 39
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index....................................................... S-23
Insurance Proceeds.......................................... S-15
Interest Accrual Period..................................... S-16
Interest Payment Amount..................................... S-16
Invested Amount............................................. S-11
Invested Amount Payment..................................... S-18
Investor Certificate........................................ S-10
Investor Percentage......................................... S-17
Issuer...................................................... S-10
Liquidation Proceeds........................................ S-15
Loan-to-Value Ratio......................................... S-25
Management Agreement........................................ S-3
Margin...................................................... S-23
Master Servicing Agreement.................................. S-4
Master Servicing Fee........................................ S-32
Maximum Rate................................................ S-24
Morgan...................................................... S-13
Mortgage.................................................... S-30
Mortgage File............................................... S-30
Mortgage Loan Purchase Agreement............................ S-23
Mortgage Note............................................... S-30
Mortgaged Property.......................................... S-23
Net Interest Shortfall...................................... S-16
Net Interest Shortfalls..................................... S-16
Offered Bonds............................................... S-10
Original Class B-1 Principal Amount......................... S-11
Original Class B-2 Principal Amount......................... S-11
Original Invested Amount.................................... S-11
Original Senior Class Principal Amount...................... S-11
Originator.................................................. S-30
Owner Trustee............................................... S-4
Payment Date................................................ S-15
Periodic Rate Cap........................................... S-24
Plan........................................................ S-34
Plan Asset Regulations...................................... S-34
Plan Investors.............................................. S-34
Pledged Mortgage Pool....................................... S-23
Pledged Mortgages........................................... S-23
Pool Principal Balance...................................... S-17
Prepayment Assumption....................................... S-20
Prepayment Interest Shortfall............................... S-16
Primary Mortgage Insurance Policy........................... S-34
PTCE........................................................ S-30
Rating Agencies............................................. S-36
Record Date................................................. S-10
Redwood Trust............................................... S-10
REMIC....................................................... S-34
REO Property................................................ S-33
</TABLE>
S-38
<PAGE> 40
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Replacement Pledged Mortgage................................ S-30
Rules....................................................... S-12
Scheduled Payments.......................................... S-23
Senior Bonds.............................................S-4, S-10
Senior Class Principal Amount............................... S-11
Senior Interest Payment Amount.............................. S-16
Senior Percentage........................................... S-17
Servicer.................................................... S-31
Servicing Agreement......................................... S-31
Servicing Fee............................................... S-32
Shortfalls.................................................. S-16
SMMEA....................................................... S-6
Stated Principal Balance.................................... S-17
Structuring Assumptions..................................... S-20
Subordinated Bonds.......................................S-4, S-10
Substitution Adjustment Amount.............................. S-30
Terms and Conditions........................................ S-13
Variable Rate Debt Instruments.............................. S-34
</TABLE>
S-39
<PAGE> 41
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Sequoia
Mortgage Trust , Collateralized Mortgage Bonds (the "Global Bonds")
will be available only in book-entry form. Investors in the Global Bonds may
hold such Global Bonds through any of The Depository Trust Company ("DTC"),
CEDEL or Euroclear. The Global Bonds will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Bonds through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Bonds through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior collateralized mortgage bond issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Bonds will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Bonds will be subject to
U.S. withholding taxes unless such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All Global Bonds will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors' interests in the Global Bonds will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC (each, a "DTC Participant"). As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Bonds through DTC will follow the
settlement practices' applicable to other collateralized mortgage bond issues.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Bonds through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
Eurobonds, except that there will be no temporary global security and no
"lock-up" or restricted period. Global Bonds will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
collateralized mortgage bond issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional Eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global
Bonds are to be transferred from the account of a DTC Participant to the account
of a CEDEL Participant or a Euroclear Participant, the purchaser will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the
A-1
<PAGE> 42
respective Depositary, as the case may be, to receive the Global Bonds against
payment. Payment will include interest accrued on the Global Bonds from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in such accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Bonds. After settlement
has been completed, the Global Bonds will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the CEDEL Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Bonds will accrue from, the value
date (which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the CEDEL or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global Bonds
are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Bonds would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Bonds were credited to their accounts. However,
interest on the Global Bonds would accrue from the value date. Therefore, in
many cases the investment income on the Global Bonds earned during that one-day
period may substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each CEDEL Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Bonds to the
respective European Depository for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global Bonds are
to be transferred by the respective clearing system, through the respective
Depositary, to a DTC Participant. The seller will send instructions to CEDEL or
Euroclear through a CEDEL Participant or Euroclear Participant at least one
business day prior to settlement. In these cases CEDEL or Euroclear will
instruct the respective Depositary, as appropriate, to deliver the Global Bonds
to the DTC Participant's account against payment. Payment will include interest
accrued on the Global Bonds from and including the last coupon payment to and
excluding the settlement date on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of the CEDEL Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
CEDEL Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended valued date (i.e., the trade fails), receipt of the cash proceeds
in the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Bonds from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would
A-2
<PAGE> 43
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Bonds in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Bonds
sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of the Global Bonds holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of the Global
Bonds that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are Bond Owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption
or Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Bond Owner or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Bond Owner of a Global
Bond or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate
whose income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. This summary does not deal with all aspects of U.S. federal income
tax withholding that may be relevant to foreign holders of the Global Bonds.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Bonds.
A-3
<PAGE> 44
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY , 2000)
$
[LOGO] SEQUOIA MORTGAGE TRUST
BOND ISSUER
Consider carefully the
risk factors beginning on
page S-9 of this
prospectus supplement
which include:
- Yield, Prepayment and
Maturity Risks;
- Cash Flow
Considerations;
- Limited Recourse;
- Bankruptcy and
Insolvency Risks;
- Risks associated with
Book-Entry Bonds; and
- Limited Liquidity of
Investments.
The Bonds are redeemable
only under circumstances
described in this
prospectus supplement.
The Bonds represent
obligations of the Trust
only and do not represent
an interest in or
obligation of the Bond
Issuer, Sequoia Mortgage
Funding Corporation or any
of their affiliates.
The Senior Bonds will be unconditionally and irrevocably guaranteed as to
payment of Insured Payments, as defined in this prospectus supplement, pursuant
to the terms of the financial guaranty insurance policy to be issued:
[INSURER LOGO]
Bonds of each Series will be characterized for federal income tax purposes as
debt instruments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
COLLATERALIZED MORTGAGE BONDS
$ CLASS A-1 BONDS
$ CLASS B-1 BONDS
THE BOND ISSUER WILL ISSUE:
- - One class of Senior Class A-1 Bonds; and
- - One class of Subordinated Class B-1 Bonds.
THE BONDS:
- - Will be collateralized by primarily year [fixed adjustable] rate,
conventional mortgage loans secured by first liens on one- to four-family
residential properties;
- - Pay the holders of Senior Bonds payments of interest and principal from the
collateral pledged to secure the Bonds and the bond insurance policy;
- - Pay the holders of Subordinated Bonds payments of interest and principal
solely from the collateral pledged to secure the Bonds as described more fully
under the heading "Description of Bonds-Priority of Payments and Allocation of
Shortfalls" in this prospectus supplement; and
- - Pay all holders of Bonds the amounts of principal and interest due thereon on
the th day of each month, or if such day is not a business day, the next
succeeding business day, commencing on , 200 . Interest payments
are described more fully under the heading "Description of the Bonds-Interest"
in this prospectus supplement;
<PAGE> 45
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Important Notice about the Information Presented in this
Prospectus Supplement and the Accompanying Prospectus..... S-3
Where You can Find More Information......................... S-3
Summary..................................................... S-5
Risk Factors................................................ S-9
The Issuer.................................................. S-11
Description of the Bonds.................................... S-11
Credit Enhancement.......................................... S-23
Security for the Bonds...................................... S-23
Servicing of the Pledged Mortgages.......................... S-31
Use of Proceeds............................................. S-34
Federal Income Tax Consequences............................. S-35
ERISA Matters............................................... S-35
Method of Distribution...................................... S-36
Legal Matters............................................... S-36
Ratings..................................................... S-36
Index of Defined Terms...................................... S-38
</TABLE>
S-2
<PAGE> 46
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We tell you about the bonds in two separate documents that progressively
provide more detail: (1) the accompanying prospectus, which provides general
information, some of which may not apply to your series of bonds, and (2) this
prospectus supplement, which describes the specific terms of your series of
bonds and may be different from the information in the prospectus.
IF THE TERMS OF YOUR SERIES OF BONDS AND ANY OTHER INFORMATION CONTAINED
HEREIN VARY BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,
YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under "Index of Defined Terms" beginning on
page S-38 in this prospectus supplement.
The underwriter may engage in transactions that stabilize, maintain, or in
some way affect the price of the bonds. These types of transactions may include
stabilizing the purchase of bonds to cover syndicate short positions and the
imposition of penalty bids. For a description of these activities, please read
the section entitled "Underwriting" in this prospectus supplement.
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, proxy statements and other information. You can read and copy
these documents at the public reference facility maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can
also copy and inspect such reports, proxy statements and other information at
the following regional offices of the SEC:
<TABLE>
<S> <C>
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. SEC filings are also available to the public on the SEC's web
site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information that we incorporate by
reference is considered to be part of this prospectus supplement, and later
information that we file with the SEC will automatically update and supersede
this information.
This prospectus supplement and the accompanying prospectus are part of a
registration statement filed by the Depositor with the SEC (Registration No.
333-22681). You may request a free copy of any of the above filings by writing
or calling:
SEQUOIA MORTGAGE FUNDING CORPORATION
591 REDWOOD HIGHWAY, SUITE 3120
MILL VALLEY, CA 94941
(415) 389-7373
S-3
<PAGE> 47
You should rely only on the information provided in this prospectus
supplement or the accompanying prospectus or incorporated by reference herein.
We have not authorized anyone else to provide you with different information.
You should not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus or that
the information incorporated by reference herein is accurate as of any date
other than the date stated therein.
S-4
<PAGE> 48
SUMMARY
This summary highlights selected information from this prospectus
supplement and does not contain all the information that you need to consider in
making your investment decision. Please read this entire prospectus supplement
and the accompanying prospectus carefully for additional information about the
Offered Bonds.
OFFERED BONDS
Sequoia Mortgage Trust , collateralized mortgage bonds,
Class A-1 and Class B-1 are the bonds being offered in this prospectus
supplement.
SECURITIES OTHER THAN THE OFFERED BONDS
In addition to the bonds, the investor certificate will be issued but will
not be offered by this prospectus supplement. The investor certificate will
provide limited credit support for the bonds as described in this prospectus
supplement.
DESIGNATIONS
<TABLE>
<S> <C>
Senior bonds -- Class A-1 Bonds
Subordinated bonds -- Class B-1 Bonds
Offered Bonds -- the senior bonds and
the subordinated
bonds
Book-entry bonds -- all classes of bonds
</TABLE>
BOND ISSUER
The Bond 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 in this prospectus supplement, 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 "Depositor" or the "Company"), and a wholly owned subsidiary of Redwood
Trust, Inc., a Maryland corporation ("Redwood Trust"). Redwood Trust will be the
manager of the issuer pursuant to a management agreement ("Management
Agreement") entered into with the issuer. None of the Company, Redwood Trust or
the Bond Trustee has guaranteed or is otherwise obligated with respect to
payment of the bonds, and no other person or entity other than the issuer is
obligated to pay the bonds.
We refer you to "The Issuer" in this prospectus supplement and the
accompanying prospectus for more detail.
BOND TRUSTEE
, a banking corporation organized under the laws of
.
OWNER TRUSTEE
, a banking corporation organized under the laws of the
state of Delaware.
MASTER SERVICING AGREEMENT
The pledged mortgages will be serviced pursuant to a master servicing
agreement dated as of 1, 200 ,among the issuer, the bond trustee
and the master servicer.
MASTER SERVICER
will act as master servicer for the pledged mortgages.
We refer you to Servicing of the Pledged Mortgages -- The Master Servicer'
and "-- Servicing Compensation and Payment of Expenses" in this prospectus
supplement for more detail.
DEPOSIT TRUST AGREEMENT
The issuer will be established and the investor certificate will be issued
pursuant to a deposit trust agreement dated as of , 200 , among the
depositor and the owner trustee.
INDENTURE
The bonds and the investor certificate will be issued pursuant to an
indenture dated as of , 200 , among the issuer and the bond
trustee.
CUT-OFF DATE
, 200
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CLOSING DATE
On or about , 200
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
next business day thereafter, commencing in 200 . 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 last business day preceding a payment date unless the bonds are no
longer book-entry bonds in which case the record date is the last business day
of the month preceding the month of a payment date.
PRIORITY OF PAYMENTS
Payments will be made on each payment date from available funds in the
following order of priority:
1. To interest on the senior bonds;
2. To principal of the senior bonds;
3. To interest on the subordinated bonds;
4. To principal of the subordinated bonds;
5. To interest on the investor certificate;
6. To principal of the investor certificate; and
7. To the holder of the investor certificate, all remaining funds.
We refer you to "Description of the Bonds -- Priority of Payment" in this
prospectus supplement and in the prospectus for more information.
PAYMENTS OF INTEREST
To the extent funds are available, each class of bonds will be entitled to
receive interest in the amount of the interest payment amount. The interest
accrual period for each class of bonds will be the calendar month preceding the
month of the respective payment date.
We refer you to "Description of the Bonds -- Interest" in this prospectus
supplement and in the prospectus for more information.
PAYMENTS OF PRINCIPAL
To the extent funds are available, principal payments in reduction of the
class principal amount of each class of bonds will be made on each payment date.
We refer you to "Description of the Bonds -- Principal" in this prospectus
supplement and in the prospectus for more information.
STATED MATURITY
The stated maturity for each class of bonds is the date determined by the
Depositor which is years after the payment date immediately following the last
maturity date of any pledged mortgage.
We refer you to "Description of the Bonds -- Stated Maturity" and
"-- Average Weighted Lives of the Bonds" in this prospectus supplement for more
detail.
OPTIONAL REDEMPTION OF THE BONDS
The bonds may be redeemed at a redemption price equal to 100% of the unpaid
principal amount of such bonds, plus accrued and unpaid interest thereon at the
applicable bond interest rate. The bonds are not otherwise subject to redemption
or call at the option of the issuer nor are they subject to special redemption.
We refer you to "Description of the Bonds -- Optional Redemption" in this
prospectus supplement and in the prospectus for more information.
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CREDIT ENHANCEMENT
- SUBORDINATION
The subordinated bonds and the investor certificate will provide credit
enhancement for the senior bonds. The investor certificate will provide credit
enhancement for the subordinated bonds.
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 as the holders of the subordinated bonds.
We refer you to "Description of the Bonds -- Priority of Payments and
Allocation of Shortfalls" and "Credit Enhancement" in this prospectus supplement
and in the prospectus for more information.
- BOND INSURANCE POLICY
will issue a financial guaranty insurance policy pursuant to
which it will irrevocably and unconditionally guarantee payment of the insured
payment if the bond trustee determines that available funds for a payment date
are less than the senior bond interest payment amount and the senior bond
principal payment amount. The insurer's claims paying ability is rated by
.
We refer you to "Credit Enhancement -- the Bond Insurance Policy" in this
prospectus supplement for more detail.
ADVANCES
The master servicer is obligated to make advances of cash which will be
included with mortgage collections, in an amount equal to the delinquent monthly
payments due on the immediately preceding monthly payment date. The master
servicer is under no obligation to make advances to the extent it determines
such advances are not recoverable from future payments or collections on the
related mortgage loans or to guarantee or insure against losses.
We refer you to "Servicing of Mortgage Loans -- Advances" in this
prospectus supplement and in the prospectus for more information.
SECURITY FOR THE BONDS
The bonds will be secured by collateral consisting of the following:
- pledged mortgages;
- bond account;
- distribution account; or
- any combination of the above.
We refer you to "Security for the Bonds -- the Pledged Mortgages",
"Description of the Bonds -- Payments on Pledged Mortgages; Accounts", and
"Servicing of the Pledged Mortgages".
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 nonexempt
bondholders.
We refer you to "Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus for more information.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended, or section 4975 of the Internal Revenue
Code of 1986, as amended, should carefully review with its legal advisors
whether the purchase or holding of Class A Bonds could give rise to a
transaction prohibited or not otherwise permissible under applicable law.
We refer you to "ERISA Considerations" in this prospectus supplement and in
the prospectus for more information.
LEGAL INVESTMENT
So long as the Class A Bonds are rated in one of the two highest ratings
categories by at least one nationally recognized statistical rating agency, the
Class A Bonds will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984 or SMMEA.
We refer you to "Legal Investment" in this prospectus supplement and in the
prospectus for more information.
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BOND RATING
It is a condition to the issuance of the Class A Bonds that the Class A
Bonds be rated "AAAr" by Standard & Poor's Ratings Services and "Aaa" by Moody's
Investors Service, Inc. Standard & Poor's assigns the additional symbol of "r"
to highlight classes of securities that Standard & Poor's believes may
experience high volatility or high variability in expected returns due to
non-credit risks; however, the absence of an "r" symbol should not be taken as
an indication that a class will exhibit volatility or variability in total
return.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
agency. A security rating does not address the frequency of prepayments on the
mortgage loans or the corresponding effect on yield to investors.
We refer you to "Bond Rating" in this prospectus supplement and in the
prospectus for more information.
USE OF PROCEEDS
The issuer intends to distribute all of the net proceeds of the issuance of
the bonds to the depositor which will apply such proceeds to the purchase of the
pledged mortgages.
We refer you to "Method of Payment" in this prospectus supplement and in
the prospectus for more information.
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RISK FACTORS
INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE
PURCHASE OF BONDS. YOU SHOULD ALSO CONSIDER THE RISK FACTORS DESCRIBED IN THE
ACCOMPANYING PROSPECTUS.
PREPAYMENTS ARE UNPREDICTABLE AND AFFECT YIELD
The rate of principal distributions and yield to maturity on the bonds will
be directly related to the rate of principal payments on the trust assets. For
example, the rate of principal payments on the loans will be affected by the
following:
- the amortization schedules of the loans;
- the rate of principal prepayments, including partial prepayments and
prepayments resulting from refinancing, by borrowers;
- liquidations of defaulted loans by the master servicer; and
- repurchases of loans by the seller as a result of defective documentation
or breaches of representations and warranties.
The rate of principal payments on loans is influenced by a variety of
economic, geographic, social and other factors. For example, if interest rates
for similar loans fall below the interest rates on the loans, the rate of
prepayment would generally be expected to increase. Conversely, if interest
rates on similar loans rise above the interest rates on the loans, the rate of
prepayment would generally be expected to decrease. We cannot predict the rate
at which borrowers will repay their loans. Please consider the following:
- If you are purchasing a bond at a discount, in particular, a
principal-only bond, your yield may be lower than expected if principal
payments on the loans occur at a slower rate than you expected;
- If you are purchasing a bond at a premium, in particular, an
interest-only bond, your yield may be lower than expected if principal
payments on the loans occur at a faster rate than you expected and you
could lose your initial investment; and
- The earlier a payment of principal occurs, the greater the impact on your
yield. For example, if you purchase a bond at a premium, although the
average rate of principal payments is consistent with your expectations,
if the rate of principal payments occurs initially at a rate higher than
expected, which would adversely impact your yield, a subsequent reduction
in the rate of principal payments will not offset any adverse yield
effect.
We refer you to "Security for the Bonds -- the Pledged Mortgages" in this
prospectus supplement for more detail.
CASH FLOW CONSIDERATIONS AND RISKS
The mortgaged property assets of the trust are the sole source of
distributions for the bonds. Even if the mortgaged properties provide adequate
security for the pledged mortgages, you could encounter substantial delays in
connection with the liquidation of pledged mortgages that are delinquent. This
could result in shortfalls in payments on the bonds if the credit enhancement
created by the overcollateralization of the bonds is insufficient and if
payments under the bond insurance policy were unavailable. 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 bondholders. If any of the mortgaged
properties fail to provide adequate security for the related pledged mortgages,
bondholders could experience a loss if the credit enhancement created by the
overcollateralization of the bonds has been exhausted and if payments under the
bond insurance policy were unavailable.
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YOU WILL HAVE LIMITED RECOURSE
The assets of the trust are the sole source of distributions for the bonds.
The bonds represent obligations solely of the issuer and neither the bonds nor
the trust assets will be guaranteed by or insured by any governmental agency or
instrumentality, the sponsor, the seller, the master servicer, the trustee or
any of their affiliates, unless otherwise specified. Consequently, if payments
on the trust assets are insufficient to make all payments required on the
certificates you may incur a loss on your investment.
CONCENTRATION OF PLEDGED MORTGAGES COULD ADVERSELY AFFECT YOUR INVESTMENT
Most of the pledged mortgages are secured by mortgaged properties located
in California and Maryland. 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
by the the occurrence of natural disasters, such as earthquakes, hurricanes,
tornadoes, tidal waves, mud slides, fires and floods, in these areas.
ABILITY TO RESELL SECURITIES MAY BE LIMITED
There is currently no market for any of the bonds. We cannot assure you
that a secondary market will develop, or if it does develop, that it will
continue to exist for the term of the bonds. Consequently, you may not be able
to sell your bonds readily or at prices that will enable you to realize your
desired yield. The market values of the bonds are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary market for asset backed bonds have experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity can have a
severely adverse effect on the prices of bonds that are especially sensitive to
prepayment, credit, orinterest rate risk, or that have been structured to meet
the investment requirements of limited categories of investors.
YOUR PAYMENTS AND RIGHTS MAY BE ADVERSELY AFFECTED BY INSOLVENCY OF SELLER
Redwood Trust, Sequoia Mortgage Funding Corporation and the issuer will
treat the transfer of the loans from Redwood Trust to Sequoia Mortgage Funding
Corporation and from Sequoia Mortgage Funding Corporation to the issuer as a
sale for accounting purposes. If these characterizations are correct, then if
Redwood Trust were to become bankrupt, the loans would not be part of Redwood
Trust's bankruptcy estate and would not be available to Redwood Trust's
creditors. On the other hand, if Redwood Trust becomes bankrupt, its bankruptcy
trustee or one of its creditors may argue that the transfer of the loans is a
pledge of the loans for a borrowing rather than a sale. Such an attempt, even if
unsuccessful, could result in delays in payments to you.
In the event of a bankruptcy of the master servicer, the bankruptcy trustee
or receiver may have the power to prevent the trustee or the bondholders from
appointing a successor master servicer, which could result in a delay in
payments to you. 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 master servicer to liquidate the
property, which could result in a delay in payments to you.
CONSEQUENCES OF OWNING BOOK-ENTRY SECURITIES
LIMIT ON LIQUIDITY OF SECURITIES. Issuance of the bonds in book-entry form
may reduce their liquidity in the secondary trading market because investors may
be unwilling to purchase certificates for which they cannot obtain physical
bonds.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
book-entry bonds can be effected only though the DTC, participating
organizations, indirect participants and certain banks, your ability to transfer
or pledge a book-entry bond to persons or entities that do not participate in
the DTC system or otherwise to take actions in respect of such bonds, may be
limited due to lack of a physical bond.
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DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt of
distributions on book-entry bonds because the distributions will be forwarded by
the trustee to DTC for DTC to credit the accounts of its participants which will
thereafter credit them to your account either directly or indirectly through
indirect participants, as applicable.
We refer you to "Description of the Bonds" in this prospectus supplement
for more detail.
RATING OF THE SECURITIES DOES NOT ASSURE PAYMENT
It will be a condition to the issuance of the bonds offered hereby that
they be rated in one of the four highest rating categories by the rating agency
identified in this supplement. The ratings of the bonds will depend primarily on
an assessment by the ratings agencies and the claims paying ability of the
insurer. The ratings of the bonds will be based on, among other things, the
adequacy of the value of the trust assets and any credit enhancement. The rating
should not be deemed a recommendation to purchase, hold or sell the bonds,
particularly since the ratings do not address market price or suitability for an
investor. There is no assurance that the ratings will remain in effect over the
life of the bond, and may be lowered or withdrawn.
We refer you to "Rating" in this prospectus supplement for more detail.
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").
BOOK-ENTRY BONDS
The Bonds will be book-entry Bonds (each, a Class of "Book-Entry Bonds").
Persons acquiring beneficial ownership interests in the Bonds ("Bond Owners")
may elect to hold their Bonds through the Depository Trust Company ("DTC") in
the United States, or CEDEL or Euroclear (in Europe) if they are participants of
such systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Bonds will be issued in one or more certificates which
equal the aggregate principal amount of the Bonds and will initially be
registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear
will hold omnibus positions on behalf of their participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A., will act as depositary for CEDEL and The Chase Manhattan Bank will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Bonds in minimum denominations
representing Class Principal Amounts of $ and in multiples of
$1,000 in excess thereof. Except as described below, no person acquiring a
Book-Entry Bond (each, a "beneficial owner") will be entitled to receive a
physical certificate representing such Bond (a "Definitive Bond"). Unless and
until Definitive Bonds are issued, it is anticipated that the only "Bondholders"
of the Bonds will be Cede & Co., as nominee of DTC. Bond Owners will not be
Bondholders as that term is used in the Indenture. Bond Owners are only
permitted to exercise their rights indirectly through the participating
organizations that utilize the services of DTC, including securities brokers and
dealers, banks and trust companies and clearing corporations and certain other
organizations ("Participants") and DTC.
The beneficial owner's ownership of a Book-Entry Bond will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Bond will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant, and on the records of
CEDEL or Euroclear, as appropriate).
Bond Owners will receive all payments of principal of, and interest on, the
Bonds from the Bond Trustee through DTC and DTC participants. While the Bonds
are outstanding (except under the circumstances described below), under the
rules, regulations and procedures creating and affecting DTC and its operations
(the "Rules"), DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Bonds and is required to receive and
transmit payments of principal of, and interest on, the
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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-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
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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 "Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Payments on the Book-Entry Bonds will be made on each Distribution Date by
the Bond Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable DTC participants in accordance
with DTC's normal procedures. Each DTC participant will be responsible for
disbursing such payments to the beneficial owners of the Book-Entry Bonds that
it represents and to each Financial Intermediary for which it acts as agent.
Each such Financial Intermediary will be responsible for disbursing funds to the
beneficial owners of the Book-Entry Bonds that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Bonds may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Bond Trustee to Cede & Co., as nominee of DTC. Payments with
respect to Bonds held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. See "FEDERAL INCOME TAX
CONSEQUENCES -- Withholding with Respect to Certain Foreign Investors" and
"-- Backup
S-14
<PAGE> 58
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 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
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<PAGE> 59
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 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
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<PAGE> 60
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.
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.
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<PAGE> 61
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 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
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<PAGE> 62
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 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
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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>
(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
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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).
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.
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<PAGE> 65
In general, the weighted average lives of the Bonds will be shortened if
the level of prepayments of principal of the Pledged Mortgages increases.
However, the weighted average lives of the Bonds will depend upon a variety of
other factors, including the timing of changes in such rate of principal
payments and the priority sequence of distributions of principal of the Classes
of Bonds. See "DESCRIPTION OF THE BONDS -- Principal" herein.
The interaction of the foregoing factors may have different effects on the
Senior Bonds and the Subordinated Bonds and the effects on any Class may vary at
different times during the life of such Class. Accordingly, no assurance can be
given as to the weighted average life of any Class of Bonds. Further, to the
extent the prices of the Bonds represent discounts or premiums to their
respective original Class Principal Amounts, variability in the weighted average
lives of such Classes of Bonds will result in variability in the related yields
to maturity. For an example of how the weighted average lives of the Classes of
Bonds may be affected at various constant Prepayment Assumptions, see the
Decrement Tables below.
DECREMENT TABLES
The following tables indicate the percentages of the initial Class
Principal Amounts of the Classes of Bonds that would be outstanding after each
of the dates shown at various constant Prepayment Assumptions and the
corresponding weighted average lives of such Classes. The tables have been
prepared on the basis of the Structuring Assumptions. It is not likely that (i)
all of the Pledged Mortgages will have the characteristics assumed, (ii) all of
the Pledged Mortgages will prepay at the constant Prepayment Assumptions
specified in the tables or at any constant Prepayment Assumption or (iii) all of
the Pledged Mortgages will prepay at the same rate. Moreover, the diverse
remaining terms to maturity of the Pledged Mortgages could produce slower or
faster principal payments than indicated in the tables at the specified constant
Prepayment Assumptions, even if the weighted average remaining term to maturity
of the Pledged Mortgages is consistent with the remaining terms to maturity of
the Pledged Mortgages specified in the Structuring Assumptions.
PERCENT OF INITIAL CLASS PRINCIPAL AMOUNTS OUTSTANDING
[DECREMENT TABLES]
REDEMPTION AT THE OPTION OF THE ISSUER
The Bonds may be redeemed in whole, but not in part, at the Issuer's
option, on any Payment Date on or after the earlier of (a) years after the
initial issuance of the Bonds and (b) the Payment Date on which the sum of (i)
the Senior Class Principal Amount (ii) the Subordinated Class Principal Amount
and (iii) the Invested Amount, after giving effect to payments to be made on
such Payment Date, is % or less of the aggregate of the Stated Principal
Balances of the Pledged Mortgages as of the Cut-off Date, at a redemption price
equal to 100% of the unpaid principal amount of such Bonds (including, in the
case of the Subordinated Bonds, any unpaid Subordinated Principal Carryover
Shortfall), plus accrued and unpaid interest at the applicable Bond Interest
Rate through the month preceding the month in which such optional redemption
date occurs. The Bonds are not otherwise subject to call or redemption at the
option of the Issuer nor are they subject to special redemption. See
"DESCRIPTION OF THE BONDS -- Redemption at the Option of the Issuer" in the
Prospectus.
Notice of any redemption to be made at the option of the Issuer must be
given by the Issuer to the Bond Trustee not less than 30 days prior to the
redemption date and must be mailed by the Issuer or the Bond Trustee to affected
Bondholders at least ten days prior to the redemption date.
CONTROLLING CLASS UNDER THE INDENTURE
For the purposes described in the Prospectus under the headings "The
Indenture -- Modification of Indenture," "-- Events of Default" and "Rights Upon
Event of Default," the "Controlling Class" shall be the Class A-1 Bondholders
or, if the Class A-1 Bonds are no longer outstanding, the Class B-1 Bondholders.
S-22
<PAGE> 66
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-23
<PAGE> 67
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-24
<PAGE> 68
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.
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<PAGE> 69
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Pledged Mortgages. Other than with respect to
rates of interest, percentages (approximate) are stated by Stated Principal
Balance of the Pledged Mortgages as of the Cut-off Date and have been rounded in
order to total 100%.
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-26
<PAGE> 70
<TABLE>
<CAPTION>
CURRENT PLEDGED MORTGAGE PRINCIPAL BALANCE(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-27
<PAGE> 71
<TABLE>
<CAPTION>
PURPOSE OF PLEDGED MORTGAGES
- -----------------------------------------------------------------------------------------------
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-28
<PAGE> 72
<TABLE>
<CAPTION>
PROPERTY TYPE
- -----------------------------------------------------------------------------------------------
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-29
<PAGE> 73
<TABLE>
<CAPTION>
NEXT NOTE RATE ADJUSTMENT DATES(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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,
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<PAGE> 74
Redwood Trust may remove such Pledged Mortgage (a "Deleted Pledged Mortgage")
from the Collateral and substitute in its place another mortgage loan (a
"Replacement Pledged Mortgage"). Any Replacement Pledged Mortgage generally
will, on the date of substitution, among other characteristics set forth in the
Mortgage Loan Purchase Agreement, (i) have a principal balance, after deduction
of all Scheduled Payments due in the month of substitution, not in excess of,
and not more than % less than, the Stated Principal Balance of the Deleted
Pledged Mortgage (the amount of any shortfall to be deposited in the Bond
Account by Redwood and held for distribution to the Bondholders on the related
Payment Date (a "Substitution Adjustment Amount")), (ii) have a Mortgage Rate
not lower than, and not more than % per annum higher than, that of the
Deleted Pledged Mortgage, (iii) have a Loan-to-Value Ratio not higher than that
of the Deleted Pledged Mortgage, (iv) have a remaining term to maturity not
greater than (and not more than less than) that of the Deleted Pledged
Mortgage, and (v) comply with all of the representations and warranties set
forth in the Mortgage Loan Purchase Agreement as of the date of substitution.
This cure, purchase or substitution obligation constitutes the sole remedy
available to Bondholders or the Bond Trustee for omission of, or a material
defect in, a Pledged Mortgage document.
UNDERWRITING STANDARDS
All of the Pledged Mortgages have been purchased by Redwood Trust in the
ordinary course of business directly from banks, savings and loan associations,
mortgage bankers and other mortgage loan originators (each, an "Originator") or
in the secondary market. Redwood Trust approves individual institutions as
eligible Originators after an evaluation of certain criteria, including the
Originator's mortgage origination and servicing experience and financial
stability. Each Originator and/or the entity from which Redwood Trust purchased
the Pledged Mortgages will represent and warrant that all Pledged Mortgages
originated and/or sold by it will have been underwritten in accordance with
standards consistent with those utilized by mortgage lenders generally during
the period of origination.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expense, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In most cases, an employment
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
S-31
<PAGE> 75
subservicers of the Pledged Mortgages. Notwithstanding any such servicing
arrangements, the Master Servicer will remain liable for its servicing duties
and obligations under the Master Servicing Agreement.
SERVICING AND COLLECTION PROCEDURES
On or prior to the Closing Date, the Master Servicer will enter into a
separate Servicing Agreement with each Servicer to perform, as independent
contractor, servicing functions for the Master Servicer subject to its
supervision. Such servicing functions include collection and remittance of
principal and interest payments, administration of mortgage escrow accounts,
collection of certain insurance claims and, if necessary, foreclosure. The
Master Servicer may permit Servicers to contract with subservicers to perform
some or all of the Servicer's servicing duties, but the Servicers will not
thereby be released from their obligations under the Servicing Agreement. The
Master Servicer also may enter into sub-servicing agreements directly with an
affiliate of a Servicer or permit a Servicer to transfer its servicing rights
and obligations to a third party. In such instances, the affiliate or third
party, as the case may be, will perform servicing functions comparable to those
normally performed by the Servicer as described above, and the Servicer will not
be obligated to perform such servicing functions. When used herein with respect
to servicing obligations, the term Servicer includes any such affiliate or third
party. The Master Servicer may perform certain supervisory functions with
respect to servicing by the Servicer directly or through an agent or independent
contractor and the Master Servicer will be responsible for administering and
servicing the Pledged Mortgages pursuant to the Master Servicing Agreement.
On or before the Closing Date, the Master Servicer will establish one or
more accounts (the "Bond Account") into which each Servicer will remit
collections on the mortgage loans serviced by it (net of its related servicing
compensation). For purposes of the Master Servicing Agreement, , as
Master Servicer, will be deemed to have received any amounts with respect to the
Pledged Mortgages that are received by a Servicer regardless of whether such
amounts are remitted by the Servicer to the Master Servicer. The Master Servicer
has reserved the right to remove the Servicer servicing any Pledged Mortgage at
any time and will exercise that right if it considers such removal to be in the
best interest of the Bondholders. In the event that the Master Servicer removes
a Servicer, the Master Servicer will continue to be responsible for servicing
the related Pledged Mortgages.
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
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<PAGE> 76
Mortgages, and no assurances can be given that the foreclosure, delinquency and
loss experience presented in the table below will be indicative of such
experience on the Pledged Mortgages in the future:
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31,
199 199 199
------------ ------------ ------------
<S> <C> <C> <C>
Total Number of Conventional Mortgage Loans in
Portfolio...........................................
Delinquent Mortgage Loans and Pending Foreclosures at
Period End (1):.....................................
30-59 days.......................................
60-89............................................
90 days or more (excluding foreclosures).........
Total Delinquencies..............................
Foreclosures pending
Total delinquencies and foreclosures pending........
Net Loss(2)...........................................
</TABLE>
- ---------------
(1) As a percentage of the total number of loans master serviced.
(2) There is no material difference between gross loss and net loss.
There can be no assurance that factors beyond the Master Servicer's
control, such as national or local economic conditions or downturns in the real
estate markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future. [For example, over the last
several years there has been a general deterioration of the real estate market
and weakening of the economy in many regions of the of the country, including
California. The general deterioration of the real estate market has been
reflected in increases in delinquencies of loans secured by real estate, slower
absorption rates of real estate into the market and lower sales prices for real
estate. The general weakening of the economy has been reflected in decreases in
the financial strength of borrowers and decreases in the value of collateral
serving as collateral for loans. If the real estate market and economy continue
to decline, the Master Servicer may experience an increase in delinquencies on
the loans it services and higher net loss on liquidated loans.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Pledged Mortgages are payable out of
the interest payments on each Pledged Mortgage. The Expenses Fees will vary from
Pledged Mortgage to Pledged Mortgage. The rate at which the Expense Fees accrue
(the "Expense Fee Rate") will range from % to % per annum, in each
case of the Stated Principal Balance of the related Pledged Mortgage. As of the
Cut-off Date, the weighted average Expense Fee Rate equaled approximately
%. The Expense Fees consist of (a) master servicing compensation payable to
the Master Servicer in respect of its master servicing activities (the "Master
Servicing Fee"), (b) servicing compensation payable to the Servicers in respect
of their servicing activities (the "Servicing Fee") and (c) fees payable to the
Bond Trustee in respect of its activities as trustee under the Indenture. The
Master Servicing Fee will be % per annum of the Stated Principal Balance of
each Pledged Mortgage. The Servicing Fee payable to each Servicer will vary from
Pledged Mortgage to Pledged Mortgage and will range from % to % per
annum, in each case of the Stated Principal 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.
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<PAGE> 77
ADJUSTMENT TO MASTER SERVICING FEE AND INVESTED AMOUNT IN CONNECTION WITH
CERTAIN PREPAID PLEDGED MORTGAGES
When a borrower prepays a Pledged Mortgage between Due Dates, the borrower
is required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Principal prepayments by borrowers received during a
calendar month will be distributed to Bondholders on the Payment Date in the
month following the month of receipt. Pursuant to the Master Servicing
Agreement, the Master Servicing Fee for any month may be reduced by an amount
with respect to each such prepaid Pledged Mortgage sufficient to pay to
Bondholders the full amount of interest to which they would be entitled in
respect of such Pledged Mortgage on the related Payment Date. If shortfalls in
interest as a result of prepayments in any month exceed the sum of (i) amount of
the Master Servicing Fee for such month and (ii) the amounts otherwise payable
on such Payment Date to the holder of the Investor Certificate as described in
clauses "fifth", "sixth" and "seventh" under "DESCRIPTION OF THE
BONDS -- Priority of Payments and Allocation of Shortfalls" herein, the amount
of funds available to be paid to Bondholders in respect of interest on such
Payment Date will be reduced by the amount of such excess. See "DESCRIPTION OF
THE BONDS -- Interest" herein.
ADVANCES
Subject to the following limitations, the Master Servicer will be required
to advance prior to each Payment Date, from its own funds, funds advanced by the
related Servicer or amounts received with respect to the Pledged Mortgages that
do not constitute Available Funds for such Payment Date, an amount equal to the
aggregate of payments of principal of and interest on the Pledged Mortgages (net
of the Master Servicing Fee and the applicable Servicing Fee with respect to the
related Pledged Mortgages) which were due on the related Due Date and which were
delinquent on the related Determination Date, together with an amount equivalent
to interest on each Pledged Mortgage as to which the related Mortgaged Property
has been acquired by the Bond Trustee through foreclosure or deed-in-lieu of
foreclosure ("REO Property") (any such advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Bonds and the Investor Certificate rather than to
guarantee or insure against losses. The Master Servicer is obligated to make
Advances with respect to delinquent payments of principal of or interest on each
Pledged Mortgage to the extent that such Advances are, in its reasonable
judgment, recoverable from future payments and collections or insurance payments
or proceeds of liquidation of the related Pledged Mortgage. If the Master
Servicer determines on any Determination Date to make an Advance, such Advance
will be included with the payment to Bondholders and the holder of the Investor
Certificate on the related Payment Date. [Any failure by a Servicer to advance
funds as required under the related Servicing Agreement will constitute a
default thereunder, in which case the Master Servicer will be obligated to make
any such advance in accordance with the terms of the Master Servicing
Agreement.] Any failure by the Master Servicer to make an Advance as required
under the Master Servicing Agreement with respect to the Bonds and the Investor
Certificate will constitute a Servicing Default thereunder, in which case the
Bond Trustee or the successor master servicer will be obligated to make any such
Advance, in accordance with the terms of the Master Servicing Agreement. Subject
to the terms of the Bond Insurance Policy, the Bond Insurance Policy will
provide protection to the Senior Bondholders against any shortfall resulting
from delinquencies as to which a 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.
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<PAGE> 78
FEDERAL INCOME TAX CONSEQUENCES
Giancarlo and Gnazzo, A Professional Corporation, has advised the Company
that, in its opinion the Bonds will be treated as debt for federal income tax
purposes, and not as an ownership interest in the Mortgage Collateral, the
Issuer or a separate association taxable as a corporation. Interest, including
original issue discount with respect to any Class of Bonds issued with original
issue discount, will be taxable to non-exempt Bondholders. The Tax Prepayment
Assumption (as defined in the Prospectus under "FEDERAL INCOME TAX
CONSEQUENCES -- Original Issue Discount") for the purposes of determining the
amount and rate of accrual of original issue discount on the Bonds assumes that
the Pledged Mortgages are prepaid at a rate of % of the Prepayment
Assumption. Based upon (i) [the assumed prepayment rate] and (ii) the expected
price to the public of each Class of the Bonds as of the date hereof (including
interest accrued before the issue date, if any), the Senior Bonds will not be
issued with original issue discount and the Subordinated Bonds will be treated
as issued with original issue discount. [Although it is unclear, the Issuer
intends to treat the Bonds as "Variable Rate Debt Instruments" and the stated
interest on the Bonds as "qualified stated interest payments" (as each term is
defined in the Prospectus under "FEDERAL INCOME TAX CONSEQUENCES")].
Notwithstanding the use of in pricing the Bonds, no
representation is made that the Pledged Mortgages will actually prepay at
or at any other rate. The amount of original issue discount and
certain other information with respect to each Bond will be set forth on the
face of such Bond as required by applicable regulations and as described in the
Prospectus. See "DESCRIPTION OF THE BONDS -- Weighted Average Life of the Bonds"
herein and "FEDERAL TAX CONSEQUENCES" in the Prospectus.
The Issuer will not elect to treat the segregated pool of assets securing
the Bonds as a real estate mortgage investment conduit ("REMIC") for federal
income tax purposes. Giancarlo & Gnazzo, A Professional Corporation, has further
advised the Company that, in its opinion, the Issuer will not be classified as a
taxable mortgage pool.
ERISA MATTERS
Fiduciaries of employee benefit plans and certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans, and collective investment funds in which such plans, accounts, annuities
or arrangements are invested, that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or corresponding provisions of the
Internal Revenue Code of 1986, as amended (the "Code") (any of the foregoing a
"Plan"), persons acting on behalf of a Plan, or persons using the assets of a
Plan ("Plan Investors"), should carefully review with their legal advisors
whether the purchase or holding of the Bonds could give rise to a transaction
that is prohibited under ERISA or the Code or cause the Pledged Mortgages
securing the Bonds to be treated as "plan assets" for purposes of regulations of
the Department of Labor set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset
Regulations"). Prospective investors should be aware that, although certain
exceptions from the application of the prohibited transaction rules and the Plan
Asset Regulations exist, there can be no assurance that any such exception will
apply with respect to the acquisition of the Bonds. See "ERISA MATTERS" in the
Prospectus.
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 invest-
S-35
<PAGE> 79
ments by bank collective investment funds; (iii) PTCE 90-1, regarding
investments by insurance company pooled separate accounts; (iv) PTCE 84-14,
regarding transactions negotiated by qualified professional asset managers; or
(v) PTCE 96-23, regarding transactions effected by in-house asset managers.
Before purchasing the Bonds, a Plan subject to the fiduciary responsibility
provisions of ERISA or described in Section 4975(e)(1) (and not exempt under
Section 4975(g)) of the Code should consult with its counsel to determine
whether the conditions of any exemption would be met. A purchaser of the Bonds
should be aware, however, that even if the conditions specified in one or more
exemptions are met, the scope of the relief provided by an exemption might not
cover all acts that might be construed as prohibited transactions. See "ERISA
MATTERS" in the Prospectus.
Although not entirely free from doubt, the Issuer believes that the Bonds
will be treated as debt obligations without significant equity features for
purposes of the Plan Asset Regulations. Accordingly, a Plan that acquires the
Bonds should not be treated as having acquired a direct interest in the assets
of the Issuer. However, there can be no complete assurance that the Bonds will
be treated as debt obligations without significant equity features for purposes
of the Plan Asset Regulations.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Company, Redwood Trust and the Underwriter, the Company has agreed
to cause the Issuer to sell to the Underwriter, and the Underwriter has agreed
to purchase from the Issuer, the Bonds. Distribution of the Bonds will be made
by the Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the sale
of the Bonds, the Underwriter may be deemed to have received compensation from
the Issuer in the form of underwriting discounts.
The Underwriter intends to make a secondary market in the Bonds, but has no
obligation to do so. There can be no assurance that a secondary market for the
Bonds will develop or, if it does develop, that it will continue or that it will
provide Bondholders with a sufficient level of liquidity of investment. The
Bonds will not be listed on any national securities exchange.
The Company and Redwood Trust have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to, certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Bonds will be passed upon for the Issuer by Tobin &
Tobin, a professional corporation, San Francisco, California. Certain tax
matters will be passed upon by for the Issuer by Giancarlo and Gnazzo, A
Professional Corporation, San Francisco, California. Brown & Wood LLP, New York,
New York will act as counsel for the Underwriter.
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
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<PAGE> 80
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> 81
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adjustment Date............................................. S-24
Advance..................................................... S-34
Available Funds............................................. S-16
Belgian Cooperative......................................... S-14
Beneficial owner............................................ S-12
Bond Account.............................................S-15, S-32
Bond Distribution Amount.................................... S-15
Bond Interest Rate.......................................... S-16
Bond Owners................................................. S-12
Bond Trustee................................................ S-15
Bonds.................................................S-1, S-5, S11
Book-Entry Bonds............................................ S-12
CEDEL Participants.......................................... S-13
Certificate Interest Payment Amount......................... S-17
Certificate Interest Rate................................... S-12
Class Principal Amount...................................... S-12
Code.....................................................S-10, S-35
Company....................................................S-2, S-5
Controlling Class........................................... S-22
Cooperative................................................. S-14
CPR......................................................... S-21
Cut-off Date Pool Principal Balance......................... S-24
Definitive Bond............................................. S-12
Deleted Pledged Mortgage.................................... S-31
Deposit Trust Agreement..................................... S-5
Distribution Account......................................S-9, S-15
DTC......................................................... S-12
Due Date.................................................... S-24
ERISA....................................................S-10, S-35
Euroclear Operator.......................................... S-14
Euroclear Participants...................................... S-14
European Depositaries....................................... S-12
Expense Fee Rate............................................ S-33
FHLMC....................................................... S-25
Financial Intermediary...................................... S-12
FNMA........................................................ S-25
Index.....................................................S-8, S-24
Indirect Participants....................................... S-13
Insurance Proceeds.......................................... S-16
Interest Accrual Period...................................S-6, S-17
Invested Amount............................................. S-12
Invested Payment Amount..................................... S-17
Investor Certificate......................................S-1, S-11
Investor Percentage......................................... S-18
Issuer....................................................S-5, S-11
Liquidated Pledged Mortgage................................. S-20
</TABLE>
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<PAGE> 82
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Liquidation Proceeds........................................ S-16
Loan-to-Value Ratio......................................... S-25
Management Agreement........................................ S-5
Margin...................................................... S-24
Master Servicing Fee........................................ S-33
Maximum Rate................................................ S-24
Morgan...................................................... S-14
Mortgage.................................................... S-30
Mortgage File............................................... S-30
Mortgage Loan Purchase Agreement............................ S-23
Mortgage Note............................................... S-30
Mortgaged Property.......................................... S-23
Net Interest Shortfall...................................... S-17
Net Interest Shortfalls..................................... S-17
Offered Bonds........................................S-1, S-5, S-12
Original Invested Amount.................................... S-12
Original Senior Class Principal Amount...................... S-12
Original Subordinated Class Principal Amount................ S-12
Originator.................................................. S-31
Owner Trustee............................................... S-5
Participants................................................ S-12
Payment Date.........................................S-1, S-5, S-16
Periodic Rate Cap........................................... S-24
Plan.....................................................S-10, S-35
Plan Asset Regulations...................................S-10, S-35
Plan Investors...........................................S-10, S-35
Pledged Mortgage Pool.....................................S-7, S-23
Pledged Mortgages........................................... S-23
Pool Principal Balance...................................... S-18
Prepayment Assumption....................................... S-21
Prepayment Interest Shortfall............................... S-17
Primary Mortgage Insurance Policy........................... S-25
PTCE........................................................ S-35
Rating Agencies...........................................S-8, S-36
Realized Loss............................................... S-20
Record Date................................................. S-16
Redwood Trust........................................S-2, S-5, S-11
Relevant Depositary......................................... S-12
REMIC....................................................... S-35
REO Property................................................ S-34
Replacement Pledged Mortgage................................ S-31
Rules....................................................... S-12
Scheduled Payments.......................................... S-24
Senior Bond Interest Rate................................... S-17
Senior Bonds..............................................S-1, S-11
Senior Class Principal Amount............................... S-12
Senior Interest Payment Amount.............................. S-17
Senior Percentage........................................... S-18
</TABLE>
S-39
<PAGE> 83
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Senior Principal Payment Amount............................. S-18
Servicing Fee............................................... S-33
Shortfalls.................................................. S-19
SMMEA....................................................... S-7
Stated Principal Balance.................................... S-18
Structuring Assumptions..................................... S-20
Subordinated Bond Interest Rate............................. S-17
Subordinated Bonds........................................S-1, S-11
Subordinated Class Principal Amount......................... S-12
Subordinated Interest Carryover Shortfall................... S-17
Subordinated Interest Payment Amount........................ S-17
Subordinated Percentage..................................... S-18
Subordinated Principal Carryover Shortfall.................. S-18
Subordinated Principal Payment Amount....................... S-18
Substitution Adjustment Amount.............................. S-31
Terms and Conditions........................................ S-14
Variable Rate Debt Instruments.............................. S-35
</TABLE>
S-40
<PAGE> 84
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Sequoia
Mortgage Trust , Collateralized Mortgage Bonds (the "Global Bonds")
will be available only in book-entry form. Investors in the Global Bonds may
hold such Global Bonds through any of The Depository Trust Company ("DTC"),
CEDEL or Euroclear. The Global Bonds will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Bonds through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Bonds through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior collateralized mortgage bond issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Bonds will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Bonds will be subject to
U.S. withholding taxes unless such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All Global Bonds will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors' interests in the Global Bonds will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC (each, a "DTC Participant"). As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Bonds through DTC will follow the
settlement practices' applicable to other collateralized mortgage bond issues.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Bonds through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
Eurobonds, except that there will be no temporary global security and no
"lock-up" or restricted period. Global Bonds will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
collateralized mortgage bond issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional Eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global
Bonds are to be transferred from the account of a DTC Participant to the account
of a CEDEL Participant or a Euroclear Participant, the purchaser will send
instructions to CEDEL or Euroclear through a CEDEL Participant or
A-1
<PAGE> 85
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Bonds against payment. Payment will include interest accrued
on the Global Bonds from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Bonds. After settlement has been completed, the Global Bonds will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Bonds will accrue from, the value date (which would be the preceding day when
settlement occurred in New York). If settlement is not completed on the intended
value date (i.e., the trade fails), the CEDEL or Euroclear cash debt will be
valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global Bonds
are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Bonds would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Bonds were credited to their accounts. However,
interest on the Global Bonds would accrue from the value date. Therefore, in
many cases the investment income on the Global Bonds earned during that one-day
period may substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each CEDEL Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Bonds to the
respective European Depository for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global Bonds are
to be transferred by the respective clearing system, through the respective
Depositary, to a DTC Participant. The seller will send instructions to CEDEL or
Euroclear through a CEDEL Participant or Euroclear Participant at least one
business day prior to settlement. In these cases CEDEL or Euroclear will
instruct the respective Depositary, as appropriate, to deliver the Global Bonds
to the DTC Participant's account against payment. Payment will include interest
accrued on the Global Bonds from and including the last coupon payment to and
excluding the settlement date on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of the CEDEL Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
CEDEL Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended valued date (i.e., the trade fails), receipt of the cash proceeds
in the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
A-2
<PAGE> 86
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Bonds from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Bonds in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Bonds
sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of the Global Bonds holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of the Global
Bonds that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are Bond Owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption
or Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Bond Owner or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Bond Owner of a Bond or,
in the case of a Form 1001 or a Form 4224 filer, his agent, files by submitting
the appropriate form to the person through whom it holds (the clearing agency,
in the case of persons holding directly on the books of the clearing agency).
Form W-8 and Form 1001 are effective for three calendar years and Form 4224 is
effective for one calendar year.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate
whose income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. This
A-3
<PAGE> 87
summary does not deal with all aspects of U.S. federal income tax withholding
that may be relevant to foreign holders of the Global Bonds. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Bonds.
A-4
<PAGE> 88
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY , 2000)
$
[LOGO] SEQUOIA MORTGAGE TRUST
BOND ISSUER
Consider carefully the
risk factors beginning on
page S-7 of this
prospectus supplement
which include:
- Yield, Prepayment and
Maturity Risks;
- Cash Flow
Considerations;
- Limited Recourse;
- Bankruptcy and
Insolvency Risks;
- Risks associated with
Book-Entry Bonds; and
- Limited Liquidity of
Investments.
The Bonds are redeemable
only under circumstances
described in this
prospectus supplement.
The Bonds represent
obligations of the Trust
only and do not represent
an interest in or
obligation of the Bond
Issuer, Sequoia Mortgage
Funding Corporation or any
of their affiliates.
The Senior Bonds will be unconditionally and irrevocably guaranteed as to
payment of Insured Payments, as defined in this prospectus supplement, pursuant
to the terms of the financial guaranty insurance policy to be issued:
[INSURER LOGO]
The Trust will make a REMIC election for federal income tax purposes.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
COLLATERALIZED MORTGAGE BONDS
$ CLASS A-1 BONDS
$ CLASS B-1 BONDS
THE TRUST WILL ISSUE:
- - One class of Senior Class A-1 Bonds;
- - One class of Subordinated Class B-1 Bonds; and
- - [One or Two] classes of Residual [Certificates or Bonds].
THE BONDS:
- - Will be collateralized by primarily year [fixed adjustable] rate,
conventional mortgage loans secured by first liens on one- to four-family
residential properties;
- - Pay the holders of Senior Bonds payments of interest and principal from the
collateral pledged to secure the Bonds and the bond insurance policy;
- - Pay the holders of Subordinated Bonds payments of interest and principal
solely from the collateral pledged to secure the Bonds as described more fully
under the heading "Description of Bonds-Priority of Payments and Allocation of
Shortfalls" in this prospectus supplement; and
- - Pay all holders of Bonds the amounts of principal and interest due thereon on
the th day of each month, or if such day is not a business day, the next
succeeding business day, commencing on , 200 . Interest
payments are described more fully under the heading "Description of the
Bonds-Interest" in this prospectus supplement;
<PAGE> 89
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We tell you about the bonds in two separate documents that progressively
provide more detail: (1) the accompanying prospectus, which provides general
information, some of which may not apply to your series of bonds, and (2) this
prospectus supplement, which describes the specific terms of your series of
bonds and may be different from the information in the prospectus.
IF THE TERMS OF YOUR SERIES OF BONDS AND ANY OTHER INFORMATION CONTAINED
HEREIN VARY BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,
YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under "Index of Defined Terms" beginning on
page S-36 in this prospectus supplement.
The underwriter may engage in transactions that stabilize, maintain, or in some
way affect the price of the bonds. These types of transactions may include
stabilizing the purchase of bonds to cover syndicate short positions and the
imposition of penalty bids. For a description of these activities, please read
the section entitled "Underwriting" in this prospectus supplement.
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, proxy statements and other information. You can read and copy
these documents at the public reference facility maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can
also copy and inspect such reports, proxy statements and other information at
the following regional offices of the SEC:
<TABLE>
<S> <C>
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. SEC filings are also available to the public on the SEC's web
site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information that we incorporate by
reference is considered to be part of this prospectus supplement, and later
information that we file with the SEC will automatically update and supersede
this information.
This prospectus supplement and the accompanying prospectus are part of a
registration statement filed by the Depositor with the SEC (Registration No.
333-22681). You may request a free copy of any of the above filings by writing
or calling:
SEQUOIA MORTGAGE FUNDING CORPORATION
591 REDWOOD HIGHWAY, SUITE 3120
MILL VALLEY, CA 94941
(415) 389-7373
S-1
<PAGE> 90
You should rely only on the information provided in this prospectus supplement
or the accompanying prospectus or incorporated by reference herein. We have not
authorized anyone else to provide you with different information. You should not
assume that the information in this prospectus supplement or the accompanying
prospectus is accurate as of any date other than the date on the cover page of
this prospectus supplement or the accompanying prospectus or that the
information incorporated by reference herein is accurate as of any date other
than the date stated therein.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by Reference............. S-1
Available Information....................................... S-1
Summary..................................................... S-3
Risk Factors................................................ S-7
The Issuer.................................................. S-9
Description of the Bonds.................................... S-9
Credit Enhancement.......................................... S-20
Security for the Bonds...................................... S-21
Servicing of the Pledged Mortgages.......................... S-29
Use of Proceeds............................................. S-32
Federal Income Tax Consequences............................. S-33
ERISA Matters............................................... S-33
Method of Distribution...................................... S-34
Legal Matters............................................... S-34
Ratings..................................................... S-34
Index of Defined Terms...................................... S-36
</TABLE>
S-2
<PAGE> 91
SUMMARY
This summary highlights selected information from this prospectus
supplement and does not contain all the information that you need to consider in
making your investment decision. Please read this entire prospectus supplement
and the accompanying prospectus carefully for additional information about the
Offered Bonds.
OFFERED BONDS
Sequoia Mortgage Trust , collateralized mortgage bonds,
Class A-1 and Class B-1 are the bonds being offered by this prospectus
supplement.
SECURITIES OTHER THAN THE OFFERED BONDS
In addition to the bonds, the residual [certificates or bonds] will be
issued but will not be offered by this prospectus supplement. [The residual
bonds will provide limited credit support for the bonds as described in this
prospectus supplement.]
DESIGNATIONS
<TABLE>
<S> <C>
Senior bonds -- Class A-1 Bonds
Subordinated bonds -- Class B-1 Bonds
[Residual certificates -- Class R-UT
Certificates
and Class R-LT
Certificates]
[Residual bonds -- Residual Bonds]
Bonds -- the senior
bonds, the
subordinated
bonds [and the
residual bonds]
Book-entry bonds -- all classes of
bonds
</TABLE>
BOND ISSUER
The Bond 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 in this prospectus supplement, for the sole purpose of
issuing the bonds and the residual [certificates or bonds]. The settlor and sole
beneficiary of the issuer is Sequoia Mortgage Funding Corporation, a Delaware
corporation (the "Depositor" or 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 ("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 other person or
entity other than the issuer is obligated to pay the bonds.
We refer you to "The Issuer" in this prospectus supplement and the
accompanying prospectus for more detail.
BOND TRUSTEE
, a banking corporation organized under the laws of .
OWNER TRUSTEE
, a banking corporation organized under the laws of the state of
Delaware.
MASTER SERVICING AGREEMENT
The pledged mortgages will be serviced pursuant to a master servicing
agreement dated as of 1, 200 , among the issuer, the bond
trustee and the master servicer.
MASTER SERVICER
will act as master servicer for the pledged mortgages.
We refer you to "Servicing of the Pledged Mortgages -- The Master Servicer"
and "-- Servicing Compensation and Payment of Expenses" in this prospectus
supplement for more detail.
DEPOSIT TRUST AGREEMENT
The issuer will be established pursuant to an amended and restated deposit
trust agreement dated as of , 200 , among the depositor and the
owner trustee.
S-3
<PAGE> 92
INDENTURE
The bonds [and residual certificates] will be issued pursuant to an
indenture dated as of , 20 , among the issuer and the trustee.
CUT-OFF DATE
, 200
CLOSING DATE
On or about , 200
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
next business day thereafter, commencing in 200 . 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 last business day preceding a payment date unless the bonds are no
longer book-entry bonds in which case the record date is the last business day
of the month preceding the month of a payment date.
PRIORITY OF PAYMENTS
Payments will be made on each payment date from available funds in the
following order of priority:
1. To interest on the senior bonds;
2. To principal of the senior bonds;
3. To interest on the subordinated bonds;
4. To principal of the subordinated bonds;
5. [To interest on the residual bonds];
6. [To principal of the residual bonds]; and
7. [To the holder of the residual certificate, all remaining funds.]
We refer you to "Description of the Bonds -- Priority of Payment" in this
prospectus supplement and in the prospectus for more information.
PAYMENTS OF INTEREST
To the extent funds are available, each class of bonds will be entitled to
receive interest in the amount of the interest payment amount. The interest
accrual period for each class of bonds will be the calendar month preceding the
month of the respective payment date.
We refer you to "Description of the Bonds -- Interest" in this prospectus
supplement and in the prospectus for more information.
PAYMENTS OF PRINCIPAL
To the extent funds are available, principal payments in reduction of the
class principal amount of each class of bonds will be made on each payment date.
We refer you to "Description of the Bonds -- Principal" in this prospectus
supplement and in the prospectus for more information.
STATED MATURITY
The stated maturity for each class of bonds is the date determined by the
Depositor which is years after the payment date immediately following the last
maturity date of any pledged mortgage.
We refer you to "Description of the Bonds -- Stated Maturity" and
"-- Average Weighted Lives of the Bonds" in this prospectus supplement for more
detail.
OPTIONAL REDEMPTION OF THE BONDS
The bonds may be redeemed at a redemption price equal to 100% of the unpaid
principal amount of such bonds, plus accrued and unpaid interest thereon at the
applicable bond interest rate. The bonds are not otherwise subject to redemption
or call at the option of the issuer nor are they subject to special redemption.
S-4
<PAGE> 93
We refer you to "Description of the Bonds -- Optional Redemption" in this
prospectus supplement and in the prospectus for more information.
CREDIT ENHANCEMENT
- SUBORDINATION
The subordinated bonds [and the residual bonds] will provide credit
enhancement for the senior bonds. [The residual bonds will provide credit
enhancement for the subordinated bonds.]
The rights of holders of the subordinated bonds [and the residual bonds] 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 residual bonds will be further subordinated to such rights of the holders of
the subordinated bonds.]
We refer you to "Description of the Bonds -- Priority of Payments and
Allocation of Shortfalls" and "Credit Enhancement" in this prospectus supplement
and in the prospectus for more information.
- BOND INSURANCE POLICY
will issue a financial guaranty insurance policy pursuant to
which it will irrevocably and unconditionally guarantee payment of the insured
payment if the bond trustee determines that available funds for a payment date
are less than the senior bond interest payment amount and the senior bond
principal payment amount. The insurer's claims paying ability is rated by
.
We refer you to "Credit Enhancement -- the Bond Insurance Policy" in this
prospectus supplement for more detail.
ADVANCES
The master servicer is obligated to make advances of cash which will be
included with mortgage collections, in an amount equal to the delinquent monthly
payments due on the immediately preceding monthly payment date. The master
servicer is under no obligation to make advances to the extent it determines
such advances are not recoverable from future payments or collections on the
related mortgage loans or to guarantee or insure against losses.
We refer you to "Servicing of Mortgage Loans -- Advances" in this
prospectus supplement and in the prospectus for more information.
SECURITY FOR THE BONDS
The bonds will be secured by collateral consisting of the following:
- pledged mortgages;
- bond account;
- distribution account; or
- any combination of the above.
We refer you to "Security for the Bonds -- the Pledged Mortgages",
"Description of the Bonds -- Payments on Pledged Mortgages; Accounts", and
"Servicing of the Pledged Mortgages".
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the trust fund, will comprise multiple
real estate mortgage investment conduits, organized in a [tiered] REMIC
structure. The Class A-1 Bonds and Class B-1 Bonds will represent beneficial
ownership of REMIC regular interests in the upper tier REMIC identified in the
pooling and servicing agreement.
The Class R Bonds will represent the beneficial ownership of the sole class
of residual interest in each REMIC.
We refer you to "Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus for more information.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended, or section 4975 of the Internal Revenue
Code of 1986, as amended, should carefully review with its legal advisors
whether the purchase or holding of Class A Bonds could give rise to a
transaction prohibited or not otherwise permissible under applicable law.
We refer you to "ERISA Considerations" in this prospectus supplement and in
the prospectus for more information.
S-5
<PAGE> 94
LEGAL INVESTMENT
So long as the Class A Bonds are rated in one of the two highest ratings
categories by at least one nationally recognized statistical rating agency, the
Class A Bonds will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984 or SMMEA.
We refer you to "Legal Investment" in this prospectus supplement and in the
prospectus for more information.
BOND RATING
It is a condition to the issuance of the Class A Bonds that the Class A
Bonds be rated "AAAr" by Standard & Poor's Ratings Services and "Aaa" by Moody's
Investors Service, Inc. Standard & Poor's assigns the additional symbol of "r"
to highlight classes of securities that Standard & Poor's believes may
experience high volatility or high variability in expected returns due to
non-credit risks; however, the absence of an "r" symbol should not be taken as
an indication that a class will exhibit volatility or variability in total
return.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
agency. A security rating does not address the frequency of prepayments on the
mortgage loans or the corresponding effect on yield to investors.
We refer you to "Bond Rating" in this prospectus supplement and in the
prospectus for more information.
USE OF PROCEEDS
The issuer intends to distribute all of the net proceeds of the issuance of
the bonds to the depositor which will apply such proceeds to the purchase of the
pledged mortgages.
We refer you to "Method of Payment" in this prospectus supplement and in
the prospectus for more information.
S-6
<PAGE> 95
RISK FACTORS
INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE
PURCHASE OF BONDS. YOU SHOULD ALSO CONSIDER THE RISK FACTORS DESCRIBED IN THE
ACCOMPANYING PROSPECTUS.
PREPAYMENTS ARE UNPREDICTABLE AND AFFECT YIELD
The rate of principal distributions and yield to maturity on the bonds will
be directly related to the rate of principal payments on the trust assets. For
example, the rate of principal payments on the loans will be affected by the
following:
- the amortization schedules of the loans;
- the rate of principal prepayments, including partial prepayments and
prepayments resulting from refinancing, by borrowers;
- liquidations of defaulted loans by the master servicer;
- repurchases of loans by the seller as a result of defective documentation
or breaches of representations and warranties; and
- the redemption of the bonds by the issuer.
The rate of principal payments on loans is influenced by a variety of
economic, geographic, social and other factors. For example, if interest rates
for similar loans fall below the interest rates on the loans, the rate of
prepayment would generally be expected to increase. Conversely, if interest
rates on similar loans rise above the interest rates on the loans, the rate of
prepayment would generally be expected to decrease. We cannot predict the rate
at which borrowers will repay their loans. Please consider the following:
- If you are purchasing a bond at a discount, in particular, a
principal-only bond, your yield may be lower than expected if principal
payments on the loans occur at a slower rate than you expected;
- If you are purchasing a bond at a premium, in particular, an
interest-only bond, your yield may be lower than expected if principal
payments on the loans occur at a faster rate than you expected and you
could lose your initial investment; and
- The earlier a payment of principal occurs, the greater the impact on your
yield. For example, if you purchase a bond at a premium, although the
average rate of principal payments is consistent with your expectations,
if the rate of principal payments occurs initially at a rate higher than
expected, which would adversely impact your yield, a subsequent reduction
in the rate of principal payments will not offset any adverse yield
effect.
We refer you to "Security for the Bonds -- the Pledged Mortgages" in this
prospectus supplement for more detail.
CASH FLOW CONSIDERATIONS AND RISKS
The mortgaged property assets of the trust are the sole source of
distributions for the bonds. Even if the mortgaged properties provide adequate
security for the bond collateral pledged mortgages, you could encounter
substantial delays in connection with the liquidation of pledged mortgages that
are delinquent. This could result in shortfalls in payments on the bonds if the
credit enhancement created by the overcollateralization of the bonds is
insufficient and if payments under the bond insurance policy were unavailable.
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 bondholders.
If any of the mortgaged properties fail to provide adequate security for the
related pledged mortgages, bondholders could experience a loss if the credit
enhancement created by the overcollateralization of the bonds has been exhausted
and if payments under the bond insurance policy were unavailable.
S-7
<PAGE> 96
YOU WILL HAVE LIMITED RECOURSE
The assets of the trust are the sole source of distributions for the bonds.
The bonds represent obligations solely of the Issuer and neither the bonds nor
the trust assets will be guaranteed by or insured by any governmental agency or
instrumentality, the sponsor, the seller, the master servicer, the trustee or
any of their affiliates, unless otherwise specified. Consequently, if payments
on the trust assets are insufficient to make all payments required on the bonds
you may incur a loss on your investment.
CONCENTRATION OF PLEDGED MORTGAGES COULD ADVERSELY AFFECT YOUR INVESTMENT
Most of the pledged mortgages are secured by mortgaged properties located
in California and Maryland. 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
by the occurrence of natural disasters, such as earthquakes, hurricanes,
tornadoes, tidal waves, mud slides, fires and floods, in these areas.
ABILITY TO RESELL SECURITIES MAY BE LIMITED
There is currently no market for any of the bonds. We cannot assure you
that a secondary market will develop, or if it does develop, that it will
continue to exist for the term of the bonds. Consequently, you may not be able
to sell your bonds readily or at prices that will enable you to realize your
desired yield. The market values of the bonds are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary market for asset backed bonds has experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity can have a
severely adverse effect on the prices of bonds that are especially sensitive to
prepayment, credit, or interest rate risk, or that have been structured to meet
the investment requirements of limited categories of investors.
YOUR PAYMENTS AND RIGHTS MAY BE ADVERSELY AFFECTED BY INSOLVENCY OF SELLER
RWT Holdings, the seller and the depositor will treat the transfer of the
loans from RWT Holdings to the seller and from the seller to the depositor as a
sale for accounting purposes. If these characterizations are correct, then if
RWT Holdings were to become bankrupt, the loans would not be part of RWT
Holding's bankruptcy estate and would not be available to RWT Holding's
creditors. On the other hand, if RWT Holdings becomes bankrupt, its bankruptcy
trustee or one of its creditors may argue that the transfer of the loans is a
pledge of the loans for a borrowing rather than a sale. Such an attempt, even if
unsuccessful, could result in delays in payments to you.
In the event of a bankruptcy of the master servicer, the bankruptcy trustee
or receiver may have the power to prevent the trustee or the bondholders from
appointing a successor master servicer, which could result in a delay in
payments to you. 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 master servicer to liquidate the
property, which could result in a delay in payments to you.
CONSEQUENCES OF OWNING BOOK-ENTRY SECURITIES
LIMIT ON LIQUIDITY OF SECURITIES. Issuance of the bonds in book-entry form
may reduce their liquidity in the secondary trading market because investors may
be unwilling to purchase bonds for which they cannot obtain physical bonds.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
book-entry bonds can be effected only though the DTC, participating
organizations, indirect participants and certain banks, your ability to transfer
or pledge a book-entry bond to persons or entities that do not participate in
the DTC system or otherwise to take actions in respect of such bonds, may be
limited due to lack of a physical bond.
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DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt of
distributions on book-entry bonds because the distributions will be forwarded by
the trustee to DTC for DTC to credit the accounts of its participants which will
thereafter credit them to your account either directly or indirectly through
indirect participants, as applicable.
We refer you to "Description of the Bonds" in this prospectus supplement
for more detail.
RATING OF THE SECURITIES DOES NOT ASSURE PAYMENT
It will be a condition to the issuance of the bonds offered hereby that
they be rated in one of the four highest rating categories by the rating agency
identified in this supplement. The ratings of the bonds will depend primarily on
an assessment by the ratings agencies and the claims paying ability of the
insurer. The ratings of the bonds will be based on, among other things, the
adequacy of the value of the trust assets and any credit enhancement. The rating
should not be deemed a recommendation to purchase, hold or sell the bonds,
particularly since the ratings do not address market price or suitability for an
investor. There is no assurance that the ratings will remain in effect over the
life of the bond, and they may be lowered or withdrawn.
We refer you to "Rating" in this prospectus supplement for more detail.
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 Residual Certificates]. 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 [and the Residual Certificates] will be issued pursuant to the
Indenture. Set forth below are summaries of the specific terms and provisions
pursuant to which the Bonds [and Residual Certificates] 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") [and the Residual Bonds (the
"Residual Bonds")]. [The Issuer will also issue the Class R-UT Certificate and
Class
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R-LT Certificate (the Class R-LT Certificate (the Class R-UT Certificate and the
Class R-LT Certificate collectively, the "Residual Certificates")] as described
herein. The Senior Bonds and the Subordinated Bonds are collectively referred to
herein as the "Offered Bonds." Only the Senior Bonds and the Subordinated Bonds
are offered hereby. The Classes of Bonds will have the respective Bond Interest
Rates described on the cover hereof.
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 [and
(c) the Residual Bonds (the "Residual 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 and Subordinated Class Principal Amount
immediately prior to such date, and (ii) the Original Residual Class Principal
Amount reduced by all amounts previously distributed to holders of the Residual
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") [and the Residual Bonds will have an original Residual Class Principal
Amount of $ (the "Original Residual Class Principal Amount")].
BOOK-ENTRY BONDS
The Bonds will be book-entry Bonds (each, a Class of "Book-Entry Bonds").
Persons acquiring beneficial ownership interests in the Bonds ("Bond Owners")
may elect to hold their Bonds through the Depository Trust Company ("DTC") in
the United States, or CEDEL or Euroclear (in Europe) if they are participants of
such systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Bonds will be issued in one or more certificates which
equal the aggregate principal amount of the Bonds and will initially be
registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear
will hold omnibus positions on behalf of their participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A., will act as depositary for CEDEL and The Chase Manhattan Bank will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Bonds in minimum denominations
representing Class Principal Amounts of $ and in multiples of
$1,000 in excess thereof. Except as described below, no person acquiring a
Book-Entry Bond (each, a "beneficial owner") will be entitled to receive a
physical certificate representing such Bond (a "Definitive Bond"). Unless and
until Definitive Bonds are issued, it is anticipated that the only "Bondholders"
of the Bonds will be Cede & Co., as nominee of DTC. Bond Owners will not be
Bondholders as that term is used in the Indenture. Bond Owners are only
permitted to exercise their rights indirectly through the participating
organizations that utilize the services of DTC, including securities brokers and
dealers, banks and trust companies and clearing corporations and certain other
organizations ("Participants") and DTC.
The beneficial owner's ownership of a Book-Entry Bond will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Bond will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant, and on the records of
CEDEL or Euroclear, as appropriate).
Bond Owners will receive all payments of principal of, and interest on, the
Bonds from the Bond Trustee through DTC and DTC participants. While the Bonds
are outstanding (except under the circumstances described below), under the
rules, regulations and procedures creating and affecting DTC and its operations
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(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-Entry Bonds will be subject to the rules, regulations and
procedures governing DTC and DTC participants as in effect from time to time.
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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 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
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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 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
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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 [(v) the Residual Interest Payment Amount and (vi) the Residual
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 200 (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 Residual Bonds; (vi) to principal of the Residual Bonds; and]
[(vii) to the holder of the Residual Certificates, 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
Residual Class Principal 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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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 will be entitled
to receive an amount allocable to interest as described below (as to each such
Class, 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 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 Residual Bonds (the "Residual Interest Payment Amount") will be
equal to sum of (i) interest at the Residual Bond Interest Rate on the Residual
Class Principal Amount, (ii) interest at the Residual Bond Interest Rate on any
Residual 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 "Residual Interest
Carryover Shortfall") and (iv) interest at the Residual Bond Interest Rate on
any Residual Interest Carryover Shortfall (to the extent permitted by applicable
law).] 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 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 Residual
Bond as described in clauses "fifth", and "sixth" 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.
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Accrued interest to be paid on any Payment Date will be calculated, in the
case of each Class of Bonds, on the basis of the related Class Principal 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 Residual Bonds].
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 Residual Class Principal 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 Residual Class Principal Amount,] in each
case immediately prior to 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
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Liquidated Pledged Mortgage during the [calendar month] preceding the month of
such Payment Date, the Stated Principal Balance of such Pledged Mortgage and (f)
all partial and full principal prepayments by borrowers received during the
[calendar month] preceding the month of such Payment Date and (ii) any
Subordinated Principal Carryover Shortfall. The "Subordinated Principal
Carryover Shortfall" for any Payment Date will equal the excess of (a) the
Original Subordinated Class Principal Amount reduced by all amounts previously
distributed to holders of the Subordinated Bonds as payments of principal or
Subordinated Principal Carryover Shortfall, over (b) the Subordinated Class
Principal Amount immediately prior to such date.
[RESIDUAL PRINCIPAL PAYMENT AMOUNT. On each Payment Date, to the extent of
Available Funds therefor, the Residual Principal Payment Amount shall be
distributed as set forth in the Priority of Payments and Allocation of
Shortfalls.]
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 Residual Interest Payment Amount;]
[sixth, to the Residual Amount Payment; and]
[seventh, to the holder of the Residual 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 payments of principal on the Residual Bonds],
the Senior Percentage, the Subordinated Percentage [and the residual 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 Residual Percentage] may
cause the Senior Bonds to amortize more rapidly, and the Subordinated Bonds [and
the Residual Bonds] to amortize more slowly, than would otherwise have been the
case in the absence of such shortfalls. An investor should consider the risk
that, in the case of any Bond purchased at a discount, a slower than anticipated
rate of principal payments on the Pledged Mortgages could result in an actual
yield to such investor that is lower than the anticipated yield and, in the case
of any Bond purchased at a premium, a faster than anticipated rate of principal
payments on the Pledged Mortgages could result in an actual yield to such
investor that is lower than the anticipated yield. In addition, an investor in
the Bonds should consider the risk that there can be no assurance that investors
in the Bonds will be able to reinvest the payments thereon at yields equaling or
exceeding the yields on such Bonds. It is possible that yields on any such
reinvestments will be lower, and may be significantly lower, than the yields on
the Bonds. See "RISK FACTORS -- Yield, Prepayment and Maturity Risks" herein and
"RISK FACTORS -- Prepayment and Yield Considerations" in the Prospectus. In
general, a "Realized Loss" means, with respect to a Liquidated Pledged Mortgage,
the amount by which the remaining unpaid principal balance of the related
Pledged Mortgage exceeds the amount of Liquidation Proceeds applied to the
principal balance of the related Pledged Mortgage. A "Liquidated Pledged
Mortgage" is a defaulted Pledged Mortgage as to which the Master Servicer has
determined that all recoverable liquidation and insurance proceeds have been
received.
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Under the Indenture, an Event of Default will not occur solely due to the
occurrence of Shortfalls that affect only the Subordinated Bonds [and/or the
Residual 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 [or Residual 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 [or the Residual 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
[Residual Bonds], second to the Subordinated Bonds and third, in the event the
Insurer defaults on its obligations under the Bond Insurance Policy, to the
Senior Bonds.
STATED MATURITY
The Stated Maturity for each Class of Bonds is the date determined by the
Company which is years after the Payment Date immediately following the latest
maturity date of any Pledged Mortgage. The Stated Maturity of each Class of
Bonds is , 20 . See "DESCRIPTION OF THE BONDS -- Weighted Average
Life of the Bonds" and "SECURITY FOR THE BONDS" herein and in the Prospectus.
STRUCTURING ASSUMPTIONS
Unless otherwise specified, the information in the tables in this
Prospectus Supplement has been prepared on the basis of the following assumed
characteristics of the Pledged Mortgages and the following additional
assumptions (collectively, the "Structuring Assumptions"): (i) the Pledged
Mortgage Pool consists of one Pledged Mortgage with the following
characteristics:
<TABLE>
<CAPTION>
ORIGINAL TERM REMAINING TERM
PRINCIPAL NET MORTGAGE IN MATURITY TO MATURITY
BALANCE MORTGAGE RATE RATE (IN MONTHS) (IN MONTHS)
----------------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
$ % %
</TABLE>
(ii) the Pledged Mortgages prepay at the specified constant Prepayment
Assumptions, (iii) no defaults in the payment by Mortgagors of principal of and
interest on the Pledged Mortgages are experienced, (iv) scheduled payments on
the Pledged Mortgages are received on the first day of each month commencing in
the calendar month following the Closing Date and are computed prior to giving
effect to prepayments received on the last day of the prior month, (v)
prepayments are allocated as described herein without giving effect to loss and
delinquency tests, (vi) there are no Net Interest Shortfalls and prepayments
represent prepayments in full of individual Pledged Mortgages and are received
on the last day of each month, commencing in the calendar month of the Closing
Date, (vii) the scheduled monthly payment for each Pledged Mortgage has been
calculated based on the assumed mortgage loan characteristics described in item
(i) above such that each
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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, of each Class of Bonds, 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 at the applicable interest
rate described on the cover hereof or described herein, (x) payments in respect
of the Bonds 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).
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Pledged Mortgages, see "RISK FACTORS -- Yield,
Prepayment and Maturity Risks" herein and "RISK FACTORS -- Prepayment and Yield
Considerations" in the Prospectus.
In general, the weighted average lives of the Bonds will be shortened if
the level of prepayments of principal of the Pledged Mortgages increases.
However, the weighted average lives of the Bonds will depend upon a variety of
other factors, including the timing of changes in such rate of principal
payments and the priority sequence of distributions of principal of the Classes
of Bonds. See "DESCRIPTION OF THE BONDS -- Principal" herein.
The interaction of the foregoing factors may have different effects on the
Senior Bonds and the Subordinated Bonds [and the Residual Bonds] and the effects
on any Class may vary at different times during
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<PAGE> 108
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 Residual Class Principal Amount, after giving effect to payments
to be made on such Payment Date, is % or less of the aggregate of the
Stated Principal Balances of the Pledged Mortgages as of the Cut-off Date, at a
redemption price equal to 100% of the unpaid principal amount of such Bonds
(including, in the case of the Subordinated Bonds, any unpaid Subordinated
Principal Carryover Shortfall), plus accrued and unpaid interest at the
applicable Bond Interest Rate through the month preceding the month in which
such optional redemption date occurs. The Bonds are not otherwise subject to
call or redemption at the option of the Issuer nor are they subject to special
redemption. See "DESCRIPTION OF THE BONDS -- Redemption at the Option of the
Issuer" in the Prospectus.
Notice of any redemption to be made at the option of the Issuer must be
given by the Issuer to the Bond Trustee not less than 30 days prior to the
redemption date and must be mailed by the Issuer or the Bond Trustee to affected
Bondholders at least ten days prior to the redemption date.
CONTROLLING CLASS UNDER THE INDENTURE
For the purposes described in the Prospectus under the headings "The
Indenture -- Modification of Indenture," "-- Events of Default" and "Rights Upon
Event of Default," the "Controlling Class" shall be the Class A-1 Bondholders
or, if the Class A-1 Bonds are no longer outstanding, the Class B-1 Bondholders.
CREDIT ENHANCEMENT
Credit enhancement for the Senior Bonds will be provided by the
Subordinated Bonds, [by the Residual Bonds] and by the Bond Insurance Policy (as
defined herein). [Credit enhancement for the Subordinated Bonds will be provided
by the Residual Bonds.]
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SUBORDINATION
The rights of holders of the Subordinated Bonds [and the Residual Bonds] 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 Residual Bonds 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 Residual Bonds] to the
Senior Bonds [and the further subordination of the Residual Bonds 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 Residual Bonds 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 Residual Bonds will result in losses on the Subordinated Bonds.]
See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of
Shortfalls" herein.
THE BOND INSURANCE POLICY
[DESCRIPTION OF THE BOND INSURANCE POLICY]
THE INSURER
[DESCRIPTION OF THE INSURER]
SECURITY FOR THE BONDS
GENERAL
The Bonds will be secured by assignments to the Bond Trustee of collateral
consisting of (i) the Pledged Mortgages, (ii) funds on deposit in the Bond
Account and the Distribution Account, (iii) the Issuer's rights under the Master
Servicing Agreement, (iv) [the Issuer's rights under any Servicing Agreement,]
(v) the Issuer's rights under the Mortgage Loan Purchase Agreement (as defined
herein), and (vi) the proceeds of all of the foregoing.
THE PLEDGED MORTGAGES
The Bonds will be secured by a pool (the "Pledged Mortgage Pool") of
-year conventional mortgage loans secured by first liens on one- to
four-family residential properties (each, a "Mortgaged Property"). None of the
Pledged Mortgages will be guaranteed by any governmental agency. All of the
Pledged Mortgages will have been deposited with the Issuer by the Company which,
in turn, will have acquired them from Redwood Trust pursuant to an agreement
(the "Mortgage Loan Purchase Agreement") between the Company and Redwood Trust.
All of the Pledged Mortgages will have been acquired by Redwood Trust in the
ordinary course of its business and substantially in accordance with the
underwriting criteria specified herein.
GENERAL. Under the Mortgage Loan Purchase Agreement, Redwood Trust will
make certain representations, warranties and covenants to the Company relating
to, among other things, the due execution and enforceability of the Mortgage
Loan Purchase Agreement and certain characteristics of the Pledged Mortgages
and, subject to the limitations described below under " -- Assignment of Pledged
Mortgages," will be obligated to purchase or substitute a similar mortgage loan
for any Pledged Mortgage as to which there exists deficient documentation or an
uncured material breach of any such representation, warranty or covenant. See
"MORTGAGE LOAN PROGRAM -- Representations by Sellers; Repurchases" in the
Prospectus. Under the Deposit Trust Agreement, the Company will assign all of
its rights under the Mortgage Loan Purchase Agreement to the Issuer. Under the
Indenture, the Issuer will pledge all its right, title and interest in and to
such representations, warranties and covenants (including Redwood Trust's
purchase
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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 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 .
S-22
<PAGE> 111
The latest stated maturity date of any Pledged Mortgage is ,
20 . The earliest stated maturity date of any Pledged Mortgage is ,
20 .
[As of the Cut-off Date, no Pledged Mortgage was delinquent more than
days.]
[None of the Pledged Mortgages are subject to buydown agreements.] [No
Pledged Mortgage provides for deferred interest or negative amortization.]
No Pledged Mortgage had a Loan-to-Value Ratio at origination of more than
%. [Except for
Pledged Mortgages, representing approximately % of the Cut-off Date Pool
Principal Balance,] each Pledged Mortgage with a Loan-to-Value Ratio at
origination of greater than 80% is covered by a primary mortgage insurance
policy (each a "Primary Mortgage Insurance Policy") issued by a mortgage
insurance company acceptable to the Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or any nationally
recognized statistical rating organization, which policy provides coverage of a
portion of the original principal balance of the related Pledged Mortgage equal
to the product of the original principal balance thereof and a fraction, the
numerator of which is the excess of the original principal balance of the
related Pledged Mortgage over 75% of the lesser of the appraised value and
selling price of the related Mortgage Property and the denominator of which is
the original principal balance of the related Pledged Mortgage, plus accrued
interest thereon and related foreclosure expenses. No such Primary Mortgage
Insurance Policy will be required with respect to any such Pledged Mortgage
after the date on which the related Loan-to-Value Ratio is 80% or less or, based
on a new appraisal, the principal balance of such Pledged Mortgage represents
80% or less of the new appraised value. See " -- Underwriting Standards" herein.
The "Loan-to-Value Ratio" of a Pledged Mortgage at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Pledged Mortgage at the date of determination and the
denominator of which is (a) in the case of a purchase, the lesser of the selling
price of the Mortgaged Property and its appraised value determined in an
appraisal obtained by the originator at origination of such Pledged Mortgage, or
(b) in the case of a refinance, the appraised value of the Mortgaged Property at
the time of such refinance. No assurance can be given that the value of any
Mortgaged Property has remained or will remain at the level that existed on the
appraisal or sales date. If residential real estate values generally or in a
particular geographic area decline, the Loan-to-Value Ratios might not be a
reliable indicator of the rates of delinquencies, foreclosures and losses that
could occur with respect to such Pledged Mortgages.
S-23
<PAGE> 112
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Pledged Mortgages. Other than with respect to
rates of interest, percentages (approximate) are stated by Stated Principal
Balance of the Pledged Mortgages as of the Cut-off Date and have been rounded in
order to total 100%.
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-24
<PAGE> 113
<TABLE>
<CAPTION>
CURRENT PLEDGED MORTGAGE PRINCIPAL BALANCE(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-25
<PAGE> 114
<TABLE>
<CAPTION>
PURPOSE OF PLEDGED MORTGAGES
- -----------------------------------------------------------------------------------------------
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-26
<PAGE> 115
<TABLE>
<CAPTION>
PROPERTY TYPE
- -----------------------------------------------------------------------------------------------
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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
NUMBER OF PRINCIPAL PERCENT 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-27
<PAGE> 116
<TABLE>
<CAPTION>
NEXT NOTE RATE ADJUSTMENT DATES(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE
NUMBER OF PRINCIPAL PERCENT 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-28
<PAGE> 117
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. Notwithstanding anything contained
herein to the contrary, no Replacement Pledged Mortgage may be substituted for a
Deleted Pledged Mortgage at any time after two (2) years after the Closing Date.
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
S-29
<PAGE> 118
servicing functions with respect to the Pledged Mortgages. The Master Servicer
will administer and supervise the performance of each Servicer, who may in turn
be administering and supervising the performance of the subservicers of the
Pledged Mortgages. Notwithstanding any such servicing arrangements, the Master
Servicer will remain liable for its servicing duties and obligations under the
Master Servicing Agreement.
SERVICING AND COLLECTION PROCEDURES
On or prior to the Closing Date, the Master Servicer will enter into a
separate Servicing Agreement with each Servicer to perform, as independent
contractor, servicing functions for the Master Servicer subject to its
supervision. Such servicing functions include collection and remittance of
principal and interest payments, administration of mortgage escrow accounts,
collection of certain insurance claims and, if necessary, foreclosure. The
Master Servicer may permit Servicers to contract with subservicers to perform
some or all of the Servicer's servicing duties, but the Servicers will not
thereby be released from their obligations under the Servicing Agreement. The
Master Servicer also may enter into sub-servicing agreements directly with an
affiliate of a Servicer or permit a Servicer to transfer its servicing rights
and obligations to a third party. In such instances, the affiliate or third
party, as the case may be, will perform servicing functions comparable to those
normally performed by the Servicer as described above, and the Servicer will not
be obligated to perform such servicing functions. When used herein with respect
to servicing obligations, the term Servicer includes any such affiliate or third
party. The Master Servicer may perform certain supervisory functions with
respect to servicing by the Servicer directly or through an agent or independent
contractor and the Master Servicer will be responsible for administering and
servicing the Pledged Mortgages pursuant to the Master Servicing Agreement.
On or before the Closing Date, the Master Servicer will establish one or
more accounts (the "Bond Account") into which each Servicer will remit
collections on the mortgage loans serviced by it (net of its related servicing
compensation). For purposes of the Master Servicing Agreement, , as
Master Servicer, will be deemed to have received any amounts with respect to the
Pledged Mortgages that are received by a Servicer regardless of whether such
amounts are remitted by the Servicer to the Master Servicer. The Master Servicer
has reserved the right to remove the Servicer servicing any Pledged Mortgage at
any time and will exercise that right if it considers such removal to be in the
best interest of the Bondholders. In the event that the Master Servicer removes
a Servicer, the Master Servicer will continue to be responsible for servicing
the related Pledged Mortgages.
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
S-30
<PAGE> 119
Mortgages, and no assurances can be given that the foreclosure, delinquency and
loss experience presented in the table below will be indicative of such
experience on the Pledged Mortgages in the future:
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31,
199 199 199
------------ ------------ ------------
<S> <C> <C> <C>
Total Number of Conventional Mortgage Loans in
Portfolio...........................................
Delinquent Mortgage Loans and Pending Foreclosures at
Period End (1):.....................................
30-59 days.......................................
60-89............................................
90 days or more (excluding foreclosures).........
Total Delinquencies..............................
Foreclosures pending
Total delinquencies and foreclosures pending........
Net Loss(2)...........................................
</TABLE>
- ---------------
(1) As a percentage of the total number of loans master serviced.
(2) There is no material difference between gross loss and net loss.
There can be no assurance that factors beyond the Master Servicer's
control, such as national or local economic conditions or downturns in the real
estate markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future. [For example, over the last
several years there has been a general deterioration of the real estate market
and weakening of the economy in many regions of the of the country, including
California. The general deterioration of the real estate market has been
reflected in increases in delinquencies of loans secured by real estate, slower
absorption rates of real estate into the market and lower sales prices for real
estate. The general weakening of the economy has been reflected in decreases in
the financial strength of borrowers and decreases in the value of collateral
serving as collateral for loans. If the real estate market and economy continue
to decline, the Master Servicer may experience an increase in delinquencies on
the loans it services and higher net loss on liquidated loans.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Pledged Mortgages are payable out of
the interest payments on each Pledged Mortgage. The 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 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.
S-31
<PAGE> 120
ADJUSTMENT TO MASTER SERVICING FEE AND INVESTED AMOUNT IN CONNECTION WITH
CERTAIN PREPAID PLEDGED MORTGAGES
When a borrower prepays a Pledged Mortgage between Due Dates, the borrower
is required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Principal prepayments by borrowers received during a
calendar month will be distributed to Bondholders on the Payment Date in the
month following the month of receipt. Pursuant to the Master Servicing
Agreement, the Master Servicing Fee for any month may be reduced by an amount
with respect to each such prepaid Pledged Mortgage sufficient to pay to
Bondholders the full amount of interest to which they would be entitled in
respect of such Pledged Mortgage on the related Payment Date. If shortfalls in
interest as a result of prepayments in any month exceed the sum of (i) amount of
the Master Servicing Fee for such month and (ii) the amounts otherwise payable
on such Payment Date to the holder of the Investor Certificate as described in
clauses "fifth", "sixth" and "seventh" under "DESCRIPTION OF THE
BONDS -- Priority of Payments and Allocation of Shortfalls" herein, the amount
of funds available to be paid to Bondholders in respect of interest on such
Payment Date will be reduced by the amount of such excess. See "DESCRIPTION OF
THE BONDS -- Interest" herein.
ADVANCES
Subject to the following limitations, the Master Servicer will be required
to advance prior to each Payment Date, from its own funds, funds advanced by the
related Servicer or amounts received with respect to the Pledged Mortgages that
do not constitute Available Funds for such Payment Date, an amount equal to the
aggregate of payments of principal of and interest on the Pledged Mortgages (net
of the Master Servicing Fee and the applicable Servicing Fee with respect to the
related Pledged Mortgages) which were due on the related Due Date and which were
delinquent on the related Determination Date, together with an amount equivalent
to interest on each Pledged Mortgage as to which the related Mortgaged Property
has been acquired by the Bond Trustee through foreclosure or deed-in-lieu of
foreclosure ("REO Property") (any such advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Bonds 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 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 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.
S-32
<PAGE> 121
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Trust Estate [(exclusive of the rights
in respect of the Additional Collateral)] will consist of a pool of assets with
respect to which an election will be made to treat such pool as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. The
Class A and Class B Bonds will be designated as "regular interests" in the REMIC
and the Class R [Bonds/Certificates] will represent the "residual interest" in
the [upper tier/lower tier] REMIC. Accordingly, prospective investors should
review the section entitled "REMIC Bonds" under "FEDERAL INCOME TAX
CONSEQUENCES" in the Prospectus.
The Class A and Class B Bonds may be treated as having been issued with
original issue discount. The prepayment assumption that will be used for
purposes of computing original issue discount, if any, for federal income tax
purposes is a CPR of []%. No representation is made that the Mortgage Loans
will, in fact, prepay at this or any other rate.
See "FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus.
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.
S-33
<PAGE> 122
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. [Revise per REMIC regular interests]
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Company, Redwood Trust and the Underwriter, the Company has agreed
to cause the Issuer to sell to the Underwriter, and the Underwriter has agreed
to purchase from the Issuer, the Bonds. Distribution of the Bonds will be made
by the Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the sale
of the Bonds, the Underwriter may be deemed to have received compensation from
the Issuer in the form of underwriting discounts.
The Underwriter intends to make a secondary market in the Bonds, but has no
obligation to do so. There can be no assurance that a secondary market for the
Bonds will develop or, if it does develop, that it will continue or that it will
provide Bondholders with a sufficient level of liquidity of investment. The
Bonds will not be listed on any national securities exchange.
The Company and Redwood Trust have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to, certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Bonds will be passed upon for the Issuer by Tobin &
Tobin, a professional corporation, San Francisco, California. Certain tax
matters will be passed upon by for the Issuer by Giancarlo and Gnazzo, A
Professional Corporation, San Francisco, California. Brown & Wood LLP, New York,
New York will act as counsel for the Underwriter.
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.
S-34
<PAGE> 123
The ratings assigned to the Bonds should be evaluated independently from
similar ratings on other types of securities. A rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the Rating Agencies.
The Issuer has not requested a rating of the Bonds by any rating agency
other than the Rating Agencies; there can be no assurance, however, as to
whether any other rating agency will rate the Bonds or, if it does, what rating
would be assigned by such other rating agency. The rating assigned by such other
rating agency to the Bonds could be lower than the respective ratings assigned
by the Rating Agencies.
S-35
<PAGE> 124
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adjustment Date............................................. S-22
Advance..................................................... S-31
Available Funds............................................. S-14
Belgian Cooperative......................................... S-12
Beneficial owner............................................ S-10
Bond Account.............................................S-13, S-29
Bond Distribution Amount.................................... S-14
Bond Interest Rate.......................................... S-15
Bond Owners................................................. S-10
Bond Trustee................................................ S-3
Bonds.................................................S-1, S-3, S-9
Book-Entry Bonds............................................ S-10
CEDEL Participants.......................................... S-11
Class Principal Amount...................................... S-10
Code........................................................ S-32
Company....................................................S-3, S-9
Controlling Class........................................... S-20
Cooperative................................................. S-12
CPR......................................................... S-19
Cut-off Date Pool Principal Balance......................... S-22
Definitive Bond............................................. S-10
Deleted Pledged Mortgage.................................... S-28
Deposit Trust Agreement..................................... S-3
Distribution Account........................................ S-13
DTC......................................................... S-10
Due Date.................................................... S-22
ERISA.....................................................S-5, S-32
Euroclear Operator.......................................... S-12
Euroclear Participants...................................... S-12
European Depositaries....................................... S-10
Expense Fee Rate............................................ S-30
FHLMC....................................................... S-23
Financial Intermediary...................................... S-10
FNMA........................................................ S-23
Index....................................................... S-22
Indirect Participants....................................... S-11
Insurance Proceeds.......................................... S-11
Interest Accrual Period..................................... S-15
Interest Payment Amount..................................... S-15
Issuer...................................................... S-3
Liquidated Pledged Mortgage................................. S-17
Liquidation Proceeds........................................ S-14
Loan-to-Value Ratio......................................... S-23
Management Agreement........................................ S-3
Margin...................................................... S-22
Master Servicing Fee........................................ S-30
</TABLE>
S-36
<PAGE> 125
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Maximum Rate................................................ S-22
Morgan...................................................... S-12
Mortgage.................................................... S-28
Mortgage File............................................... S-28
Mortgage Loan Purchase Agreement............................ S-21
Mortgage Note............................................... S-28
Mortgaged Property.......................................... S-21
Net Interest Shortfall...................................... S-15
Net Interest Shortfalls..................................... S-15
Offered Bonds........................................S-1, S-3, S-10
Original Subordinated Class Principal Amount................ S-10
Original Senior Class Principal Amount...................... S-10
Original Residual Class Principal Amount.................... S-10
Originator.................................................. S-28
Owner Trustee............................................... S-3
Participants................................................ S-10
Payment Date...................................................S-14
Periodic Rate Cap........................................... S-22
Plan...........................................................S-32
Plan Asset Regulations.........................................S-32
Plan Investors.................................................S-32
Pledged Mortgage Pool..........................................S-21
Pledged Mortgages........................................... S-21
Pool Principal Balance...................................... S-16
Prepayment Assumption....................................... S-19
Prepayment Interest Shortfall............................... S-15
Primary Mortgage Insurance Policy........................... S-23
PTCE........................................................ S-32
Rating Agencies...........................................S-6, S-33
Realized Loss............................................... S-17
Record Date................................................. S-14
Redwood Trust..............................................S-3, S-9
Relevant Depositary......................................... S-10
Relief Act Reduction........................................ S-15
REMIC....................................................... S-32
REO Property................................................ S-31
Replacement Pledged Mortgage................................ S-28
Residual Bonds.............................................. S-9
Residual Certificates....................................... S-10
Residual Class Principal Amount............................. S-10
Residual Interest Carryover Shortfall....................... S-15
Residual Interest Payment Amount............................ S-15
Rules....................................................... S-10
Scheduled Payments.......................................... S-22
Senior Bond Interest Rate................................... S-15
Senior Bonds...............................................S-3, S-9
Senior Class Principal Amount............................... S-10
Senior Interest Payment Amount.............................. S-15
</TABLE>
S-37
<PAGE> 126
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Senior Percentage........................................... S-16
Senior Principal Payment Amount............................. S-16
Servicer.................................................... S-29
Servicing Agreement......................................... S-29
Servicing Fee............................................... S-30
Shortfalls.................................................. S-17
SMMEA....................................................... S-6
Stated Principal Balance.................................... S-16
Structuring Assumptions..................................... S-18
Subordinated Bond Interest Rate............................. S-15
Subordinated Bonds.........................................S-3, S-9
Subordinated Class Principal Amount......................... S-10
Subordinated Interest Carryover Shortfall................... S-15
Subordinated Interest Payment Amount........................ S-15
Subordinated Percentage..................................... S-16
Subordinated Principal Carryover Shortfall.................. S-16
Subordinated Principal Payment Amount....................... S-16
Substitution Adjustment Amount.............................. S-28
Terms and Conditions........................................ S-12
</TABLE>
S-38
<PAGE> 127
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Sequoia
Mortgage Trust , Collateralized Mortgage Bonds (the "Global Bonds")
will be available only in book-entry form. Investors in the Global Bonds may
hold such Global Bonds through any of The Depository Trust Company ("DTC"),
CEDEL or Euroclear. The Global Bonds will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Bonds through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Bonds through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior collateralized mortgage bond issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Bonds will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Bonds will be subject to
U.S. withholding taxes unless such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All Global Bonds will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors' interests in the Global Bonds will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC (each, a "DTC Participant"). As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Bonds through DTC will follow the
settlement practices' applicable to other collateralized mortgage bond issues.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Bonds through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
Eurobonds, except that there will be no temporary global security and no
"lock-up" or restricted period. Global Bonds will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
collateralized mortgage bond issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional Eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global
Bonds are to be transferred from the account of a DTC Participant to the account
of a CEDEL Participant or a Euroclear Participant, the purchaser will send
instructions to CEDEL or Euroclear through a CEDEL Participant or
A-1
<PAGE> 128
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Bonds against payment. Payment will include interest accrued
on the Global Bonds from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Bonds. After settlement has been completed, the Global Bonds will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Bonds will accrue from, the value date (which would be the preceding day when
settlement occurred in New York). If settlement is not completed on the intended
value date (i.e., the trade fails), the CEDEL or Euroclear cash debt will be
valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global Bonds
are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Bonds would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Bonds were credited to their accounts. However,
interest on the Global Bonds would accrue from the value date. Therefore, in
many cases the investment income on the Global Bonds earned during that one-day
period may substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each CEDEL Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Bonds to the
respective European Depository for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global Bonds are
to be transferred by the respective clearing system, through the respective
Depositary, to a DTC Participant. The seller will send instructions to CEDEL or
Euroclear through a CEDEL Participant or Euroclear Participant at least one
business day prior to settlement. In these cases CEDEL or Euroclear will
instruct the respective Depositary, as appropriate, to deliver the Global Bonds
to the DTC Participant's account against payment. Payment will include interest
accrued on the Global Bonds from and including the last coupon payment to and
excluding the settlement date on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of the CEDEL Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
CEDEL Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended valued date (i.e., the trade fails), receipt of the cash proceeds
in the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
A-2
<PAGE> 129
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Bonds from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Bonds in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Bonds
sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of the Global Bonds holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of the Global
Bonds that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are Bond Owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption
or Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Bond Owner or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Bond Owner of a Bond or,
in the case of a Form 1001 or a Form 4224 filer, his agent, files by submitting
the appropriate form to the person through whom it holds (the clearing agency,
in the case of persons holding directly on the books of the clearing agency).
Form W-8 and Form 1001 are effective for three calendar years and Form 4224 is
effective for one calendar year.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate
whose income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. This
A-3
<PAGE> 130
summary does not deal with all aspects of U.S. federal income tax withholding
that may be relevant to foreign holders of the Global Bonds. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Bonds.
A-4
<PAGE> 131
PROSPECTUS
MAY , 2000
SEQUOIA MORTGAGE FUNDING CORPORATION
DEPOSITOR
$3,000,000,000
(AGGREGATE AMOUNT)
COLLATERALIZED MORTGAGE BONDS
(ISSUABLE IN SERIES)
Consider carefully the
risk factors beginning on
page S-8 of this
prospectus which include:
- Yield, Prepayment and
Maturity Risks;
- Cash Flow
Considerations;
- Limited Recourse;
- Bankruptcy and
Insolvency Risks;
- Risks associated with
Book-Entry Bonds; and
- Limited Liquidity of
Investments.
The Bonds are redeemable
only under circumstances
described herein and in
the related prospectus
supplement.
Each series of bonds will
be issued by a separate
trust, will represent
obligations solely of such
trust and will not be
insured or guaranteed by
GNMA, FNMA or FHLMC or any
other governmental agency
or instrumentality, any
affiliate of the
Depositor, or, unless
otherwise specified in the
related prospectus
supplement, any other
person or entity.
Bonds of each series will be characterized for federal income tax purposes as
debt instruments or interests in a REMIC.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS RELATES TO:
- - The establishment of one or more trusts to issue and sell one or more series
of collateralized mortgage bonds.
THE BONDS:
- - Will be collateralized by one or more of the following:
- - Fixed-rate, first or junior lien mortgage loans secured by one- to four-
family residential properties;
- - Floating-rate, first or junior lien mortgage loans secured by one- to
four-family residential properties;
- - Mortgage pass-through securities issued or guaranteed by GNMA, FNMA, or FHLMC;
- - Private mortgage-backed securities; or
- - Any combination thereof; and
- - Will receive principal payments in the manner specified in the related
prospectus supplement.
EACH SERIES OF BONDS:
- - May include one or more classes of bonds entitled to principal distributions,
with disproportionate, nominal or no interest distributions or interest
distributions, with disproportionate or nominal distributions;
- - May include one or more classes of bonds entitled to receive principal
distributions prior to other classes.
- - 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; and
- - Will have credit enhancement as specified in the related prospectus
supplement.
<PAGE> 132
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED
IN THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We tell you about the bonds in two separate documents that progressively
provide more detail: (1) this prospectus, which provides general information,
some of which may not apply to your series of bonds, and (2) the accompanying
prospectus supplement, which describes the specific terms of your series of
bonds and may be different from the information in this prospectus.
IF THE TERMS OF YOUR SERIES OF BONDS AND ANY OTHER INFORMATION CONTAINED
HEREIN VARY BETWEEN THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT,
YOU SHOULD RELY ON THE INFORMATION IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following table of contents and the table of contents
included in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under "Index of Defined Terms" beginning on page 75 in
this prospectus.
The underwriter may engage in transactions that stabilize, maintain, or in
some way affect the price of the bonds. These types of transactions may include
stabilizing the purchase of bonds to cover syndicate short positions and the
imposition of penalty bids. For a description of these activities, please read
the section entitled "Plan of Distribution" in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC" OR "COMMISSION"), including
annual, quarterly and special reports, proxy statements and other information.
You can read and copy these documents at the public reference facility
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, NW, Room 1024,
Washington, DC 20549. You can also copy and inspect such reports, proxy
statements and other information at the following regional offices of the SEC:
<TABLE>
<S> <C>
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. SEC filings are also available to the public on the SEC's web
site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information that we incorporate by
reference is considered to be part of the accompanying prospectus supplement,
and later information that we file with the SEC will automatically update and
supersede this information.
This prospectus and the accompanying prospectus supplement are part of a
registration statement filed by the Depositor with the SEC (Registration No.
333-22681). You may request a free copy of any of the above filings by writing
or calling:
SEQUOIA MORTGAGE FUNDING CORPORATION
591 REDWOOD HIGHWAY, SUITE 3120
MILL VALLEY, CA 94941
(415) 389-7373
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You should rely only on the information provided in this prospectus or the
accompanying prospectus supplement or incorporated by reference herein. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this prospectus or the accompanying
prospectus supplement is accurate as of any date other than the date on the
cover page of this prospectus or the accompanying prospectus supplement or that
the information incorporated by reference herein is accurate as of any date
other than the date stated therein.
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SUMMARY
This summary highlights selected information from this prospectus and does
not contain all the information that you need to consider in making your
investment decision. Please read this entire prospectus carefully for additional
information about the offered bonds.
OFFERED BONDS
Each trust will issue collateralized mortgage bonds, in such designations
and classes as set forth in the prospectus supplement.
We refer you to "Description of the Bonds" in this prospectus and in the
related prospectus supplement for more information.
DESIGNATIONS
<TABLE>
<S> <C>
Senior bonds -- such classes of bonds as
are supported by one or
more subordinated
classes of bonds, as set
forth in the prospectus
supplement
Subordinated bonds -- such classes of bonds as
are subordinated to
senior classes of bonds,
as set forth in the
prospectus supplement
Offered bonds -- those classes of bonds
as set forth in the
prospectus supplement
</TABLE>
We refer you to "Description of the Bonds" in this prospectus and in the
related prospectus supplement for more information.
BOND ISSUER
The bond issuer with respect to each series of bonds will be a statutory
business trust under the laws of the State of Delaware and will be established
by Sequoia Mortgage Funding Corporation by the deposit trust agreement, as
defined in this prospectus, for the sole purpose of issuing the bonds and the
investor certificate. Sequoia Mortgage Funding Corporation is a wholly owned
limited purpose finance subsidiary of Redwood Trust, Inc., a Maryland
corporation. Redwood Trust will be the manager of the issuer pursuant to a
management agreement entered into with the issuer. None of Redwood Trust,
Sequoia Mortgage Funding Corporation nor any of their respective affiliates, has
guaranteed or is otherwise obligated with respect to payment of the bonds, and
no other person or entity other than the issuer is obligated to pay the bonds.
We refer you to "The Issuer" in this prospectus and in the related
prospectus supplement for more information.
BOND TRUSTEE
The bonds will be issued pursuant to the indenture between the issuer and a
financial institution qualified to act as the indenture trustee, such trustee to
be named in the prospectus supplement.
OWNER TRUSTEE
The owner trustee will be a financial institution qualified to act as owner
trustee of a statutory business trust under the laws of the State of Delaware,
such owner trustee to be named in the prospectus supplement.
MASTER SERVICER
The entity or entities named as 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 among the master
servicer, the related issuer and the related bond trustee.
The mortgages pledged as collateral will be serviced pursuant to a master
servicing agreement among the issuer, the bond trustee and the master servicer.
We refer you to "Servicing of the Pledged Mortgages" in this prospectus and
in the related prospectus supplement for more information.
SPECIAL SERVICER
If specified in the related prospectus supplement, Sequoia Mortgage Funding
Corporation may appoint a special servicer for the related series of bonds.
We refer you to "Servicing of the Pledged Mortgages--Special Servicing
Agreement" in this prospectus and in the related prospectus supplement for more
information.
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PRIORITY OF PAYMENTS
Payment of principal and interest on bonds of a series will be allocated
among the classes of bonds of such series on the payment dates and 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
interest to one or more other classes of bonds of such series.
We refer you to "Description of the Bonds--General" in this prospectus and
in the related prospectus supplement for more information.
PAYMENTS OF INTEREST
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
specified in the related prospectus supplement.
We refer you to "Description of the Bonds -- Interest" in this prospectus
and in the related prospectus supplement for more information.
PAYMENTS OF PRINCIPAL
Each class of bonds of a series will receive principal payments on each
payment date, in the manner set forth for such class 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 to one ore more other classes of bonds of
such series, as specified in the related prospectus supplement. All payments of
principal on 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.
We refer you to "Description of the Bonds -- Principal" in this prospectus
and in the related prospectus supplement for more information.
STATED MATURITY
The stated maturities for the classes of bonds comprising a series are the
dates determined by Sequoia Mortgage Funding Corporation to fall within a
specified period after the dates on which the bonds of each such class will be
fully paid assuming:
- Timely receipt of payments, with no prepayments, on the mortgage
collateral securing the bonds;
- If applicable, such scheduled payments are, upon deposit in the bond
account, reinvested at a rate specified in the related prospectus
supplement;
- No mortgage collateral is substituted by the issuer or the seller for any
of the mortgage collateral initially pledged to secure the bonds of a
series; and
- 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 assumption 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 the
stated maturity, if so provided in the related prospectus supplement.
We refer you to "Description of the Bonds--Stated Maturity" in this
prospectus and in the related prospectus supplement for more information.
REDEMPTION OF THE BONDS
- SPECIAL REDEMPTION OF BONDS
The bonds of each series may be subject to special redemption as specified
in the related prospectus supplement. Pursuant to a special redemption, the
issuer will be required to redeem, on the dates specified in the related
prospectus supplement, at 100% of their unpaid original amount, plus accrued
interest, outstanding bonds of a series or class at the determination of the
bond trustee.
We refer you to "Description of the Bonds--Special Redemption" in this
prospectus and in the related prospectus supplement for more information.
- OPTIONAL REDEMPTION OF THE BONDS
The bonds of each series may be subject to redemption at the option of the
issuer if so provided in the related prospectus supplement.
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We refer you to "Description of the Bonds--Optional Redemption" in this
prospectus and in the related prospectus supplement for more information.
SECURITY FOR THE BONDS
The security for a series of bonds may consist of:
- pledged mortgages
- a pool of conventional, loans secured by first or junior mortgages or
deeds of trust on one-to four-family residential properties. The pledged
mortgages may include cooperative apartment loans secured by security
interests in shares issued by private, nonprofit, cooperative housing
corporations and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific units in such
cooperatives' buildings;
- securities issued and guaranteed by governmental agencies such as GNMA,
FNMA and FHLMC;
- private mortgage-backed securities; and
- any combination of the above.
We refer you to "Security for the Bonds" in this prospectus and in the
related prospectus supplement for more information.
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 the pledged
mortgages as servicing compensation, to pay insurance premiums or to reimburse
the master servicer or any servicer for advances it has made, will be remitted
to an account to be established as an eligible account on the closing date for
the sale of such series of bonds.
On or prior to the closing date, the bond trustee will establish a
distribution account which shall be an eligible account 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, the master servicer will withdraw from the bond account the amount
to be distributed to bondholders on such payment date, to the extent of funds
available, and will deposit such amount in the distribution account.
We refer you to "Security for the Bonds--Bond and Distribution Accounts" in
this prospectus and in the related prospectus supplement for more information.
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, which will be used to
purchase additional mortgage collateral during a period specified in such
prospectus supplement.
We refer you to "Security for the Bonds--Pre-Funding Accounts" in this
prospectus and in the related prospectus supplement for more information.
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 specified in the related prospectus supplement. 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. Credit
enhancement could consist of any one or more of the following:
- subordination of one or more classes of bonds to one or more classes of
Senior bonds;
- reserve funds;
- mortgage pool insurance policy;
- special hazard insurance policy;
- bankruptcy bond;
- bond insurance polices, surety bonds and guarantees;
- letter of credit;
- over-collateralization;
- cross-collateralization;
- minimum principal payment agreement;
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- derivative arrangements; and
- any combination of the above.
We refer you to "Credit Enhancement" in this prospectus and in the related
prospectus supplement for more information.
ADVANCES
The master servicer and each servicer may be obligated to make advances of
cash which will be included with mortgage collections, in an amount equal to the
delinquent monthly payments due on the immediately preceding monthly payment
date. The master servicer's and each servicer's obligation may be subject to
limitations as specified 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.
We refer you to "Servicing of Mortgage Loans -- Advances" in this
prospectus and in the related prospectus supplement for more information.
BOND RATING
It will be a condition to the issuance of the securities offered hereby
that they be rated in one of the four highest rating categories by at least one
rating agency as identified in the prospectus supplement. The ratings of the
securities will be based on, among other things, the adequacy of the value of
the trust assets and any credit enhancement. A security rating does not address
the frequency of prepayments on the mortgage loans or the corresponding effect
on yield to investors. The rating should not be deemed a recommendation to
purchase, hold or sell the securities, particularly since the ratings do not
address market price or suitability for an investor. There is no assurance that
the ratings will remain in effect over the life of the security, and the ratings
may be lowered or withdrawn.
We refer you to "Summary of Terms -- Ratings" in this prospectus and in the
related prospectus supplement for more information.
FEDERAL INCOME TAX CONSEQUENCES
A series of bonds may be treated as debt for federal income tax purposes,
and interest, including original issue discount with respect to any class of
such bonds issued with original issue discount, will be taxable to nonexempt
bondholders.
Alternatively, the depositor may elect to have a series of bonds issued in
a REMIC structure, with one or more classes of regular and residual interests.
We refer you to "Federal Income Tax Consequences" in this prospectus and in
the related prospectus supplement for more information.
LEGAL INVESTMENT
So long as any class of bonds is rated in one of the two highest ratings
categories by at least one nationally recognized statistical rating agency, such
class of bonds will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984.
We refer you to "Legal Investment" in this prospectus and in the related
prospectus supplement for more information.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended, or section 4975 of the Internal Revenue
Code of 1986, as amended, should carefully review with its legal advisors
whether the purchase or holding of bonds could give rise to a transaction
prohibited or not otherwise permissible under applicable law.
We refer you to "ERISA Considerations" in this prospectus and in the
related prospectus supplement for more information.
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RISK FACTORS
INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE
PURCHASE OF BONDS. YOU SHOULD ALSO CONSIDER THE RISK FACTORS DESCRIBED IN THE
ACCOMPANYING PROSPECTUS SUPPLEMENTS.
A DECLINE IN THE VALUE OF MORTGAGED PROPERTIES RELATIVE TO THE OUTSTANDING
BALANCE OF THE RELATED PLEDGED MORTGAGES COULD RESULT IN LOSSES ON YOUR
INVESTMENT.
If the value of mortgaged properties declines such that the outstanding
balance of the related pledged mortgages equals or exceeds the value of the
mortgaged properties, investors will bear the losses on such pledged mortgages
that are not otherwise covered by credit enhancement. Factors that could
adversely affect the value of mortgaged properties are:
- an overall decline in the residential real estate market in the areas in
which the mortgaged properties are located;
- a decline in the general condition of the mortgaged properties as a
result of the borrower's failure to maintain adequately the mortgaged
property; and
- natural disasters that are not necessarily covered by insurance, such as
earthquakes and floods.
DELAYS DUE TO LIQUIDATION COULD RESULT IN DELAYED PAYMENT OF PROCEEDS TO
INVESTORS.
There could be substantial delays in connection with the liquidation of
defaulted pledged mortgages. 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 and could take
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a mortgaged
property. If a borrower defaults, these restrictions 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. Also, 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, including legal fees, cost of legal
action, real estate taxes and maintenance and preservation expenses.
PLEDGED MORTGAGES THAT ARE SECURED BY JUNIOR LIENS COULD RESULT IN PAYMENT
DELAYS AND LOSSES ON YOUR INVESTMENT.
Mortgages and deeds of trust that are junior in priority receive proceeds
from liquidation, insurance or condemnation proceedings for the related property
only after the senior liens and related foreclosure costs have been paid. If the
remaining proceeds are insufficient to satisfy the junior liens, then:
- there will be a delay in payments to you while a deficiency judgment
against the borrower is sought; and
- you may incur a loss if a deficiency judgment cannot be obtained or is
not realized upon.
PREPAYMENTS ARE UNPREDICTABLE AND AFFECT YIELD.
The rate of principal distributions and yield to maturity on the bonds will
be directly related to the rate of principal payments on the trust assets. For
example, the rate of principal payments on the loans will be affected by the
following:
- the amortization schedules of the loans;
- the rate of principal prepayments, including partial prepayments and
prepayments resulting from refinancing, by borrowers;
- liquidations of defaulted loans by the master servicer;
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- repurchases of loans by the seller as a result of defective documentation
or breaches of representations and warranties; and
- the optional purchase by the master servicer of all of the loans in
connection with the termination of the trust.
The rate of principal payments on loans is influenced by a variety of
economic, geographic, social and other factors. For example, if interest rates
for similar loans fall below the interest rates on the loans, the rate of
prepayment would generally be expected to increase. Conversely, if interest
rates on similar loans rise above the interest rates on the loans, the rate of
prepayment would generally be expected to decrease. We cannot predict the rate
at which borrowers will repay their loans. Please consider the following:
- If you are purchasing a bond at a discount, in particular, a
principal-only bond, your yield may be lower than expected if principal
payments on the loans occur at a slower rate than you expected;
- If you are purchasing a bond at a premium, in particular, an
interest-only bond, your yield may be lower than expected if principal
payments on the loans occur at a faster rate than you expected and you
could lose your initial investment; and
- The earlier a payment of principal occurs, the greater the impact on your
yield. For example, if you purchase a bond at a premium, although the
average rate of principal payments is consistent with your expectations,
if the rate of principal payments occurs initially at a rate higher than
expected, which would adversely impact your yield, a subsequent reduction
in the rate of principal payments will not offset any adverse yield
effect.
We refer you to "Security for the Bonds -- the Pledged Mortgages" in this
prospectus for more detail.
ENVIRONMENTAL CONTAMINATION OF MORTGAGED PROPERTY COULD RESULT IN LOSSES OF
PROCEEDS TO INVESTORS.
Under the laws of some states, contamination of a property may give rise to
a lien on the property that 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, 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, regardless of whether the environmental damage or threat was caused by
a prior owner. A lender also risks liability on foreclosure of the related
mortgaged property. Any lien of costs attached to a contaminated mortgaged
property could result in a loss to investors.
YOU WILL HAVE LIMITED RECOURSE
The assets of the trust are the sole source of distributions for the bonds.
The bonds represent obligations solely of the issuer and neither the bonds nor
the trust assets will be guaranteed by or insured by any governmental agency or
instrumentality, the depositor, the seller, the master servicer, the trustee or
any of their affiliates, unless otherwise specified. Consequently, if payments
on the trust assets are insufficient to make all payments required on the bonds
you may incur a loss on your investment.
CONCENTRATION OF PLEDGED MORTGAGES COULD ADVERSELY AFFECT YOUR INVESTMENT
The pledged mortgages may be secured by mortgaged properties that are
concentrated in particular geographic areas, as specified in the prospectus
supplement. 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 by the
occurrence of natural disasters, such as earthquakes, hurricanes, tornadoes,
tidal waves, mud slides, fires and floods, in these areas.
ABILITY TO RESELL SECURITIES MAY BE LIMITED
We cannot assure you that a secondary market for any of the bonds will
develop, or if it does develop, that it will continue to exist for the term of
the bonds. Consequently, you may not be able to sell your bonds readily
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or at prices that will enable you to realize your desired yield. The market
values of the bonds are likely to fluctuate; these fluctuations may be
significant and could result in significant losses to you.
The secondary market for mortgage backed bonds has experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity can have a
severely adverse effect on the prices of bonds that are especially sensitive to
prepayment, credit, or interest rate risk, or that have been structured to meet
the investment requirements of limited categories of investors.
YOUR PAYMENTS AND RIGHTS MAY BE ADVERSELY AFFECTED BY INSOLVENCY OF SELLER
The seller, the depositor and the issuer will treat the transfer of the
loans from the seller to the depositor and from the depositor to the issuer as a
sale for accounting purposes. If these characterizations are correct, then if
the seller were to become bankrupt, the loans would not be part of the seller's
bankruptcy estate and would not be available to the seller's creditors. On the
other hand, if the seller becomes bankrupt, its bankruptcy trustee or one of its
creditors may argue that the transfer of the loans is a pledge of the loans as
bond for a borrowing rather than a sale. Such an attempt, even if unsuccessful,
could result in delays in payments to you.
In the event of a bankruptcy of the master servicer, the bankruptcy trustee
or receiver may have the power to prevent the trustee or the bondholders from
appointing a successor master servicer, which could result in a delay in
payments to you. 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 master servicer to liquidate the
property, which could result in a delay in payments to you.
CONSEQUENCES OF OWNING BOOK-ENTRY SECURITIES
LIMIT ON LIQUIDITY OF SECURITIES. Issuance of the bonds in book-entry form
may reduce their liquidity in the secondary trading market because investors may
be unwilling to purchase bonds for which they cannot obtain physical bonds.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
book-entry bonds can be effected only through the DTC System, by dealing with a
participating organization, indirect participant or a qualified bank, your
ability to transfer or pledge a book-entry bond to persons or entities that do
not participate in the DTC system or otherwise act with respect of such bonds,
may be limited due to the lack of a physical bond.
DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt of
distributions on book-entry bonds because the distributions will be forwarded by
the trustee to DTC for DTC to credit the accounts of its participants which will
thereafter credit them to your account either directly or indirectly through
indirect participants, as applicable.
We refer you to "Description of the Bonds" in this prospectus for more
detail.
RATING OF THE SECURITIES DOES NOT ASSURE PAYMENT
It will be a condition to the issuance of the bonds offered hereby that
they be rated in one of the four highest rating categories by the rating agency
identified in this supplement. The ratings of the bonds will depend primarily on
an assessment by the rating agency and the claims paying ability of the insurer,
if any. The ratings of the bonds will be based on, among other things, the
adequacy of the value of the trust assets and any credit enhancement. The
ratings should not be deemed a recommendation to purchase, hold or sell the
bonds, particularly since the ratings do not address market price or suitability
for an investor. There is no assurance that the ratings will remain in effect
over the life of the bond, and may be lowered or withdrawn.
We refer you to "Rating" in this prospectus for more detail.
PRE-FUNDING ACCOUNTS MAY RESULT IN RE-INVESTMENT RISK TO INVESTORS.
Amounts remaining in any pre-funded account at the end of the related
funding period will be distributed as prepayment of principal to investors on
the distribution date immediately following the end of the funding
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period in the manner specified in the related prospectus supplement. Investors
will bear any reinvestment risk resulting from such prepayment.
THE ADDITION OF SUBSEQUENT MORTGAGE COLLATERAL TO PRE-FUNDING ACCOUNTS DURING
THE FUNDING PERIOD MAY ADVERSELY AFFECT THE PERFORMANCE OF THE BONDS.
Although subsequent mortgage collateral must satisfy the characteristics
described in the related prospectus supplement, such subsequent mortgage
collateral may have different characteristics, including, without limitation, a
more recent origination date than the initial mortgage collateral. As a result,
the addition of such subsequent mortgage collateral to the pre-funding account
may adversely affect the performance of the related bonds.
OWNERS OF ORIGINAL ISSUE DISCOUNT BONDS SHOULD CONSIDER FEDERAL INCOME TAX
CONSEQUENCES.
An investor owning 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 bonds with deferred
interest will be treated as original issue discount for this federal income tax
purpose.
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
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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 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 holders of the Bonds of each such
Series (the "Bondholders"). The holders of the beneficial interest in each
Issuer will not be liable for payment of principal and interest on the Bonds,
and holders of Bonds of each Series will be deemed to have released the holders
of beneficial interest from any claim, liability or obligation on or with
respect to the Bonds of such Series.
THE COMPANY
The Company was incorporated in the State of Delaware on January 31, 1997
and is a limited purpose finance subsidiary of Redwood Trust. The Company is a
qualified real estate investment trust subsidiary. Redwood Trust is a publicly
owned real estate investment trust. The Company's principal executive offices
are located at 591 Redwood Highway, Suite 3120, Mill Valley, California 94941.
The Company's telephone number is 415-381-1765.
Redwood Trust has agreed with the Company that Redwood Trust will not file
or cause to be filed any voluntary petition in bankruptcy against the Company or
any trust created by it until at least one year after the date on which the
Bonds have been paid in full, if at all.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Bonds of each Series
will be applied by the Company to the purchase or acquisition of the related
Mortgage Collateral or the payment of expenses incurred in connection with the
issuance of Bonds and otherwise incurred in connection with the conduct of the
Company's operations. The Mortgage Collateral pledged to secure a Series of
Bonds will either be contributed to the Company's capital by Redwood Trust (or
an affiliate) or acquired by the Company from Redwood Trust (or an affiliate) or
another Seller and deposited with the Issuer of such Series by the Company.
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MORTGAGE LOAN PROGRAM
The Pledged Mortgages will have been purchased by the Depositor, either
directly or through affiliates, from Sellers. The Pledged Mortgages so acquired
by the Depositor will have been originated substantially in accordance with the
underwriting criteria specified below under "Underwriting Standards."
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will represent and warrant that all Pledged Mortgages originated and/or
sold by it to the Depositor or one of its affiliates will have been underwritten
in accordance with standards consistent with those utilized by mortgage lenders
generally during the period of origination. The related Prospectus Supplement
will include detailed information with respect to the underwriting standards
employed by the applicable originators of the Pledged Mortgages, to the extent
such information is reasonably available to the Depositor. Such information may
include, as applicable, underwriting guidelines with respect to required
borrower income, debt to income ratios, credit histories, loan-to-value ratios
and documentation and verification requirements.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial conditions, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In most cases, an employment
verification is obtained from an independent source (typically the borrower's
employer) which verification reports, among other things, the length of
employment with that organization, the current salary, and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. The appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home. The value of
the property being financed, as indicated by the appraisal, must be such that it
currently supports, and is anticipated to support in the future, the outstanding
loan balance. The maximum Loan-to-Value Ratio is generally not expected to
exceed 95%. Most loans with Loan-to-Value Ratios in excess of 80% at origination
must be covered by private mortgage insurance insuring the balance thereof down
to a 75% Loan-to-Value Ratio. The method of calculating the "Loan-to-Value
Ratio" of a Pledged Mortgage will be described in the Prospectus Supplement for
a Series of Bonds secured by Pledged Mortgages.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the Mortgaged Property (such as property taxes and hazard insurance) and (ii)
to meet monthly housing expenses and other financial obligations and monthly
living expenses. The maximum housing expense to income ratio referred to in (i)
is generally not expected to exceed 40% and the maximum debt to income ratio
described in (ii) is generally not expected to exceed 55%. The underwriting
standards applied by Sellers may be varied in appropriate cases where factors
such as low Loan-to-Value Ratios or other favorable credit issues exist.
The Depositor expects that a substantial portion of the Pledged Mortgages
it purchases will be "jumbo" loans, i.e., loans that exceed the maximum balance
for purchase by the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC"). Under current regulations, the
maximum principal balance allowed on loans eligible for purchase by FNMA or
FHLMC
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ranges from $252,700 ($379,050 for mortgage loans secured by mortgaged
properties located in either Alaska or Hawaii) for one-unit to $485,800
($728,700 for mortgage loans secured by mortgaged properties located in either
Alaska or Hawaii) for four-unit residential loans. The maximum loan amount is
generally not expected to exceed $1,500,000 in the case of any of the foregoing
types of loans.
A lender may originate mortgage loans under a reduced documentation
program. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain underwriting documentation concerning income and employment verification
is waived.
In the case of a loan secured by a leasehold interest in a real property,
the title to which is held by a third party lessor, generally, the Seller will
be required to represent and warrant, among other things, that the remaining
term of the lease and any sublease is at least five years longer than the
remaining term of the mortgage loan.
Certain of the types of loans which may be included in the Mortgage
Collateral are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, certain of such Pledged
Mortgages may provide for escalating or variable payments by the mortgagor or
obligor. These types of Pledged Mortgages are underwritten on the basis of a
judgment that mortgagors or obligors will have the ability to make monthly
payments required initially. In some instances, however, a mortgagor's or
obligor's income may not be sufficient to permit continued loan payments as such
payments increase. These types of loans may also be underwritten primarily upon
the basis of Loan-to-Value Ratios or other favorable credit factors.
QUALITY CONTROL
The Depositor's parent, Redwood Trust, has developed a quality control
program to monitor the quality of loan underwriting at the time of acquisition
and on an ongoing basis. All loans purchased by the Depositor will be subject to
this quality control program. A legal document review of each loan acquired will
be conducted to verify the accuracy and completeness of the information
contained in the mortgage notes, security instruments and other pertinent
documents in the file. A sample of loans to be acquired, selected by focusing on
those loans with higher risk characteristics, will normally be submitted to a
third party nationally recognized underwriting review firm for a compliance
check of underwriting and review of income, asset and appraisal information.
REPRESENTATIONS BY SELLERS; REPURCHASES
Each Seller will have made representations and warranties in respect of the
mortgage loans sold by such Seller and included in the Pledged Mortgages
securing a Series of Bonds. Such representations and warranties generally
include, among other things: (i) that title insurance (or in the case of
Mortgaged Properties located in areas where such policies are generally not
available, an attorney's certificate of title) and any required hazard insurance
policy and Primary Mortgage Insurance Policy (as defined herein) were effective
at the origination of each mortgage loan other than Cooperative Loans, and that
each policy (or certificate of title as applicable) remained in effect on the
date of purchase of the mortgage loan from the Seller by or on behalf of the
Company; (ii) that the Seller had good title to each such mortgage loan and such
mortgage loan was subject to no offsets, defenses, counterclaims or rights of
rescission except to the extent that any buydown agreement described herein may
forgive certain indebtedness of the obligors on such Pledged Mortgages (each, a
"Mortgagor"); (iii) that each mortgage loan constituted a valid first or junior
lien, as the case may be, on the Mortgaged Property (subject only to permissible
title insurance exceptions, if applicable, and certain other exceptions
described in the Master Servicing Agreement) and that the Mortgaged Property was
free from damage and was in good repair; (iv) that there were no delinquent tax
or assessment liens against the Mortgaged Property; (v) that no required payment
on a mortgage loan was 60 or more days delinquent at any time during the twelve
months prior to the date it is pledged to secure the related Series of Bonds;
and
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(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.
DESCRIPTION OF THE BONDS
GENERAL
Each Series of bonds (the "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 dates specified in the related Prospectus Supplement (the "Payment
Date") relating to such Series by check mailed to Bondholders of such Series
registered as such at the close of business on each of the dates specified in
such Prospectus Supplement (each, a "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)
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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 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 (the "Bond
Value" or "Bond Values") of the Mortgage Collateral securing such Series of
Bonds 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 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
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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
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.
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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)
OPTIONAL REDEMPTION
If so provided in the related Prospectus Supplement, the Bonds of any Class
of a Series may be subject to redemption at the option of the Issuer. Unless
otherwise provided in the related Prospectus Supplement, notice of any such
redemption must be given by the Issuer to the Bond Trustee not less than 30 days
prior to the redemption date and must be mailed by the Issuer or the Bond
Trustee to affected Bondholders at least five days prior to the redemption date.
(Indenture, Sections 10.01 and 10.02) The Prospectus Supplement for each Series
will specify the circumstances, if any, under which the Bonds of such Series may
be so redeemed, the manner of effecting such redemption, the conditions to which
such redemption are subject and the redemption prices for each Class of Bonds to
be redeemed.
CALL PROTECTION AND GUARANTEES
The Issuer also may, at its option, obtain for any Series of Bonds one or
more guarantees from a company or companies acceptable to each applicable Rating
Agency, which guarantees may provide for (i) call protection (which may include
yield maintenance) for any Class of Bonds of such Series or (ii) a guarantee of
a certain prepayment rate with respect to some or all of the Pledged Mortgages
or mortgage loans underlying the Certificates pledged as collateral for such
Series. Any call protection or guarantees may affect the weighted average life
of the Bonds of such Series.
WEIGHTED AVERAGE LIFE OF THE BONDS
All of the Pledged Mortgages securing a Series of Bonds will consist of
mortgage loans which are neither insured nor guaranteed by any governmental
agency ("Conventional Loans"). See "SECURITY FOR THE BONDS -- The Pledged
Mortgages" herein. The mortgage loans underlying the Private Mortgage-Backed
Securities, FHLMC Certificates and FNMA Certificates securing a Series of Bonds
will consist of either Conventional Loans, FHA Loans (as defined herein) or VA
Loans (as defined herein), or any combination thereof. The mortgage loans
underlying the GNMA Certificates securing a Series of Bonds will consist of FHA
Loans or VA Loans. Each Pledged Mortgage and each Certificate will provide by
its terms for monthly payments (or, in the case of Private Mortgage-Backed
Securities, such other period as may be specified in the related Prospectus
Supplement) of principal and interest in the amounts described in "SECURITY FOR
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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. 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.
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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.
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
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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
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
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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.
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.
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SECURITY FOR THE BONDS
GENERAL
Each Series of Bonds will be secured by assignments to the Bond Trustee of
collateral (the "Collateral") consisting of (i) the Mortgage Collateral pledged
as security for such Series of Bonds, (ii) funds on deposit in the Bond Account
and the Distribution Account under the Indenture for such Series of Bonds
representing payments and prepayments on Mortgage Collateral, including, to the
extent applicable, all payments which may become due under any applicable
hazard, mortgage guaranty, mortgagor bankruptcy, title insurance and bond
insurance policies (collectively, the "Insurance Proceeds") and the proceeds
(the "Liquidation Proceeds") of foreclosure or settlement of defaulted Pledged
Mortgages each as required to be remitted to the Bond Trustee, (iii) cash,
certificates of deposit, letters of credit, surety bonds, reinvestment income,
guaranteed investment contracts or any combination thereof in the aggregate
amount, if any, specified in the related Prospectus Supplement to be deposited
by the Issuer in a related Reserve Fund, (iv) the amount of cash, if any,
specified in the related Prospectus Supplement, to be initially deposited by the
Issuer in the related Bond Account, (v) certain cash accounts, insurance
policies, surety bonds, reinvestment income, guarantees, letters of credit,
cross-collateralization or derivative arrangements, as specified herein and in
the related Prospectus Supplement, (vi) to the extent applicable, the
reinvestment income on all of the foregoing, (vii) the Issuer's rights under the
Master Servicing Agreement with respect to the Series of Bonds, (viii) the
Issuer's rights under the Mortgage Loan Purchase Agreement with respect to the
Series of Bonds, (ix) amounts (excluding any reinvestment income thereon)
deposited in the related early remittance account, if any, under the Indenture
for such Series of Bonds and (x) the Issuer's rights under certain of the
Mortgage Pool Insurance Policies and/or Bond Insurance Policies obtained for
such Series of Bonds. Scheduled payments on the Mortgage Collateral securing a
Series of Bonds and amounts, if any, initially deposited in the related Bond
Account, together with, to the extent applicable, the earnings thereon at the
Assumed Reinvestment Rate for such Series specified in the related Prospectus
Supplement and, if applicable, amounts available to be withdrawn from any
related Reserve Fund, will be sufficient to make timely payments of interest on
the Bonds of such Series and to retire each Class of Bonds comprising such
Series not later than the Stated Maturity of such Class of Bonds specified in
the related Prospectus Supplement.
Each Prospectus Supplement relating to a Series of Bonds will include
information as to (i) the approximate aggregate principal amount of the Mortgage
Collateral securing such Series and whether the Mortgage Collateral consists of
Pledged Mortgages, GNMA Certificates, FNMA Certificates, FHLMC Certificates,
other pass-through certificates or collateralized mortgage obligations (the
"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 secure each Class of the
Bonds of such Series as described in the related Prospectus Supplement, and the
Collateral securing such Series will serve as collateral only for that Series of
Bonds, except to the extent that any Mortgage Pool Insurance Policies, Special
Hazard Insurance Policies, Bankruptcy Bonds or other form of credit enhancement
specified herein may, if specified in the related Prospectus Supplement, be
pledged to secure more than one Series of Bonds. See "CREDIT ENHANCEMENT"
herein.
The following is a brief description of the mortgage collateral (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.
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THE PLEDGED MORTGAGES
General. All of the fixed-rate, first or junior lien mortgage loans secured
by one-to four- family residential properties (the "Fixed Rate Pledged
Mortgages") and by 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") 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 Mortgages (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") issued by mortgage loan insurers (the "Mortgage Insurer").
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 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 loan agreement
or promissory note (the "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 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 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.
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(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 principal balance of the Pledged Mortgages as of the date pledged to
secure the related Series of Bonds, (ii) the types of property securing the
Pledged Mortgages, (iii) the original terms to maturity of the Pledged
Mortgages, (iv) the earliest origination date and latest maturity date of any of
the Pledged Mortgages, (v) the maximum and minimum per annum Mortgage Rates and
(vi) the geographical distribution of the Pledged Mortgages.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Pledged Mortgages. If the residential real estate market should
experience an overall decline in property values such that the outstanding
principal balances of the Pledged Mortgages, and any secondary financing on the
Mortgaged Properties, securing a Series of Bonds become equal to or greater than
the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by Mortgagors of scheduled payments of principal and interest on
the Pledged Mortgages and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Collateral. To the extent
that such losses are not covered by subordination provisions, any other credit
enhancement or alternative arrangements described herein and in the related
Prospectus Supplement, such losses will be borne, at least in part, by the
holders of the Bonds of the related Series.
The Issuer will cause the Pledged Mortgages securing each Series of Bonds
to be pledged to the Bond Trustee named in the related Prospectus Supplement for
the benefit of the Bondholders of such Series. The Master Servicer will service
the Pledged Mortgages, either directly or through other mortgage servicing
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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 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
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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 ("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", and such certificates, the
"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 (collectively, the "Certificates").
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
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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.
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
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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
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
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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.
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
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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 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.
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PRIVATE MORTGAGE-BACKED SECURITIES
Private Mortgage-Backed Securities may consist of (a) mortgage pass-through
certificates evidencing an undivided interest in a pool of mortgage loans or (b)
collateralized mortgage obligations secured by mortgage loans. Private
Mortgage-Backed Securities may include stripped mortgage-backed securities
representing an undivided interest in all or part of either the principal
distributions (but not the interest distributions) or the interest distributions
(but not the principal distributions) or in some specified portion of the
principal and interest distributions (but not all of such distributions) on
certain mortgage loans. Private Mortgage-Backed Securities will have been issued
pursuant to a pooling and servicing agreement, an indenture or similar agreement
(a "PMBS Agreement"). Unless otherwise specified in the related Prospectus
Supplement, the seller/servicer of the underlying mortgage loans will have
entered into the PMBS Agreement with the trustee under such PMBS Agreement (the
"PMBS Trustee"). The PMBS Trustee or its agent, or a custodian will possess the
mortgage loans underlying such Private Mortgage-Backed Security. Mortgage loans
underlying a Private Mortgage-Backed Security will be serviced by a servicer
(the "PMBS Servicer") directly or by one or more subservicers who may be subject
to the supervision of the PMBS Servicer. Private Mortgage-Backed Securities must
(i) either (a) have been previously registered under the Securities Act of 1933,
as amended (the "Securities Act") or (b) if not so registered, held for at least
the holding period required by Rule 144(k) under the Securities Act and (ii) be
acquired in bona fide secondary market transactions.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts. If
so specified in the related Prospectus Supplement, the PMBS Issuer may be an
affiliate of the Depositor. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Unless otherwise specified in the related
Prospectus Supplement, the PMBS Issuer will not have guaranteed any of the
assets conveyed to the related trust or any of the Private Mortgage-Backed
Securities issued under the PMBS Agreement. Additionally, although the mortgage
loans underlying the Private Mortgage-Backed Securities may be guaranteed by an
agency or instrumentality of the United States, the Private Mortgage-Backed
Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under the circumstances
specified in the related Prospectus Supplement.
The mortgage loans underlying the Private Mortgage-Backed Securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, Buydown Loans, adjustable mortgage loans or loans having
balloon or other special payment features. Such mortgage loans may be secured by
single (one- to four-) family property or multifamily property or by an
assignment of the proprietary lease or occupancy agreement relating to a
specific dwelling within a Cooperative and the related shares issued by such
Cooperative.
The Prospectus Supplement for a Series of Bonds for which the Mortgage
Collateral includes Private Mortgage-Backed Securities will specify the
aggregate approximate principal amount and type of the Private Mortgage-Backed
Securities to be included in the Mortgage Collateral and, as to any such Private
Mortgage-Backed Securities comprising a significant part of the Mortgage
Collateral, to the extent such information is known to the Issuer, will in
general include the following: (i) certain characteristics of the mortgage loans
that comprise the underlying assets for the Private Mortgage-Backed Securities
including (A) the payment features of such mortgage loans, (B) the approximate
aggregate principal balance of underlying mortgage loans insured or guaranteed
by a governmental entity, (C) the servicing fee or range of servicing fees with
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respect to the mortgage loans and (D) the minimum and maximum stated maturities
of the underlying mortgage loans at origination; (ii) the maximum original term
to stated maturity of the Private Mortgage-Backed Securities; (iii) the weighted
average term to stated maturity of the Private Mortgage-Backed Securities; (iv)
the pass-through or interest rate of the Private Mortgage-Backed Securities; (v)
the weighted average pass-through or interest rate of the Private
Mortgage-Backed Securities; (vi) the PMBS Issuer, the PMBS Servicer (if other
than the PMBS Issuer) and the PMBS Trustee for such Private Mortgage-Backed
Securities; (vii) certain characteristics of credit support, if any, such as
reserve funds, insurance policies, surety bonds, letters of credit or guaranties
relating to the mortgage loans underlying the Private Mortgage-Backed Securities
or to such Private Mortgage-Backed Securities themselves; (viii) the terms on
which the underlying mortgage loans for such Private Mortgage-Backed Securities
may, or are required to, be purchased prior to their stated maturity or the
stated maturity of the Private Mortgage-Backed Securities and the terms of any
redemption or other call feature; and (ix) the terms on which mortgage loans may
be substituted for those originally underlying the Private Mortgage-Backed
Securities.
SUBSTITUTION OF MORTGAGE COLLATERAL
Substitution of Mortgage Collateral (the "Substitute Collateral") will be
permitted in the event of breaches of representations and warranties with
respect to any original Mortgage Collateral or in the event the documentation
with respect to any Mortgage Collateral is determined by the Bond Trustee to be
incomplete. The period during which such substitution will be permitted
generally will be indicated in the Prospectus Supplement for a Series of Bonds.
The Prospectus Supplement for a Series of Bonds will describe the conditions
upon which Mortgage Collateral may be substituted for Mortgage Collateral
initially securing such Series.
OPTIONAL PURCHASE OF DEFAULTED PLEDGED MORTGAGES
If so provided in the related Prospectus Supplement, the Master Servicer,
the Company, the Bond Insurer and/or other entities specified in the Prospectus
Supplement may, at its option, purchase from the Issuer any Pledged Mortgage
which is delinquent in payment by more than the number of days specified in such
Prospectus Supplement, at a price specified in such Prospectus Supplement.
BOND AND DISTRIBUTION ACCOUNTS
A separate Bond Account will be established with the Bond Trustee for each
Series of Bonds for receipt of (i) all interest and principal payments
(including, to the extent applicable, any required advances by the Master
Servicer and any Servicers) and all prepayments on the Mortgage Collateral
securing such Series required to be remitted to the Bond Trustee (including, to
the extent applicable, Insurance Proceeds required to be remitted to the Bond
Trustee and Liquidation Proceeds); (ii) the amount of cash, if any, withdrawn
from any related Reserve Fund; and (iii) if so specified in the related
Prospectus Supplement, the reinvestment income on all of the foregoing. On or
prior to the date specified in the related Prospectus Supplement (each, a
"Distribution Account Deposit Date"), the Master Servicer shall withdraw from
the Bond Account the Bond Distribution Amount for such Payment Date, to the
extent of funds available for such purpose on deposit therein, and will deposit
such amount in the distribution account (the "Distribution Account").
The Bond Trustee will invest the funds in the Bond Account and the
Distribution Account in Permitted Investments maturing no later than the next
Payment Date for the related Series of Bonds. (Indenture, Section 8.02(b))
"Permitted Investments" may include (i) obligations of the United States or any
agency thereof, provided such obligations are backed by the full faith and
credit of the United States; (ii) general obligations of or obligations
guaranteed by any state of the United States or the District of Columbia
receiving the highest long-term debt rating of each applicable Rating Agency, or
such lower rating which will not result in a change in the rating then assigned
to each related Series of Bonds by each applicable Rating Agency, (iii)
commercial paper or finance company paper which is then receiving the highest
commercial or finance company paper rating of each applicable Rating Agency, or
such lower rating as will not result in a change in the rating then assigned to
each related Series of Bonds by each applicable Rating Agency; (iv) certificates
of deposit, demand or time deposits, or bankers' acceptances issued by any
depository institution or trust
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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; and
(x) short term investment funds sponsored by any trust company or national
banking association incorporated under the laws of the United States or any
state thereof which on the date of acquisition has been rated by each applicable
Rating Agency in their respective highest applicable rating category or such
lower rating as will not result in a change in the rating then assigned to each
related Series of Bonds by each such Rating Agency; provided that no such
instrument shall be a Permitted Investment if such instrument evidences the
right to receive interest only payments with respect to the obligations
underlying such instrument; and provided, further, that no investment specified
in clause (ix) or clause (x) above shall be a Permitted Investment for any
Pre-Funding Account or any related Capitalized Interest Account (as defined
herein). If a letter of credit is deposited with the Bond Trustee, such letter
of credit will be irrevocable, will name the Bond Trustee, in its capacity as
trustee for the Bondholders, as the sole beneficiary and will be issued by a
bank acceptable to each applicable Rating Agency. (Indenture, Section 1.01)
Unless an Event of Default or an event which if not timely cured will
constitute an Event of Default with respect to a Series of Bonds has occurred
and is continuing, funds remaining in the related Bond Account following a
Payment Date for such Bonds (other than certain amounts not constituting
Available Funds if so specified in the related Prospectus Supplement or any
funds required to be deposited in a related Reserve Fund) will be subject to
withdrawal upon the order of the Issuer free from the lien of the Indenture.
PRE-FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the Master Servicer
will establish and maintain an account (the "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 (the "Pre-Funded Amount") specified in
such Prospectus Supplement on the related closing date for the sale of such
Series of Bonds (the "Closing Date"). 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 a period specified in such
Prospectus Supplement (such period, the "Funding Period") to pay to the
Depositor the purchase price for additional Pledged Mortgages and/or
Certificates ("Subsequent Mortgage Collateral"). Prior to inclusion in the
Collateral securing a Series of Bonds, in accordance with the provisions of the
related Indenture, the
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Subsequent Mortgage Collateral will be subject to review by the same parties as
reviewed the initial Mortgage Collateral. Specifically, the Bond Trustee will be
required to perform a document review and an independent firm will certify the
fair value of the Subsequent Mortgage Collateral. In addition, the Issuer will
be required to deliver to the Bond Trustee a legal opinion to the effect that
all Indenture requirements have been met for including the Subsequent Mortgage
Collateral in the Collateral.
Monies on deposit in the Pre-Funding Account will not be available to cover
losses on or in respect of the related Mortgage Collateral. The Pre-Funded
Amount will not exceed 50% of the initial aggregate principal amount of the
Bonds of the related Series. The Pre-Funded Amount will be used by the related
Bond Trustee to purchase Subsequent Mortgage Collateral from the Depositor from
time to time during the Funding Period. The Funding Period, if any, for a Series
of Bonds will begin on the related Closing Date and will end on the date
specified in the related Prospectus Supplement, which in no event will be later
than the date that is one year after the related Closing Date. Monies on deposit
in the Pre-Funding Account may be invested in Permitted Investments (as such
term is defined above under "-- Bond and Distribution Accounts") under the
circumstances and in the manner described in the related Agreement. Earnings on
investment of funds in the Pre-Funding Account will be deposited into the
related Bond Account or such other trust account as is specified in the related
Prospectus Supplement and losses will be charged against the funds on deposit in
the Pre-Funding Account. Any amounts remaining in the Pre-Funding Account at the
end of the Funding Period will be paid to the related Bondholders in the manner
and priority specified in the related Prospectus Supplement, as a prepayment of
principal of the related Bonds. Certain information with respect to the
Subsequent Mortgage Collateral will be filed with the Commission on Form 8-K
within fifteen days after the date such Subsequent Mortgage Collateral is
conveyed to the related Trust.
In addition, if so specified in the related Prospectus Supplement, on the
related Closing Date the Depositor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related Series of Bonds that may arise as a result of
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the Bond Trustee for the related
Series of Bonds and is designed solely to cover the above-mentioned interest
shortfalls. Monies on deposit in the Capitalized Interest Account will not be
available to cover losses on or in respect of the related Mortgage Collateral.
To the extent that the entire amount on deposit in the Capitalized Interest
Account has not been applied to cover shortfalls in interest on the related
Series of Bonds by the end of the Funding Period, any amounts remaining in the
Capitalized Interest Account will be paid to the Depositor.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of a
Series of Bonds or with respect to the related Mortgage Collateral for the
purpose of (i) maintaining timely payments or providing additional protection
against losses on the Collateral securing such Series of Bonds, (ii) paying
administrative expenses or (iii) establishing a minimum reinvestment rate on the
payments made in respect of such Collateral or principal payment rate on such
Collateral. Credit enhancement may be in the form of the subordination of one or
more Classes of such Series, the establishment of one or more Reserve Funds, use
of a Mortgage Pool Insurance Policy, a Special Hazard Insurance Policy,
Bankruptcy Bond, cash account, insurance policy, surety bond, guaranteed
investment contract, cross-collateralization, reinvestment income, guaranty,
letter of credit or derivative arrangement as described herein and in the
related Prospectus Supplement, or any combination of the foregoing. Unless
otherwise specified in the related Prospectus Supplement, no credit enhancement
will provide protection against all risks of loss or guarantee repayment of the
entire principal balance of the Bonds and interest thereon. If losses occur
which exceed the amount covered by credit enhancement or which are not covered
by the credit enhancement, Bondholders will bear their allocable share of any
deficiencies.
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SUBORDINATION
If so specified in the related Prospectus Supplement, a Series of Bonds may
consist of one or more Classes of senior bonds ("Senior Bonds") and one or more
Classes of subordinated bonds ("Subordinated Bonds"). The rights of the holders
of the Subordinated Bonds of a Series (the "Subordinated Bondholders") to
receive payments of principal and/or interest (or any combination thereof) will
be subordinated to such rights of the holders of the Senior Bonds of the same
Series (the "Senior Bondholders") to the extent described in the related
Prospectus Supplement. This subordination is intended to enhance the likelihood
of regular receipt by the Senior Bondholders of the full amount of their
scheduled payments of principal and/or interest. The protection afforded to the
Senior Bondholders of a Series by means of the subordination feature will be
accomplished by (i) the preferential right of such holders to receive, prior to
any payment being made on the related Subordinated Bonds, the amounts of
principal and/or interest due them on each Payment Date out of the funds
available for payment on such date in the related Distribution Account and, to
the extent described in the related Prospectus Supplement, by the right of such
holders to receive future payments that would otherwise have been payable to the
Subordinated Bondholders; or (ii) as otherwise described in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
subordination may apply only in the event of certain types of losses not covered
by other forms of credit support, such as hazard losses not covered by standard
hazard insurance policies or losses due to the bankruptcy or fraud of the
borrower. The related Prospectus Supplement will set forth information
concerning, among other things, the amount of subordination of a Class or
Classes of Subordinated Bonds in a Series, the circumstances in which such
subordination will be applicable and the manner, if any, in which the amount of
subordination will decrease over time.
If so specified in the related Prospectus Supplement, delays in receipt of
scheduled payments on the Mortgage Collateral and losses with respect to the
Mortgage Collateral will be borne first by the various Classes of Subordinated
Bonds and thereafter by the various Classes of Senior Bonds, in each case under
the circumstances and subject to the limitations specified in such Prospectus
Supplement. The aggregate payments in respect of delinquent payments on the
Mortgage Collateral over the lives of the Bonds or at any time, the aggregate
losses in respect of Mortgage Collateral which must be borne by the Subordinated
Bonds by virtue of subordination and the amount of payments otherwise
distributable to the Subordinated 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
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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 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") which are
not covered as to their entire outstanding principal balances by Primary
Mortgage Insurance Policies. As more fully described below, the Master Servicer
will present claims thereunder to the Pool Insurer on behalf of itself, the Bond
Trustee and the Bondholders. The Mortgage Pool Insurance Policies, however, are
not blanket policies against loss, since claims thereunder may be made only
respecting particular defaulted Pledged Mortgages and only upon satisfaction of
certain conditions precedent described below. Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Pool Insurance Policies will not
cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy.
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.
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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 or policies (the "Special Hazard Insurance Policy") may
be obtained for a Series of Bonds secured by Pledged Mortgages and will be
issued by the insurer (the "Special Hazard Insurer") named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Bonds from (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including earthquakes
and, to a limited extent, tidal waves and related water damage or as otherwise
specified in the related Prospectus Supplement) not insured against under the
standard form of hazard insurance policy for the respective states in which the
Mortgaged Properties 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
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such amount. So long as a Mortgage Pool Insurance Policy remains in effect, the
payment by the Special Hazard Insurer of the cost of repair or of the unpaid
principal balance of the related Pledged Mortgage plus accrued interest and
certain expenses will not affect the total insurance proceeds paid to
Bondholders, but will affect the relative amounts of coverage remaining under
the related Special Hazard Insurance Policy and Mortgage Pool Insurance Policy.
To the extent specified in the related Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or a guaranteed
investment contract in a special trust account to provide protection in lieu of
or in addition to that provided by a Special Hazard Insurance Policy. The amount
of any Special Hazard Insurance Policy or of the deposit to the special trust
account in lieu thereof relating to such Bonds may be reduced so long as any
such reduction will not result in a downgrading of the rating of such Bonds by
any applicable Rating Agency.
BANKRUPTCY BONDS
If so specified in the related Prospectus Supplement, a bankruptcy bond or
bonds (the "Bankruptcy Bond") may be obtained for a Series of Bonds secured by
Pledged Mortgages to cover losses resulting from proceedings under the federal
Bankruptcy Code with respect to a Pledged Mortgage will be issued by an insurer
named in such Prospectus Supplement. Each Bankruptcy Bond will cover, to the
extent specified in the related Prospectus Supplement, certain losses resulting
from a reduction by a bankruptcy court of scheduled payments of principal and
interest on a Pledged Mortgage or a reduction by such court of the principal
amount of a Pledged Mortgage and will cover certain unpaid interest on the
amount of such a principal reduction from the date of the filing of a bankruptcy
petition. The required amount of coverage under each Bankruptcy Bond will be set
forth in the related Prospectus Supplement. Coverage under a Bankruptcy Bond may
be cancelled or reduced by the Master Servicer if such cancellation or reduction
would not adversely affect the then current rating or ratings of the related
Bonds. See "CERTAIN LEGAL ASPECTS OF THE PLEDGED MORTGAGES -- Anti-Deficiency
Legislation and Other Limitations on Lenders" herein.
To the extent specified in the related Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or a guaranteed
investment contract in a special trust account to provide protection in lieu of
or in addition to that provided by a Bankruptcy Bond. The amount of any
Bankruptcy Bond or of the 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 (the "Bond Insurance Policy")
provided by one or more insurance companies or sureties (the "Bond Insurer").
Such instruments may cover, with respect to one or more Classes of Bonds of the
related Series, timely payments of interest and/or full payments of principal on
the basis of a schedule of principal payments set forth in or determined in the
manner specified in the related Prospectus Supplement. In addition, if specified
in the related Prospectus Supplement, a Series of Bonds may also be covered by
insurance or guaranties for the purpose of (i) maintaining timely payments or
providing additional protection against losses on the Mortgage Collateral
pledged to secure such Series, (ii) paying administrative expenses or (iii)
establishing a minimum reinvestment rate on the payments made in respect of such
Mortgage Collateral or principal payment rate on such Mortgage Collateral. Such
arrangements may include agreements under which Bondholders are entitled to
receive amounts deposited in various accounts held by the Bond Trustee upon the
terms specified in such Prospectus Supplement. A copy of any such instrument for
a Series will be filed with the Commission as an exhibit to a Current Report on
Form 8-K to be filed within 15 days of issuance of the Bonds of the related
Series.
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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 principal and interest payments on each Pledged Mortgage or
Certificate, as the case may be, as an additional payment in respect of
principal to reduce the principal balance of a certain Class or Classes of Bonds
and, thus, accelerate the rate of payment of principal on such Class or Classes
of Bonds.
CROSS-COLLATERALIZATION
If so specified in the related Prospectus Supplement, separate groups of
Mortgage Collateral may be pledged to secure separate Classes of the related
Series of Bonds. In such case, credit support may be provided by a
cross-collateralization feature which requires that payments be made with
respect to Bonds secured by 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
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Issuer to make principal payments on the Bonds of the related Series at a
minimum rate set forth in such Prospectus Supplement.
DERIVATIVE ARRANGEMENTS
If so specified in the related Prospectus Supplement, credit enhancement
may be provided with respect to one or more Classes of Bonds of a Series or with
respect to the Mortgage Collateral securing a Series of Bonds in the form of one
or more derivative arrangements. A derivative arrangement is a contract or
agreement, the price of which is directly dependent upon (i.e., "derived from")
the value of one or more underlying assets, including securities, equity
indices, debt instruments, commodities, other derivative instruments, or any
agreed upon pricing index or arrangement (e.g., the movement over time of the
Consumer Price Index or interest rates). Derivatives involve rights or
obligations based on the underlying asset, but do not necessarily result in a
transfer of the underlying asset. Derivative arrangements include swap
agreements, interest rate swaps, interest rate caps, interest rate floors,
interest rate collars and currency swap agreements. A "swap agreement" is a
contractual agreement providing for a series of exchanges of principal and/or
interest in the same or different currencies. At a more general level, the term
"swap agreement" includes the exchange of fixed-for-floating payments on a given
quantity of a specified commodity, security or other asset. An "interest rate
swap" is a swap agreement between two parties to engage in a series of exchanges
of interest payments on the same notional principal amount denominated in the
same currency based, respectively, on variable or fixed rates of interest. An
"interest rate cap" is an agreement providing for multi-period cash settled
options on interest rates. The cap purchaser receives a cash payment whenever
the reference rate exceeds the ceiling rate on a fixing date. An "interest rate
floor" is an agreement providing for a multi-period interest rate option that
provides a cash payment to the holder of the option whenever the reference rate
is below the floor on a fixing date. An "interest rate collar" is an agreement
providing for a combination of an interest rate cap and an interest rate floor
such that a cap is purchased and a floor is sold or vice versa. The effect of an
interest rate collar is to place upper and lower bounds on the cost of funds. A
"currency swap agreement" is a swap agreement between two parties for the
exchange of a future series of interest and principal payments in which one
party pays in one currency and the other party pays in a different currency. The
exchange rate is fixed over the life of the currency swap agreement.
The derivative arrangements described above will support the payments on
the Bonds to the extent and under the conditions specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, no credit enhancement will provide protection against all risks of
loss or guarantee repayment of the entire principal balance of the Bonds and
interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, Bondholders will
bear their allocable share of any deficiencies.
SERVICING OF THE PLEDGED MORTGAGES
GENERAL
The master servicer (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
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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.
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
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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 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
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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 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.
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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.
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.
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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 ("Advances"), 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 Supplement, the obligations of the Master
Servicer to make Advances may be supported by a cash advance reserve fund, a
surety bond or a letter of credit, in each case as described in such Prospectus
Supplement.
RESIGNATION OF MASTER SERVICER
A Master Servicer may not resign from its obligations and duties under a
Master Servicing Agreement or assign or transfer such duties or obligations
except (i) upon a determination that its duties thereunder are no longer
permissible under applicable law or (ii) upon a sale of its servicing rights
with respect to the Pledged Mortgages with the prior written consents of the
Bond Trustee, the Issuer and any applicable Bond 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 Bond Insurer, in the exercise of their
reasonable discretion and must be approved to act as a mortgage servicer for
FHLMC or FNMA.
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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 (the "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 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 available for distribution 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.
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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 (with the consent of the Bond
Insurer, if any) 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 Bond 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. The Indenture relating to
each Series of Bonds will be filed with the Securities and Exchange Commission
within fifteen days of the closing of the sale of such Series of Bonds.
GENERAL
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that Bonds may be issued up to the aggregate principal
amount authorized from time to time by the Issuer.
MODIFICATION OF INDENTURE
With the consent of the holders of not less than 66 2/3% of the then
outstanding principal amount of the Class of Bonds of the related Series
specified in the related Prospectus Supplement to be the "Controlling Class",
the Bond Trustee and the Issuer may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture with respect to the Bonds of such Series or modify (except as provided
below) in any manner the rights of the Bondholders.
Without the consent of the holder of each outstanding Bond affected,
however, no supplemental indenture shall (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Bond or reduce the
principal amount thereof, the interest rate specified thereon or the redemption
price with respect
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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)
Each Bondholder agrees that unless a Bond Insurer default exists, the Bond
Insurer shall have the right to exercise the voting rights of the Bondholders to
the extent set forth in the Indenture.
EVENTS OF DEFAULT
An event of default (an "Event of Default") with respect to any Series of
Bonds is defined in the Indenture as being: (a) the failure (i) to pay any
principal of, or interest on, any Bond of such Series then due, (ii) if
applicable, to call for special redemption any Bonds that are required to be so
redeemed or (iii) to pay the redemption price of any Bonds called for
redemption; (b) a default in the observance of certain negative covenants in the
Indenture; (c) a default in the observance of any other covenant of the Issuer,
and the continuation of any such default for a period of 30 days after notice
thereof is given to the Issuer by the Bond Trustee or by the holders of more
than 50% in outstanding principal amount of the Controlling Class of Bonds of
such Series; (d) any representation or warranty made by the Issuer in the
Indenture or in any certificate delivered pursuant thereto being incorrect in a
material respect as of the time made, and the circumstances in respect of which
such representation or warranty is incorrect are not cured within 30 days after
notice thereof is given to the Issuer by the Bond Trustee or by the holders of
more than 50% in outstanding principal amount of the Controlling Class of Bonds
of such Series; or (e) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer. (Indenture, Section 5.01)
RIGHTS UPON EVENTS OF DEFAULT
In case an Event of Default shall occur and be continuing with respect to a
Series of Bonds, the Bond Trustee or holders of more than 50% in outstanding
principal amount of the Controlling Class of Bonds of such Series may declare
the principal of such Series of Bonds to be due and payable. Such declaration
may under certain circumstances be rescinded by the holders of a majority in
principal amount of the outstanding Bonds of such Series. (Indenture, Section
5.02)
Upon an Event of Default the Bond Trustee may, in its discretion, sell the
Collateral for such Series, in which event the Bonds of such Series will be
payable pro rata, without regard to their Stated Maturities, or in such other
manner as is specified in the related Prospectus Supplement, out of the
collections on, or the
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proceeds from the sale of, such Collateral and will, to the extent permitted by
applicable law, bear interest at the interest rate specified in the Indenture.
(Indenture, Section 5.08) If so specified in the related Prospectus Supplement,
following an Event of Default, if a Series of Bonds has been declared to be due
and payable, the Bond Trustee may, in its discretion, refrain from selling the
Collateral, including the Mortgage Collateral, for such Series and continue to
apply all amounts received on the Collateral to payments due on the Bonds of
such Series in accordance with their terms, notwithstanding the acceleration of
the maturity of such Bonds. (Indenture, Section 5.05)
In case an Event of Default shall occur and be continuing, the Bond Trustee
shall be under no obligation to expend or risk its own funds or otherwise incur
any financial liability in the performance of its duties under the Indenture if
it has reasonable grounds for believing that it has not been assured of adequate
security or indemnity. (Indenture, Section 6.01(e)) Subject to such provisions
for indemnification and certain limitations contained in the Indenture, the
holders of a majority in principal amount outstanding of the Controlling Class
of outstanding Bonds of a Series shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Bond
Trustee or exercising any trust or power conferred on the Bond Trustee with
respect to the Bonds of such Series; and the holders of a majority in principal
amount of the Controlling Class of Bonds of a Series then outstanding may, in
certain cases, waive any default with respect thereto, except a default in
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the consent of each
holder of Bonds affected. (Indenture, Sections 5.14 and 5.15)
No holder of Bonds will have the right to institute any proceeding with
respect to the Indenture, unless (a) such holder previously has given to the
Bond Trustee written notice of an Event of Default, (b) the holders of more than
50% in outstanding principal amount of the Controlling Class of Class of Bonds
of the Series have made written request upon the Bond Trustee to institute such
proceedings in its own name as Bond Trustee and have offered the Bond Trustee
indemnity in full, (c) the Bond Trustee has for 60 days neglected or refused to
institute any such proceeding and (d) no direction inconsistent with such
written request has been given to the Bond Trustee during such 60-day period by
the holders of a majority in principal amount of the outstanding Bonds of such
Series. (Indenture, Section 5.09)
CERTAIN COVENANTS OF THE ISSUER
The Issuer covenants in the Indenture, among other matters, that it will
not (a) sell, exchange or otherwise dispose of any portion of the Collateral for
a Series of Bonds except as expressly permitted by the Indenture or the Master
Servicing Agreement, (b) amend Sections 2.03 or 11.01 of the Issuer's Deposit
Trust Agreement without the consent of the holders of 66 2/3% in outstanding
principal amount of each Class of Bonds affected thereby or (c) incur, assume or
guarantee any indebtedness other than in connection with the issuance of the
Bonds. (Indenture, Section 3.09) Section 2.03 of the Issuer's Deposit Trust
Agreement provides that the trust shall not have the power to perform any act or
engage in any business whatsoever except to issue and administer the Bonds of a
Series, to receive and own the Collateral, to maintain and administer the
Collateral, to pledge the Collateral to support such Bonds pursuant to the
Indenture and to take certain other actions incidental thereto. Section 11.01 of
the Issuer's Deposit Trust Agreement prohibits the amendment of the Deposit
Trust Agreement if the Owner Trustee determines that such amendment will
adversely affect any right, duty or liability of, or immunity or indemnity in
favor of, the Owner Trustee under the Issuer's Deposit Trust Agreement, or will
cause or result in any conflict with or breach of any terms of, or default
under, the charter documents or bylaws of the Owner Trustee or any document to
which the Owner Trustee is a party.
ISSUER'S ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Bond Trustee a
written statement as to fulfillment of its obligations under the Indenture.
(Indenture, Section 3.10)
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BOND TRUSTEE'S ANNUAL REPORT
The Bond Trustee will be required to mail each year to all Bondholders a
brief report relating to its eligibility and qualifications to continue as the
Bond Trustee under the Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by the Issuer to the Bond Trustee in its individual capacity, the property
and funds physically held by the Bond Trustee as such, and any action taken by
it which materially affects the Bonds and which has not been previously
reported. (Indenture, Section 7.03)
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the Collateral securing
the Bonds of a Series upon the delivery to the Bond Trustee for cancellation of
all of the Bonds of such Series or, with certain limitations, upon deposit with
the Bond Trustee of funds sufficient for the payment in full of all of the Bonds
of such Series. (Indenture, Section 4.01)
REPORT BY BOND TRUSTEE TO BONDHOLDERS
On each Payment Date, the Bond Trustee will send a report to each
Bondholder setting forth the amount of such payment representing interest, the
amount thereof, if any, representing principal, the amount of any related
Advance and the outstanding principal amount of Bonds of each Class (the
aggregate principal amount of the Bonds of each Class in the case of holders of
Bonds on which payments of interest only are then being made) after giving
effect to the payments made on such Payment Date. (Indenture, Section 8.06)
THE BOND TRUSTEE
The Bond Trustee under each Indenture will be identified in the related
Prospectus Supplement.
CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES
The following discussion contains general summaries of certain legal
aspects of mortgage loans. Because such legal aspects are governed primarily by
applicable state law (which laws may differ substantially from state to state),
the summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which Mortgaged
Properties may be located. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Pledged
Mortgages.
GENERAL
The Pledged Mortgages will consist of notes and either mortgages, deeds of
trust, security deeds or deeds to secure debts, depending upon the prevailing
practice in the state in which the underlying Mortgaged Property is located.
Deeds of trust are used almost exclusively in California instead of mortgages. A
mortgage creates a lien upon the real property encumbered by the mortgage, which
lien is generally not prior to the lien for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
recording with a state or county office. There are two parties to a mortgage:
the mortgagor, who is the borrower and owner of the mortgaged property; and the
mortgagee, who is the lender. Under a mortgage instrument, the mortgagor
delivers to the mortgagee (i) a note or bond evidencing the loan and (ii) the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust has
three parties: the borrower-property owner, called the trustor (similar to a
mortgagor); a lender (similar to a mortgagee) called the beneficiary; and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title to,
as opposed to merely creating a lien upon, the subject property to the grantee
until such time as the underlying debt is repaid. The trustee's authority under
a deed of trust, the mortgagee's
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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.
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
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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.
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
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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 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
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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 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
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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.
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
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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.
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
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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 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 applicable 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 applicable
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,
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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 discussion summarizes the anticipated material federal income
tax consequences of the purchase, ownership and disposition of the Bonds, as
based on the advice of Giancarlo & Gnazzo, A Professional Corporation, special
tax counsel to the Issuer. This 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. This summary
does not address federal income tax consequences applicable to all categories of
investors, some of which (such as banks and insurance companies) 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 Class or Series of Bonds, the summary is subject to further
discussion or change as provided in the related Prospectus Supplement.
OVERVIEW
The federal income tax consequences applicable with respect to a specific
Series of Bonds will vary depending on whether an election is made to treat the
Trust Estate relating to such Series of Bonds as a real estate mortgage
investment conduit ("REMIC") under the Code. The Prospectus Supplement for each
Series of Bonds will specify whether a REMIC election will be made with respect
to such Series. Bonds of any Series that are not the subject of a REMIC election
("NON-REMIC BONDS") are intended to be classified as indebtedness of the Issuer
for federal income tax purposes.
NON-REMIC BONDS
General. If a REMIC election is not made, Giancarlo & Gnazzo, A
Professional Corporation, will deliver its opinion that, although no
regulations, published rulings or judicial decisions exist that discuss the
characterization for federal income tax purposes of securities with terms
substantially the same as the Non-REMIC Bonds, 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.
Status as Real Property Loans. Because, in such counsel's opinion, the
Non-REMIC Bonds will be treated as indebtedness of the Issuer for federal income
tax purposes, (i) such 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 Non-
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REMIC 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 Non-REMIC
Bonds will not constitute "real estate assets" or "government securities" within
the meaning of Code Section 856(c)(4)(A), and (iii) Non-REMIC Bonds held by a
regulated investment company will not constitute "government securities" within
the meaning of Code Section 851(b)(4)(A)(i).
Interest on Non-REMIC Bonds. Except as described below with respect to
original issue discount, market discount or premium, interest paid or accrued on
Non-REMIC Bonds generally will be treated as ordinary income to the holder, and
will be includible in income in accordance with such holder's regular method of
accounting.
Original Issue Discount. 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 accordance with the
constant yield method, in advance of receipt of the cash attributable to such
income. The 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 and in regulations issued thereunder
(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 Code requires that the amount and
rate of accrual of original issue discount be calculated based on a reasonable
assumed prepayment rate for the Pledged Mortgages, the mortgage loans underlying
the Bonds and/or other Mortgage Collateral securing the Bonds (the "TAX
PREPAYMENT ASSUMPTION") and prescribes a method for adjusting the amount and
rate of accrual of such discount if actual prepayment rates exceed the Tax
Prepayment Assumption. 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 is required to 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 of Bonds with OID. A subsequent purchaser of a
Deferred Interest Bond or 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.
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
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market discount at the time of such payment or disposition. The amount of
accrued market discount for purposes of determining the tax treatment of
subsequent principal payments or dispositions of the Bonds is to be reduced by
the amount so treated as ordinary income.
The Tax Reform Act of 1986 grants authority to the U.S. Treasury to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the U.S. Treasury, certain rules
described in the legislative history accompanying the Tax Reform Act of 1986
will apply. Under those rules, the holder of a market discount bond may elect to
accrue market discount either on the basis of a constant interest rate or using
one of the following methods. For bonds issued with original issue discount, the
amount of market discount that accrues during a period is equal to the product
of (i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the original issue discount accruing during the period and
the denominator of which is the total remaining original issue discount at the
beginning of the period. For bonds issued without original issue discount, the
amount of market discount that accrues during a period is equal to the product
of (i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the period. For purposes of calculating
market discount under any of the above methods in the case of instruments (such
as the Bonds) that provide for payments that may be accelerated by reason of
prepayments of other obligations securing such instruments, the same prepayment
assumption applicable to calculating the accrual of original issue discount
shall apply. Regulations are to provide similar rules for computing the accrual
of amortizable bond premium on instruments payable in more than one principal
installment. As an alternative to the inclusion of market discount in income on
the foregoing basis, the holder may elect to include such market discount in
income currently as it accrues on all market discount instruments acquired by
such holder in that taxable year or thereafter. In addition, accrual method
holders may elect to accrue all interest on a Bond, including de minimis
original issue discount and market discount and as adjusted by any premium,
under a constant yield method.
A subsequent holder of a Bond who acquired the Bond at a market discount
also may be required to defer, until the maturity date of the Bond or the
earlier disposition of the Bond in a taxable transaction, the deduction of a
portion of the amount of interest that the holder paid or accrued during the
taxable year on indebtedness incurred or maintained to purchase or carry the
Bond in excess of the aggregate amount of interest (including original issue
discount) includible in his or her gross income for the taxable year with
respect to such Bond. The amount of such net interest expense deferred in a
taxable year may not exceed the amount of market discount accrued on the Bond
for the days during the taxable year on which the subsequent holder held the
Bond, and the amount of such deferred deduction to be taken into account in the
taxable year in which the Bond is disposed of in a transaction in which gain or
loss is not recognized in whole or in part is limited to the amount of gain
recognized on the disposition. This deferral rule does not apply to a holder
that elects to include market discount in income currently as it accrues on all
market discount instruments acquired by such holder in that taxable year or
thereafter.
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.
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.
REMIC BONDS
General. If a REMIC election is made with respect to a Series of Bonds,
Giancarlo & Gnazzo, A Professional Corporation will deliver an opinion generally
to the effect that, under existing law, assuming timely filing of a REMIC
election and ongoing compliance with all provisions of the related Indenture and
other contemporaneous agreements, all or a portion of the Trust Estate securing
such Series of Bonds will qualify as a REMIC for federal income tax purposes.
The Bonds in such Series will be designated either as one or more "regular
interests" in a REMIC, which generally are treated as debt for federal income
tax purposes, or as "residual interests" in a REMIC, which generally are not
treated as debt for such purposes but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
REMIC. The Prospectus Supplement for such Series will indicate which Bonds are
being designated as regular interest ("REGULAR INTEREST BONDS") and which are
being designated as residual interests ("RESIDUAL INTEREST BONDS"). The REMIC
residual interests may alternatively be evidenced, instead of by a Residual
Interest Bond, by residual certificates ("RESIDUAL INTEREST CERTIFICATES"), as
set forth in the related Prospectus Supplement. Neither the Residual Interest
Bonds nor the Residual Interest Certificates will be offered by the Prospectus.
Tiered REMIC Structures. For certain Series of Bonds, two or more separate
elections may be made to treat designated portions of the related Trust Estate
as REMICs (where two separate elections are made, one will be referred to as the
"UPPER TIER REMIC" and the other as the "LOWER TIER REMIC" respectively) for
federal income tax purposes. Upon the issuance of any such Series of Bonds,
Giancarlo & Gnazzo, A Professional Corporation, will deliver its opinion
generally to the effect that, under existing law, assuming timely filing of
applicable REMIC elections and ongoing compliance with all provisions of the
related Indenture and other contemporaneous agreements, the Upper Tier REMIC and
the Lower Tier REMIC will each qualify as a REMICs for federal income tax
purposes. In certain cases, a single Residual Interest Bond may represent the
residual interest in both the Upper Tier REMIC and the Lower Tier REMIC. In such
cases, the discussion of Residual Interest Bonds set forth below should be
interpreted as applying to each residual interest separately.
Status as Real Property Loans. Except to the extent otherwise provided in
the related Prospectus Supplement: (i) REMIC Bonds held by a "domestic building
and loan association" ("DB&LS") will constitute assets described in Code Section
7701(a)(19)(C)(xi); (ii) REMIC Bonds held by a "real estate investment trust"
("REIT") will constitute "real estate assets" within the meaning of Code section
856(c)(4)(A) and interest on such Bonds will be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
Section 856(c)(3)(B); and (iii) Regular Interest Bonds held by a "financial
assets securitization investment trust" ("FASIT") will qualify for treatment as
"permitted assets" within the meaning of Code Section 860L(c)(1)(G) and as
"qualified mortgages" within the meaning of Code Section 860G(a)(3) if held by
another REMIC. REMIC Bonds held by REITs or regulated investment companies
("RIC") will not constitute "government securities" within the meaning of Code
Section 856(c)(5)(A) or 851(b)(4)(A)(ii), respectively. REMIC Bonds held by
certain financial institutions will constitute "evidences of indebtedness"
within the meaning of Code Section 582(c)(1).
In the case of items (i), (ii) and (iii) above, if less than 95% of the
REMIC's assets are assets qualifying under any of the foregoing Code Sections,
the REMIC Bonds will be qualifying assets only to the extent that
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the REMIC's assets are qualifying assets. If a Series of Bonds employs a
multi-tier REMIC structure, both the Upper Tier REMIC and the Lower Tier REMIC
will be treated as a single REMIC for purposes of determining the extent to
which the related REMIC Bonds and the income thereon will be treated as such
assets and income.
Taxation of Regular Interest Bonds.
General. Except as otherwise stated in this discussion, Regular Interest
Bonds will be treated for federal income tax purposes as debt instruments issued
by the REMIC and not as ownership interests in the REMIC or its assets. Holders
of Regular Interest Bonds that otherwise report income under a cash method of
accounting will be required to report income with respect to Regular Interest
Bonds under an accrual method.
Original Issue Discount. Certain classes of Regular Interest Bonds may be
issued with OID within the meaning of Section 1273(a) of the Code. The rules
governing OID with respect to a Regular Interest Bond are described above under
"Non-REMIC Bonds -- Original Issue Discount." Holders of Regular Interest Bonds
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Regular Interest
Bonds. In view of the complexities and current uncertainties as to the manner of
inclusion in income of OID on Regular Interest Bonds, each investor should
consult his own tax advisor to determine the appropriate amount and method of
inclusion in income of OID on such Regular Interest Bonds for federal income tax
purposes.
Market Discount. A subsequent purchaser of a Regular Interest Bond may also
be subject to the market discount provisions of Code Sections 1276 through 1278.
These rules are described above under "Non-REMIC Bonds -- Market Discount."
Premium. The rules governing "premium" apply equally to Regular Interest
Bonds (see above "Non-REMIC Bonds -- Premium).
Sale or Exchange. If a Regular Interest Bond is sold, the Holder will
recognize gain or loss equal to the difference between the amount realized on
the sale and his adjusted basis in the Regular Interest Bond. Similarly, a
Holder who receives a scheduled or prepaid principal payment with respect to a
Regular Interest Bond will recognize income or loss equal to the difference
between the amount of the payment and the allocable portion of his adjusted
basis in the Regular Interest Bond. Any such income will be treated as ordinary
income, rather than capital gain, to the extent such income reflects OID that is
not de minimis. The adjusted basis of a Regular Interest Bond generally will
equal the cost of the Regular Interest Bond to the Holder, increased by any OID
or market discount previously includible in the Holder's gross income with
respect to the Regular Interest Bond, and reduced by the portion of the basis of
the Regular Interest Bond allocable to payments on the Regular Interest Bond
previously received by the Holder and by any amortized premium. Except to the
extent that the market discount rules apply and except as provided below, any
gain or loss on the sale or other disposition of a Regular Interest Bond
generally will be capital gain or loss. Such gain or loss will be long-term gain
or loss if the Regular Interest Bond is held as a capital asset for more than
one year. Long-term capital gains of certain non-corporate taxpayers are subject
to a lower minimum tax rate than ordinary income of such taxpayers for property
held for more than one year. The maximum tax rate for corporations is the same
with respect to both ordinary income and capital gains.
If the Holder of a Regular Interest Bond is a bank, a mutual savings bank,
a thrift, or a similar institution described in Section 582 of the Code, any
gain or loss on the sale or exchange of the Regular Interest Bond will be
treated as ordinary income or loss. In the case of other types of Holders, gain
on the sale or exchange of the Regular Interest Bond will be treated as ordinary
income (i) if the Regular Interest Bond is held as part of a "conversion
transaction" as described in Code Section 1258(c), up to the amount of interest
that would have accrued on the holder's net investment in the conversion
transaction at 120% of the appropriate applicable Federal rate under Code
Section 1274(d) in effect at the time the holder entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction, (ii) in the
case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the
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amount that would have been includable in the gross income of the holder if its
yield on such Regular Interest Bond were 110% of the applicable Federal rate as
of the date of purchase, over (b) the amount of income actually includable in
the gross income of such holder with respect to such Regular Interest Bond.
Although the relevant legislative history indicates that the portion of the gain
from disposition of a Regular Interest Bond that will be recharacterized as
ordinary income is limited to the amount of OID (if any) on the Regular Interest
Bond that was not previously includible in income, the applicable Code provision
contains no such limitation.
Taxation of Holders of Residual Interest Bonds.
The REMIC will not be subject to Federal income tax except with respect to
income from prohibited transactions and certain other transactions. Instead, the
holder of a Bond representing a residual interest (a "Residual Interest Bond")
will take into account the "daily portion" of the taxable income or net loss of
the REMIC for each day during the taxable year on which such holder held the
Residual Interest Bond. The daily portion is determined by allocating to each
day in any calendar quarter its ratable portion of the taxable income or net
loss of the REMIC for such quarter, and by allocating that amount among the
holders (on such day) of the Residual Interest Bonds in proportion to their
respective holdings on such day.
The holder of a Residual Interest Bond may be required to include taxable
income from the Residual Interest Bond in excess of the cash distributed. The
reporting of taxable income without corresponding distributions could occur, for
example, in certain REMIC issues in which the loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC Regular Interests
issued without any discount or at an insubstantial discount (if this occurs, it
is likely that cash distributions will exceed taxable income in later years).
Taxable income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC Regular Interest Bonds, will typically increase
over time as lower yielding Bonds are paid, whereas interest income with respect
to loans will generally remain constant over time as a percentage of loan
principal.
In any event, because the holder of a Residual Interest Bond is taxed on
the net income of the REMIC, the taxable income derived from a Residual Interest
Bond in a given taxable year will not be equal to the taxable income associated
with investment in a corporate bond or stripped instrument having similar cash
flow characteristics and pretax yield. Therefore, the after-tax yield on the
Residual Interest Bond may be less than that of such a bond or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Bond will initially equal such holder's purchase price, and
will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Bonds to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Bond (whether at their
scheduled times or as a result of prepayments) will generally not result in any
additional taxable income or loss to a holder of a Residual Interest Bond. If
the amount of such payment exceeds a holder's adjusted basis in the Residual
Interest Bond, however, the holder will recognize gain (treated as gain from the
sale of the Residual Interest Bond) to the extent of such excess.
Sale or Exchange. A holder of a Residual Interest Bond will recognize gain
or loss on the sale or exchange of a Residual Interest Bond equal to the
difference, if any, between the amount realized and such holder's adjusted basis
in the Residual Interest Bond at the time of such sale or exchange. In general,
any such gain or loss will be capital gain or loss provided the Residual
Interest Bond is held as a capital asset. Except to
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the extent provided in regulations, which have not yet been issued, any loss
upon disposition of a Residual Interest Bond will be disallowed if the selling
holder acquires any residual interest in a REMIC or similar mortgage pool within
six months before or after such disposition. In that event, any loss will
increase such Regular Interest Bondholder's adjusted basis in the newly acquired
interest.
Excess Inclusions. The excess inclusion portion of a REMIC's income is
generally equal to the excess, if any, of REMIC taxable income for the quarterly
period allocable to a Residual Interest Bond, over the daily accruals for such
quarterly period of (i) 120% of the long term applicable federal rate on the
Startup Day multiplied by (ii) the adjusted issue price of such Residual
Interest Bond at the beginning of such quarterly period. The adjusted issue
price of a residual interest at the beginning of each calendar quarter will
equal its issue price (calculated in a manner analogous to the determination of
the issue price of a Regular Interest), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a holder and the amount of distributions made on the
Residual Interest Bond before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
The portion of the REMIC taxable income of a holder of a Residual Interest
Bond consisting of "excess inclusion" income may not be offset by other
deductions or losses, including net operating losses, on such holder's federal
income tax return. Further, if the holder of a Residual Interest Bond is an
organization subject to the tax on unrelated business income imposed by Code
Section 511, such holder's excess inclusion income will be treated as unrelated
business taxable income of such holder. In addition, under Treasury regulations
yet to be issued, if a real estate investment trust, a regulated investment
company, a common trust fund, or certain cooperatives were to own a Residual
Interest Bond, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Bond is owned by a foreign person excess inclusion income
is subject to tax at a rate of 30% which may not be reduced by treaty, is not
eligible for treatment as "portfolio interest" and is subject to certain
additional limitations. See "Tax Treatment of Foreign Investors." The Small
Business Job Protection Act of 1996 has eliminated the special rule permitting
Section 593 institutions ("thrift institutions") to use net operating losses and
other allowable deductions to offset their excess inclusion income from REMIC
residual certificates that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to residual certificates continuously held by a thrift
institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
Restrictions on Ownership and Transfer of Residual Interest Bonds. As a
condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a Residual Interest Bond by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Bond. In addition, no
transfer of a Residual Interest Bond will be permitted unless the proposed
transferee shall have furnished to the Trustee an affidavit representing and
warranting that it is neither a Disqualified Organization nor an agent or
nominee acting on behalf of a Disqualified Organization.
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If a Residual Interest Bond is transferred to a Disqualified Organization
(in violation of the restrictions set forth above), a substantial tax will be
imposed on the transferor of such Residual Interest Bond at the time of the
transfer. In addition, if a Disqualified Organization holds an interest in a
pass-through entity (including, among others, a partnership, trust, real estate
investment trust, regulated investment company, or any person holding as
nominee), that owns a Residual Interest Bond, the pass-through entity will be
required to pay an annual tax on its allocable share of the excess inclusion
income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Bond is a "noneconomic
residual interest," as described below, a transfer of a Residual Interest Bond
to a United States person will be disregarded for all Federal tax purposes
unless no significant purpose of the transfer was to impede the assessment or
collection of tax. A Residual Interest Bond is a "noneconomic residual interest"
unless, at the time of the transfer (i) the present value of the expected future
distributions on the Residual Interest Bond at least equals the product of the
present value of the anticipated excess inclusions and the highest rate of tax
for the year in which the transfer occurs, and (ii) the transferor reasonably
expects that the transferee will receive distributions from the REMIC at or
after the time at which the taxes accrue on the anticipated excess inclusions in
an amount sufficient to satisfy the accrued taxes. A significant purpose to
impede the assessment or collection of tax exists if the transferor, at the time
of the transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A transferor is presumed not to have such knowledge if (i) the transferor
conducted a reasonable investigation of the transferee and (ii) the transferee
acknowledges to the transferor that the residual interest may generate tax
liabilities in excess of the cash flow and the transferee represents that it
intends to pay such taxes associated with the residual interest as they become
due. In addition, proposed Treasury regulations issued on February 4, 2000 would
also require the present value of the anticipated tax liabilities associated
with holding the residual interest does not exceed the present value of the sum
of (i) any consideration given to the transferee to acquire the interest, (ii)
the expected future distributions on the interest, and (iii) any anticipated tax
savings associated with holding the interest as the REMIC generates losses. If a
transfer of a "noneconomic residual certificate" is disregarded, the transferor
would continue to be treated as the owner of the Residual Interest Bond and
would continue to be subject to tax on its allocable portion of the net income
of the REMIC. A similar type of limitation exists with respect to certain
transfers of Residual Interest Bonds by foreign persons to United States
persons. See "-- Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a Residual Interest Bond
should be aware that a Residual Interest Bond acquired after January 3, 1995
cannot be marked-to-market.
Administrative Matters. The REMIC's books must be maintained on a calendar
year basis and the REMIC must file an annual federal income tax return. The
REMIC will also be subject to the procedural and administrative rules of the
Code applicable to partnerships, including the determination of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction, or credit,
by the IRS in a unified administrative proceeding.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Qualification as a REMIC. The Trust Estate or one or more designated pools
of the assets of the Trust Estate may elect to be treated under the Code as a
REMIC in which the Regular Interest Bonds and Residual Interest Bonds will
constitute the "regular interests" and "residual interests," respectively, if a
REMIC election is in effect and certain tests concerning (i) the composition of
the REMIC's assets and (ii) the nature of the Holders' interests in the REMIC
are met on a continuing basis. A loss of REMIC status could have a number of
consequences for Holders. If, as the result of REMIC disqualification, the Trust
Estate were treated as an association taxable as a corporation, distributions on
the Bond could be recharacterized in part as dividends from a non-includible
corporation and in part as returns of capital. Alternatively, distributions on a
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Regular Interest Bond could continue to be treated as comprised of interest and
principal notwithstanding REMIC disqualification, in which case a cash-basis
Holder might not be required to continue to recognize interest and market
discount with respect to the Bond on a accrual basis. Under the first
alternative, a loss of REMIC status would, and under the second alternative, a
loss of REMIC status could cause the Bonds and the associated distributions not
to be qualified assets and income for the various purposes of DB&Ls, FASITs and
REITs described under "REMIC Bonds--Status as Real Property Loans" above,
although such a loss would not affect the status of the Securities as
"government securities" for REITs. The Bonds should continue to qualify as
"government securities" for RICs, regardless of whether REMIC status is lost.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any OID or market discount
on loans and other assets, and (ii) deductions, including stated interest and
OID accrued on Regular Interest Bonds, amortization of any premium with respect
to Loans, and servicing fees and other expenses of the REMIC. A holder of a
Residual Interest Bond that is an individual or a "pass-through interest holder"
(including certain pass-through entities, but not including real estate
investment trusts) will be unable to deduct servicing fees payable on the loans
or other administrative expenses of the REMIC for a given taxable year, to the
extent that such expenses, when aggregated with such holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Bonds accrue
OID (i.e., under the constant yield method taking into account the Prepayment
Assumption). The REMIC will deduct OID on the Regular Interest Bonds in the same
manner that the holders of the Regular Interest Bonds include such discount in
income, but without regard to the de minimis rules. See "Taxation of Debt
Securities" above. However, a REMIC that acquires loans at a market discount
must include such market discount in income currently, as it accrues, on a
constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include: (i) subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC; (ii) subject to limited exceptions,
the sale or other disposition of a cash flow investment; (iii) the receipt of
any income from assets not permitted to be held by the REMIC pursuant to the
Code; or (iv) the receipt of any fees or other compensation for services
rendered by the REMIC. It is anticipated that a REMIC will not engage in any
prohibited transactions in which it would recognize a material amount of net
income. In addition, subject to a number of exceptions, a tax is imposed at the
rate of 100% on amounts contributed to a REMIC after the close of the
three-month period beginning on the Startup Day. The holders of Residual
Interest Bonds will generally be responsible for the payment of any such taxes
imposed on the REMIC. To the extent not paid by
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such holders or otherwise, however, such taxes will be paid out of the Trust
Fund and will be allocated pro rata to all outstanding classes of Bonds of such
REMIC.
WITHHOLDING WITH RESPECT TO CERTAIN FOREIGN INVESTORS
Interest, including OID, paid on a Bond to a nonresident alien individual,
foreign corporation or other non-United States person unrelated to the Issuer
("Non-U.S. Person") generally will be treated as "portfolio interest" and,
therefore, will not be subject to any United States withholding tax, provided
that (i) such interest is not effectively connected with a trade or business in
the United States of the Bondholder, and (ii) the person required to withhold
tax is provided with appropriate certification that the beneficial owner of the
Bond is a Non-U.S. Person ("Foreign Person Certification"). If Foreign Person
Certification is not provided, interest (including OID) paid on such a Bond may
be subject to either a 30 percent withholding tax or 31 percent backup
withholding. See "Backup Withholding."
Final regulations dealing with withholding tax on income paid to foreign
persons, backup withholding and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997. The New
Withholding Regulations generally attempt to unify certification requirements
and modify reliance standards. The New Withholding Regulations generally will be
effective for payments made after December 31, 2000, subject to certain
transition rules. Prospective investors are strongly urged to consult their own
tax advisors with respect to the New Withholding Regulations.
The 30% withholding tax imposed on a foreign person is subject to reduction
or elimination under applicable tax treaties. Non-U.S. Persons who hold a Bond
should consult their tax advisors regarding their qualification for reduced rate
of, or exemption from, withholding and the procedure for obtaining such a
reduction or exemption.
BACKUP WITHHOLDING
Under federal income tax law, a Bondholder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner may
be subject to "backup withholding" under certain circumstances. Backup
withholding may apply to such person who is a United States person if such
person, among other things, (i) fails to furnish his social security number or
other taxpayer identification number ("TIN"), (ii) furnishes an incorrect TIN,
(iii) fails to report properly interest and dividends, or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN provided is correct and that such person is not subject to
backup withholding. Backup withholding may apply, under certain circumstances,
to a Bondholder who is a Non-U.S. Person if the Bondholder fails to provide
securities broker with a Foreign Person Certification. Backup withholding
applies to "reportable payments," which include interest payments and principal
payments to the extent of accrued OID, as well as distributions of proceeds from
the sale of Regular Interest Bonds or Residual Interest Bonds. The backup
withholding rate is 31%. Backup withholding, however, does not apply to payments
on a Bond made to certain exempt recipients, such as tax-exempt organizations,
and to certain Non-U.S. Person. Bondholders should consult their tax advisors
for additional information concerning the potential application of backup
withholding to payments received by them with respect to a Bond.
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
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<PAGE> 201
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 the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Classes of Bonds that qualify as "mortgage related securities"
will be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, life insurance companies and pension funds) created pursuant to or
existing under the laws of the United States or any state (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to state regulation to the same extent as, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
such entities. Under SMMEA, if a state enacts legislation prior to October 4,
1991 specifically limiting the legal investment authority of any of such
entities with respect to "mortgage related securities," the Bonds will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Approximately twenty-one states adopted such
legislation prior to the October 4, 1991 deadline. SMMEA provides, however, that
in no event will the enactment of any such legislation affect the validity of
any contractual commitment to purchase, hold or invest in Bonds, or require the
sale or other disposition of Bonds, so long as such contractual commitment was
made or such Bonds were acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Bonds without
limitations as to the percentage of their assets represented thereby, federal
credit unions may invest in mortgage related securities, and national banks may
purchase Bonds for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. 24 (Seventh), subject
in each case to such regulations as the applicable federal authority may
prescribe. In this connection, federal credit unions should review the National
Credit Union Administration ("NCUA") Letter to Credit Unions No. 96, as modified
by Letter to Credit Unions No. 108, which includes guidelines to assist federal
credit unions in making investment decisions for mortgage related securities,
and the NCUA's regulation "Investment and Deposit Activities" (12 C.F.R. Part
703) (whether or not the Class of Bonds under consideration for purchase
constitutes a "mortgage related security").
All depository institutions considering an investment in the Bonds (whether
or not the Class of Bonds under consideration for purchase constitutes a
"mortgage related security") should review the Federal Financial Institutions
Examination Council's Supervisory Policy Statement on Securities Activities (to
the extent adopted by their respective regulators) (the "Policy Statement"),
setting forth, in relevant part, certain securities trading and sales practices
deemed unsuitable for an institution's investment portfolio, and 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.
71
<PAGE> 202
Investors should consult their own legal advisors in determining whether and to
what extent the Bonds constitute legal investments for such investors.
ERISA MATTERS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA or plans or arrangements subject to Section 4975 of the
Code ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Bonds without regard
to the ERISA considerations described below, subject to other applicable federal
and state law. However, any such governmental or church plan which is qualified
under section 401(a) of the Code and exempt from taxation under section 501(a)
of the Code is subject to the prohibited transaction rules set forth in section
503 of the Code. Any Plan fiduciary which proposes to cause a Plan to acquire
any of the Bonds should consult with its counsel with respect to the potential
consequences under ERISA, and the Code, of the Plan's acquisition and ownership
of the Bonds. Investments by Plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL. Section 406 of ERISA prohibits parties in interest with respect
to a Plan from engaging in certain transactions (including loans) involving a
Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION. The United States Department of Labor ("Labor") has
issued final regulations concerning the definition of what constitutes the
assets of a Plan for purposes of ERISA and the prohibited transaction provisions
of the Code (the "Plan Asset Regulation"). The Plan Asset Regulation describes
the circumstances under which the assets of an entity in which a Plan invests
will be considered to be "plan assets" such that any person who exercises
control over such assets would be subject to ERISA's fiduciary standards. Under
the Plan Asset Regulation, generally when a Plan invests in another entity, the
Plan's assets do not include, solely by reason of such investment, any of the
underlying assets of the entity. However, the Plan Asset Regulation provides
that, if a Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan 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
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<PAGE> 203
substantial equity features is an inherently factual one, but that in making a
determination it would be appropriate to take into account whether the equity
features are such that a Plan's investment would be a practical vehicle for the
indirect provision of investment management services. If the Bonds are deemed to
be equity interests in the Issuer and no statutory, regulatory or administrative
exemption applies, the Issuer could be considered to hold plan assets by reason
of a Plan's investment in the Bonds. Those exemptions potentially include
Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding investments by
insurance company pooled separate accounts, PTCE 91-38, regarding investments by
bank collective investment funds, PTCE 84-14, regarding transactions effected by
a "qualified professional asset manager," PTCE 95-60, regarding investments by
insurance company general accounts, or PTCE 96-23, regarding transactions
effected by an "in-house asset manager".
REVIEW BY PLAN FIDUCIARIES. Any Plan fiduciary considering whether to
purchase any Bonds on behalf of a Plan should consult with its counsel regarding
the applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment. Among other things, before
purchasing any Bonds, a fiduciary of a Plan should make its own determination as
to whether the Issuer, as obligor on the Bonds, is a party in interest with
respect to the Plan, the availability of the exemptive relief provided in the
Plan Asset Regulations and the availability of any other prohibited transaction
exemptions.
RATING
It is a condition to the issuance of the Bonds of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Mortgage Collateral securing a Series of Bonds and any credit
enhancement with respect to such Class and will reflect such Rating Agency's
assessment solely of the likelihood that holders of a Class of Bonds will
receive payments to which such Bondholders are entitled under the related Bond.
Such rating will not constitute an assessment of the likelihood that principal
prepayments on the related Mortgage Collateral will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the Series of Bonds. Such rating
should not be deemed a recommendation to purchase, hold or sell Bonds, inasmuch
as it does not address market price or suitability for a particular investor.
Each security rating should be evaluated independently of any other security
rating. Such rating will not address the possibility that prepayment at higher
or lower rates than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor purchasing a
security at a significant premium might fail to recoup its initial investment
under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the applicable Rating Agency in the future if in its judgment 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
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<PAGE> 204
Properties or mortgaged properties securing the mortgage loans underlying any
Certificates, as the case may be, have remained or will remain at their levels
on the respective dates of origination of the related mortgage loans. If the
residential real estate markets should experience an overall decline in property
values such that the outstanding principal balances of the Mortgage Collateral
securing a particular Series of Bonds and any secondary financing on the related
Mortgaged Properties become equal to or greater than the value of the Mortgaged
Properties or mortgaged properties securing the mortgage loans underlying any
Certificates, as the case may be, the rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry. In addition, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the Mortgage Collateral and,
accordingly, the rates of delinquencies, foreclosures and losses with respect to
any Mortgage Collateral securing a particular Series of Bonds. To the extent
that such losses are not covered by credit enhancement, such losses will be
borne, at least in part, by the holders of one or more Classes of Bonds.
PLAN OF DISTRIBUTION
The Issuer may sell the Bonds offered hereby either directly or through an
underwriter or underwriters or through underwriting syndicates managed by an
underwriter or underwriters. The Prospectus Supplement for each Series will set
forth the terms of the offering of such Series and of each Class within such
Series, including the name or names of the underwriters, the proceeds to and
their use by the Issuer, and either the initial public offering price, the
discounts and commissions to the underwriters and any discounts or concessions
allowed or reallowed to certain dealers or the method by which the price at
which the underwriters will sell the Bonds will be determined.
The Bonds of a Series may be acquired by underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. The obligations of any underwriters will be
subject to certain conditions precedent, and such underwriters will be severally
obligated to purchase all the Bonds of a Series described in the related
Prospectus Supplement, if any are purchased. If Bonds of a Series are offered
other than through underwriters, the related Prospectus Supplement will contain
information regarding the nature of such offering and any agreements to be
entered into between the Issuer and purchasers of Bonds of such Series.
Redwood Trust or other affiliate of the Issuer may purchase Bonds and
pledge them to secure indebtedness or, together with its pledgees, donees,
transferees or other successors in interest, sell the Bonds, from time to time,
either directly or through one or more underwriters, underwriting syndicates or
designated agents.
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.
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<PAGE> 205
INDEX OF CERTAIN DEFINITIONS
Set forth below is a list of certain terms used in this Prospectus,
together with the pages on which the terms are defined herein.
<TABLE>
<S> <C>
Advance..................................................... 46
Agency Securities........................................... 27
Assumed Reinvestment Rate................................... 17
Available Funds............................................. 16
Balloon payments............................................ 24
Bankruptcy Bond............................................. 39
Basic Principal Payment..................................... 16
Belgian Cooperative......................................... 21
Beneficial owner............................................ 20
Bond Account................................................ 42
Bond Distribution Amount.................................... 6
Bond Insurance Policy....................................... 39
Bond Insurer................................................ 39
Bond Owners................................................. 20
Bond Trustee................................................ 11
Bond Value.................................................. 16
Bond Values................................................. 16
Bondholders................................................. 12
Bonds....................................................... 15
Book-Entry Bonds............................................ 20
Buydown Fund................................................ 25
Buydown Loans............................................... 25
Capitalized Interest Account................................ 35
CEDEL Participants.......................................... 21
CERCLA...................................................... 56
Certificates................................................ 27
Closing Date................................................ 34
Code........................................................ 11
Collateral.................................................. 23
Collateral Group............................................ 17
Commission.................................................. 2
Company..................................................... 11
Controlling Class........................................... 48
Conventional Loans.......................................... 18
Cooperative Loans........................................... 26
Cooperatives................................................ 26
Custodial Account........................................... 42
Cut-off Date................................................ 37
DB&Ls....................................................... 64
Deferred Interest Bonds..................................... 15
Definitive Bond............................................. 20
Depositor................................................... 11
Detailed Description........................................ 23
Distribution Account........................................ 33
Distribution Account Deposit Date........................... 33
</TABLE>
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<PAGE> 206
<TABLE>
<S> <C>
DTC......................................................... 20
Due Period.................................................. 16
Eligible Substitute Pledged Mortgage........................ 27
EPA......................................................... 56
ERISA....................................................... 72
Euroclear Operator.......................................... 21
Euroclear Participants...................................... 21
European Depositaries....................................... 20
Event of Default............................................ 49
FASIT....................................................... 64
FHA Loans................................................... 27
FHLMC....................................................... 13
FHLMC Act................................................... 30
FHLMC Certificates.......................................... 27
Financial Intermediary...................................... 20
Fixed Rate Pledged Mortgages................................ 24
Floating Rate Bonds......................................... 16
Floating Rate Pledged Mortgages............................. 24
FNMA........................................................ 13
FNMA Certificates........................................... 27
Foreign Person Certification................................ 70
Funding Period.............................................. 34
Garn-St Germain Act......................................... 57
GNMA........................................................ 27
GNMA Certificates........................................... 27
GNMA I Certificate.......................................... 27
GNMA II Certificate......................................... 27
GNMA Issuer................................................. 27
Guaranteed Mortgage Pass-Through Certificates............... 27
Guaranty Agreement.......................................... 28
Housing Act................................................. 27
Indenture................................................... 11
Insurance Proceeds.......................................... 23
IRS......................................................... 60
Issuer...................................................... 11
L/C Bank.................................................... 40
L/C Percentage.............................................. 40
Labor....................................................... 72
Liquidated Mortgage......................................... 45
Liquidation Proceeds........................................ 23
Lockout periods............................................. 25
Lower Tier Remic............................................ 64
Master Servicer............................................. 41
Master Servicing Agreement.................................. 41
Master Servicing Fee........................................ 45
Moody's..................................................... 34
Morgan...................................................... 21
Mortgage Collateral......................................... 23
Mortgage Insurer............................................ 24
</TABLE>
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<TABLE>
<S> <C>
Mortgage Note............................................... 24
Mortgage Pool Insurance Policy.............................. 37
Mortgage Rate............................................... 24
Mortgaged Property.......................................... 24
Mortgagor................................................... 14
NCUA........................................................ 71
New Withholding Regulations................................. 70
Non-Remic Bonds............................................. 59
Non-U.S. Person............................................. 70
Offered Bonds............................................... 4
OID Regulations............................................. 60
Owner Trustee............................................... 11
Parties in interest......................................... 72
Payment Date................................................ 15
Permitted Investments....................................... 33
Plan Asset Regulation....................................... 72
Plans....................................................... 72
Pledged Mortgages........................................... 24
PMBS Agreement.............................................. 32
PMBS Issuer................................................. 32
PMBS Servicer............................................... 32
PMBS Trustee................................................ 32
Policy Statement............................................ 71
Pool Insurer................................................ 37
Pre-Funded Amount........................................... 34
Pre-Funding Account......................................... 34
Primary Mortgage Insurance Policy........................... 24
Private Mortgage-Backed Securities.......................... 23
PTCE........................................................ 73
Purchase Price.............................................. 15
Rating Agency............................................... 73
RCRA........................................................ 57
Record Date................................................. 15
Redwood Trust............................................... 11
Regular Interest Bonds...................................... 64
REIT........................................................ 64
Relevant Depositary......................................... 20
Relief Act.................................................. 58
Remic....................................................... 59
Remittance Date............................................. 24
Reserve Fund................................................ 36
Residual Interest Bonds..................................... 64
Residual Interest Certificates.............................. 64
Rules....................................................... 20
SEC......................................................... 2
Securities Act.............................................. 31
Seller...................................................... 12
Senior Bondholders.......................................... 36
Senior Bonds................................................ 36
</TABLE>
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<TABLE>
<S> <C>
Senior Liens................................................ 25
Servicer.................................................... 41
Servicers................................................... 26
Servicing Agreement......................................... 41
Servicing Default........................................... 48
SMMEA....................................................... 71
Special Hazard Insurance Policy............................. 38
Special Hazard Insurer...................................... 38
Special Servicer............................................ 47
Special Servicing Agreement................................. 47
Spread...................................................... 16
Stand-by Master Servicer.................................... 47
Subordinated Bondholders.................................... 36
Subordinated Bonds.......................................... 36
Subsequent Mortgage Collateral.............................. 34
Substitute Collateral....................................... 33
Successor Master Servicer................................... 46
Tax Prepayment Assumption................................... 61
Terms and Conditions........................................ 21
TIN......................................................... 70
Title V..................................................... 58
UCC......................................................... 54
Upper Tier REMIC............................................ 64
VA Loans.................................................... 27
</TABLE>
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$
SEQUOIA MORTGAGE TRUST
20__ - ________
COLLATERALIZED
MORTGAGE
BONDS
-------------------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------------------
[UNDERWRITER]
, 200
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
DEALERS WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS OF THE CERTIFICATES AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING THE CERTIFICATES WILL BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL 90 DAYS AFTER
THE DATE OF THIS PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 210
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 909,090.91
Printing and Engraving Expenses............................. 30,000.00
Accounting Fees and Expenses................................ 30,000.00
Legal Fees and Expenses..................................... 100,000.00
Trustee Fees and Expenses................................... 20,000.00
Blue Sky Fees and Expenses.................................. 10,000.00
Rating Agency Fees.......................................... 160,000.00
Miscellaneous............................................... 15,909.09
-------------
Total............................................. $1,275,000.00
=============
</TABLE>
- ---------------
* All amounts except the SEC Registration Fee are estimates of expenses incurred
in connection with the issuance and distribution of a Series of Bonds in an
aggregate principal amount assumed for these purposes to be equal to
$500,000,000 of Bonds registered hereby.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if the person indemnified acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In the case of an
action by or in the right of the corporation, no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or other
such court shall deem proper. Section 145 further provides that to the extent a
director, officer, employee or agent of a corporation has been successful on the
merits or otherwise in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, he or she shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
The Certificate of Incorporation and Bylaws of the Company provide, in
effect, that, to the extent and under the circumstances permitted by Section 145
of the General Corporation Law of Delaware, the Company shall indemnify any
person who was or is a party or is threatened to be made a party to any action,
suit or proceeding of the type described above by reason of the fact that he or
she is or was a director, officer, employee or agent of the Company.
The Underwriting Agreement for any Series of Bonds may provide that the
Company and Redwood Trust will indemnify the related Underwriter or Underwriters
against, or make contributions to such Underwriter or Underwriters with respect
to, certain liabilities, including liabilities under the Securities Act of 1933.
II-1
<PAGE> 211
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
4.1.1 Form of Indenture (Debt Bond form) in substantially the form
to be entered into between each Issuer and the Bond
Trustee.*
4.1.2 Form of Indenture (REMIC Bond form) 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.**
</TABLE>
- ---------------
* Previously filed.
** To be filed pursuant to Section 305(b)(2) of the Trust Indenture Act of 1939.
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> 212
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> 213
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 Post-Effective
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California, on May 9, 2000.
SEQUOIA MORTGAGE FUNDING CORPORATION*
By /s/ DOUGLAS B. HANSEN
-----------------------------------------
Name: Douglas B. Hansen
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities as officers and directors of the Company and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ GEORGE G. BULL III= Chairman of the Board of Directors May 9, 2000
- -------------------------------------------------------- (Principal Executive Officer)
George G. Bull III
/s/ DOUGLAS B. HANSEN President and Director (Principal May 9, 2000
- -------------------------------------------------------- Financial Officer)
Douglas B. Hansen
/s/ HAROLD F. ZAGUNIS Treasurer, Secretary and Director May 9, 2000
- -------------------------------------------------------- (Principal Accounting Officer)
Harold F. Zagunis
/s/ JOHN CONNOLLY IV= Director May 9, 2000
- --------------------------------------------------------
John Connolly IV
/s/ CRAIG A. SEVERANCE= Director May 9, 2000
- --------------------------------------------------------
Craig A. Severance
</TABLE>
- ---------------
* For itself and on behalf of each trust acting as an Issuer hereunder.
= By: /s/
DOUGLAS B. HANSEN
------------------------
Douglas B. Hansen,
Attorney-in-Fact
II-4
<PAGE> 214
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- --------
<C> <S>
1.1 -- Form of Underwriting Agreement.*
4.1.1 -- Form of Indenture (Debt Bond form) in substantially the form
to be entered into between each Issuer and the Bond
Trustee.*
4.1.2 -- Form of Indenture (REMIC Bond form), 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.**
</TABLE>
- ---------------
* Previously filed.
** To be filed pursuant to Section 305(b)(2) of the Trust Indenture Act of
1939.
<PAGE> 1
EXHIBIT 4.1.2
SEQUOIA MORTGAGE TRUST 200__,
Issuer
and
_________________________________,
Trustee
INDENTURE
Dated as of _____________ __, 200__
Relating to
SEQUOIA MORTGAGE TRUST 200_-_
COLLATERALIZED MORTGAGE BONDS
<PAGE> 2
Cross-reference sheet showing the location in the indenture of the provisions
inserted pursuant to Sections 310 through 318(a) inclusive of the Trust
Indenture Act of 1939.
<TABLE>
PAGE
----
<S> <C>
TIA...................................................................................Indenture Section
Section 310
(a) (1)............................................................................6.08
(a) (2)............................................................................6.09
(a) (3)............................................................................6.14(2)
(a) (4)........................................................................Not Applicable
(a) (5)............................................................................6.08
(b) ...............................................................................6.08
...............................................................................6.10
...............................................................................11.05
(c) ...........................................................................Not Applicable
Section 311
(a) ...............................................................................6.13
(b) ...............................................................................6.13
Section 312
(a) ...............................................................................7.01(a)
...............................................................................7.02(a)
(b) ...............................................................................7.02(b)
(c) ...............................................................................7.02(c)
Section 313
(a) ...............................................................................7.03(a)
(b) ...............................................................................7.03(a)
(c) ...............................................................................7.03(a)
...............................................................................11.05
(d) ...............................................................................7.03(b)
Section 314
(a) ...............................................................................7.04
...............................................................................11.05
...............................................................................3.10
(b) (1)............................................................................2.12(c)(viii)
(b) (2)............................................................................3.06
(c) (1)............................................................................2.12(d)
...............................................................................4.01
...............................................................................11.01
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(c) (2)............................................................................2.12(c)(ii)
...............................................................................4.01
...............................................................................11.01
(c) (3)............................................................................1.01
...............................................................................2.12(f)
(d) (1)............................................................................1.01
...............................................................................8.12
(d) (2)............................................................................1.01
Not Applicable
(d) (3)............................................................................1.01
...............................................................................2.12(f)
(e) ...............................................................................11.01
Section 315
(a) ...............................................................................6.01(b)
...............................................................................6.01(c)(1)
(b) ...............................................................................6.02
...............................................................................11.05
(c) ...............................................................................6.01(a)
(d) ...............................................................................6.01(c)
(d) (1)............................................................................6.01(b)
(d) (2)............................................................................6.01(c)(2)
(d) (3)............................................................................6.01(c)(3)
(e) ...............................................................................5.16
Section 316
(a) (1) (A)...................................................................5.14
......................................................................8.01
(a) (1) (B)...................................................................5.02
......................................................................5.15
(a) (2) ..................................................................Not Applicable
(b) ...............................................................................5.10
(c) ...........................................................................Not Applicable
Section 317
(a) (1)............................................................................5.03
(a) (2)............................................................................5.06
(b) ...............................................................................3.03
Section 318
(a) ...............................................................................11.07
</TABLE>
-ii-
<PAGE> 4
TABLE OF CONTENTS
PARTIES
PRELIMINARY STATEMENT
GRANTING CLAUSE
<TABLE>
<CAPTION>
ARTICLE I
DEFINITIONS
PAGE
----
<S> <C>
SECTION 1.01. General Definitions.......................................................................... I-1
"Accountant"............................................................................................... I-1
"Accrual Date"............................................................................................. I-1
"Act"...................................................................................................... I-1
"Adjusted Net Mortgage Rate"............................................................................... I-2
"Adjustment Date".......................................................................................... I-2
"Advance".................................................................................................. I-2
"Affiliate"................................................................................................ I-2
"Agent".................................................................................................... I-2
"Appraised Value".......................................................................................... I-2
"Assignments".............................................................................................. I-2
"Authenticating Agent"..................................................................................... I-3
"Authorized Officer"....................................................................................... I-3
"Available Funds".......................................................................................... I-4
"Bank"..................................................................................................... I-4
"Bankruptcy Code".......................................................................................... I-4
"Beneficial Owner"......................................................................................... I-4
"Bond Account"............................................................................................. I-4
"Bond Distribution Amount"................................................................................. I-4
"Bond Payment Amount"...................................................................................... I-4
"Bondholder" or "Holder"................................................................................... I-4
"Bond Insurance Policy".................................................................................... I-4
"Bond Insurer"............................................................................................. I-5
"Bond Interest Rate"....................................................................................... I-5
"Bond Register" and "Bond Registrar"....................................................................... I-5
"Bonds".................................................................................................... I-5
"Book Entry Bonds"......................................................................................... I-5
"Business Day"............................................................................................. I-5
"Certificate Interest Rate"................................................................................ I-5
"Class".................................................................................................... I-5
"Class B-1 Interest Carryover Shortfall"................................................................... I-5
"Class B-1 Interest Payment Amount"........................................................................ I-6
"Class B-1 Percentage"..................................................................................... I-6
"Class B-1 Principal Amount"............................................................................... I-6
"Class B-1 Principal Carryover Shortfall".................................................................. I-6
"Class B-1 Principal Payment Amount"....................................................................... I-6
"Class B-2 Bond Interest Rate"............................................................................. I-7
"Class B-2 Interest Carryover Shortfall"................................................................... I-7
"Class B-2 Interest Payment Amount"........................................................................ I-7
"Class B-2 Percentage"..................................................................................... I-7
"Class B-2 Principal Amount"............................................................................... I-8
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C>
"Class B-2 Principal Carryover Shortfall".................................................................. I-8
"Class B-2 Principal Payment Amount"....................................................................... I-8
"Class Interest Shortfall"................................................................................. I-8
"Class Principal Amount"................................................................................... I-9
"Closing Date"............................................................................................. I-9
"Code"..................................................................................................... I-9
"Combined Prepayment Percentage"........................................................................... I-9
"Commission"............................................................................................... I-9
"Controlling Class"........................................................................................ I-9
"Cooperative Loan"......................................................................................... I-9
"Cooperative Shares"....................................................................................... I-9
"Corporate Trust Office"................................................................................... I-9
"Cut-Off Date"............................................................................................. I-9
"Debt Service Reduction"................................................................................... I-9
"Default".................................................................................................. I-10
"Defaulted Pledged Mortgage"............................................................................... I-10
"Deficient Valuation"...................................................................................... I-10
"Definitive Bonds"......................................................................................... I-10
"Deleted Pledged Mortgage"................................................................................. I-10
"Denomination"............................................................................................. I-10
"Depositor"................................................................................................ I-10
"Depository"............................................................................................... I-10
"Depository Participants".................................................................................. I-10
"Deposit Trust Agreement".................................................................................. I-10
"Determination Date"....................................................................................... I-11
"Distribution Account"..................................................................................... I-11
"Distribution Account Deposit Date"........................................................................ I-11
"Due Date"................................................................................................. I-11
"Eligible Account"......................................................................................... I-11
"Escrow Account"........................................................................................... I-12
"Event of Default"......................................................................................... I-12
"Expense Rate"............................................................................................. I-12
"FDIC"..................................................................................................... I-12
"FHLMC".................................................................................................... I-12
"FIRREA"................................................................................................... I-12
"Fitch".................................................................................................... I-12
"FNMA"..................................................................................................... I-13
"Grant".................................................................................................... I-13
"Highest Lawful Rate"...................................................................................... I-13
"Holder"................................................................................................... I-13
"Indenture" or "this Indenture"............................................................................ I-13
"Independent".............................................................................................. I-14
"Index".................................................................................................... I-14
</TABLE>
-iv-
<PAGE> 6
<TABLE>
<S> <C>
"Indirect Participant"..................................................................................... I-14
"Individual Bond".......................................................................................... I-14
"Insurance Policy"......................................................................................... I-14
"Insurance Proceeds"....................................................................................... I-15
"Insured Expenses"......................................................................................... I-15
"Interest Accrual Period".................................................................................. I-15
"Interest Conversion Date"................................................................................. I-15
"Interest Payment Amount".................................................................................. I-15
"Invested Amount".......................................................................................... I-15
"Investor Certificate"..................................................................................... I-15
"Investor Percentage"...................................................................................... I-15
"Investor Prepayment Percentage"........................................................................... I-15
"Issuer"................................................................................................... I-15
"Issuer Order" and "Issuer Request"........................................................................ I-16
"Letter Agreement"......................................................................................... I-16
"Liquidated Pledged Mortgage".............................................................................. I-16
"Liquidation Proceeds"..................................................................................... I-16
"Loan-to-Value Ratio"...................................................................................... I-16
"Margin"................................................................................................... I-16
"Master Servicer".......................................................................................... I-16
"Master Servicing Agreement"............................................................................... I-17
"Master Servicing Fee"..................................................................................... I-17
"Master Servicing Fee Rate"................................................................................ I-17
"Maturity"................................................................................................. I-17
"Maximum Rate"............................................................................................. I-17
"Moody's".................................................................................................. I-17
"Mortgage"................................................................................................. I-17
"Mortgage Documents"....................................................................................... I-18
"Mortgage Note"............................................................................................ I-18
"Mortgage Rate"............................................................................................ I-18
"Mortgaged Property"....................................................................................... I-18
"Mortgagor"................................................................................................ I-18
"Net Mortgage Rate"........................................................................................ I-18
"Net Interest Shortfalls".................................................................................. I-18
"Nonrecoverable Advance"................................................................................... I-18
"Officers' Certificate".................................................................................... I-19
"Officer's Certificate of the Master Servicer"............................................................. I-19
"Operative Agreements"..................................................................................... I-19
"Opinion of Counsel"....................................................................................... I-19
"Optional Redemption Date"................................................................................. I-19
"Optional Redemption Record Date".......................................................................... I-19
"Original Class B-1 Principal Amount"...................................................................... I-19
"Original Class B-2 Principal Amount"...................................................................... I-19
"Original Invested Amount"................................................................................. I-19
</TABLE>
-v-
<PAGE> 7
<TABLE>
<S> <C>
"Original Pledged Mortgages"............................................................................... I-19
"Original Senior Class Principal Amount"................................................................... I-19
"Original Subordination Amount"............................................................................ I-19
"OTS"...................................................................................................... I-20
"Outstanding".............................................................................................. I-20
"Outstanding Pledged Mortgage"............................................................................. I-21
"Owner".................................................................................................... I-21
"Owner Trustee"............................................................................................ I-21
"Paying Agent"............................................................................................. I-21
"Payment Date"............................................................................................. I-21
"Payment Date Statement"................................................................................... I-21
"Periodic Rate Cap"........................................................................................ I-21
"Permitted Encumbrance".................................................................................... I-21
"Permitted Investments".................................................................................... I-22
"Person"................................................................................................... I-25
"Pledged Accounts"......................................................................................... I-25
"Pledged Mortgage Schedule"................................................................................ I-25
"Pledged Mortgages"........................................................................................ I-25
"Pool Stated Principal Balance"............................................................................ I-25
"Predecessor Bonds"........................................................................................ I-25
"Prepayment Interest Shortfall"............................................................................ I-25
"Prepayment Period"........................................................................................ I-26
"Primary Mortgage Insurance Policy"........................................................................ I-26
"Principal Prepayment"..................................................................................... I-26
"Principal Prepayment in Full"............................................................................. I-26
"Proceeding"............................................................................................... I-26
"Proprietary Lease"........................................................................................ I-26
"Prospectus Supplement".................................................................................... I-26
"Purchase Price"........................................................................................... I-26
"Rating Agency"............................................................................................ I-26
"Realized Loss"............................................................................................ I-27
"Record Date".............................................................................................. I-27
"Redemption Date".......................................................................................... I-27
"Redemption Price"......................................................................................... I-28
"Refinancing Pledged Mortgage"............................................................................. I-28
"Relief Act"............................................................................................... I-28
"Relief Act Reductions".................................................................................... I-28
"REO Property"............................................................................................. I-28
"Replacement Pledged Mortgage"............................................................................. I-28
"Request for Release"...................................................................................... I-29
"Responsible Officer"...................................................................................... I-29
"S&P"...................................................................................................... I-29
"SAIF"..................................................................................................... I-29
"Sale"..................................................................................................... I-29
</TABLE>
-vi-
<PAGE> 8
<TABLE>
<S> <C>
"Scheduled Payment"........................................................................................ I-29
"Securities Act"........................................................................................... I-30
"Seller/Servicer Guide".................................................................................... I-30
"Senior Bond Interest Rate"................................................................................ I-30
"Senior Bonds"............................................................................................. I-30
"Senior Class Principal Amount"............................................................................ I-30
"Senior Interest Payment Amount"........................................................................... I-30
"Senior Interest Shortfall"................................................................................ I-30
"Senior Percentage"........................................................................................ I-30
"Senior Principal Payment Amount".......................................................................... I-30
"Servicer"................................................................................................. I-31
"Servicer Advance"......................................................................................... I-31
"Servicing Advances"....................................................................................... I-31
"Servicing Agreement"...................................................................................... I-31
"Servicing Default"........................................................................................ I-31
"Servicing Fee"............................................................................................ I-32
"Servicing Fee Rate"....................................................................................... I-32
"Servicing Officer"........................................................................................ I-32
"Stated Maturity".......................................................................................... I-32
"Stated Principal Balance"................................................................................. I-32
"Subordinated Bond Interest Rate".......................................................................... I-32
"Subordinated Bonds"....................................................................................... I-32
"Substitution Adjustment Amount"........................................................................... I-32
"Successor Master Servicer"................................................................................ I-33
"Trust Estate"............................................................................................. I-33
"Trust Indenture Act" or "TIA"............................................................................. I-33
"Trustee".................................................................................................. I-33
"Trustee Fee".............................................................................................. I-33
"Trustee Fee Rate"......................................................................................... I-33
"Trustee Mortgage File".................................................................................... I-33
"Withdrawal Date".......................................................................................... I-33
</TABLE>
<TABLE>
<S> <C> <C>
ARTICLE II
THE BONDS
SECTION 2.01. Forms Generally................................................. II-1
SECTION 2.02. Forms of Bonds and Certificate of Authentication................ II-1
SECTION 2.03. Bonds Issuable in Classes; Provisions with Respect
to Principal and Interest Payments.............................. II-2
SECTION 2.04. Denominations................................................... II-5
SECTION 2.05. Execution, Authentication, Delivery and Dating.................. II-5
SECTION 2.06. Temporary Bonds................................................. II-6
SECTION 2.07. Registration, Registration of Transfer and Exchange............. II-6
</TABLE>
-vii-
<PAGE> 9
<TABLE>
<S> <C> <C>
SECTION 2.08. Mutilated, Destroyed, Lost or Stolen Bonds...................... II-7
SECTION 2.09. Payments of Principal and Interest.............................. II-8
SECTION 2.10. Persons Deemed Owners........................................... II-10
SECTION 2.11. Cancellation.................................................... II-10
SECTION 2.12. Authentication and Delivery of Bonds............................ II-10
SECTION 2.13. Matters Relating to Book Entry Bonds............................ II-15
SECTION 2.14. Termination of Book Entry System................................ II-16
SECTION 2.15. Additional Bonds................................................ II-17
ARTICLE III
COVENANTS
SECTION 3.01. Payment of Bonds................................................ III-1
SECTION 3.02. Maintenance of Office or Agency................................. III-1
SECTION 3.03. Money for Bond Payments to Be Held in Trust..................... III-1
SECTION 3.04. Corporate Existence of Owner Trustee............................ III-4
SECTION 3.05. Protection of Trust Estate...................................... III-4
SECTION 3.06. Opinions as to Trust Estate..................................... III-6
SECTION 3.07. Performance of Obligations; Master Servicing Agreement.......... III-6
SECTION 3.08. Investment Company Act.......................................... III-7
SECTION 3.09. Negative Covenants.............................................. III-7
SECTION 3.10. Annual Statement as to Compliance............................... III-9
SECTION 3.11. Recording of Assignments........................................ III-9
SECTION 3.12. Limitation of Liability of...................................... III-9
ARTICLE IV
SATISFACTION AND DISCHARGE
SECTION 4.01. Satisfaction and Discharge of Indenture......................... IV-1
SECTION 4.02. Application of Trust Money...................................... IV-2
ARTICLE V
DEFAULTS AND REMEDIES
SECTION 5.01. Event of Default................................................ V-1
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment.............. V-3
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by
Trustee......................................................... V-4
SECTION 5.04. Remedies........................................................ V-5
SECTION 5.05. [Reserved]...................................................... V-5
</TABLE>
-viii-
<PAGE> 10
<TABLE>
<S> <C> <C>
SECTION 5.06. Trustee May File Proofs of Claim................................ V-7
SECTION 5.07. Trustee May Enforce Claims without Possession of Bonds.......... V-8
SECTION 5.08. Application of Money Collected.................................. V-8
SECTION 5.09. Limitation on Suits............................................. V-8
SECTION 5.10. Unconditional Rights of Bondholders to Receive Principal and
Interest........................................................ V-9
SECTION 5.11. Restoration of Rights and Remedies.............................. V-10
SECTION 5.12. Rights and Remedies Cumulative.................................. V-10
SECTION 5.13. Delay or Omission Not Waiver.................................... V-10
SECTION 5.14. Control by Bondholders.......................................... V-10
SECTION 5.15. Waiver of Past Defaults......................................... V-11
SECTION 5.16. Undertaking for Costs........................................... V-11
SECTION 5.17. Waiver of Stay or Extension Laws................................ V-12
SECTION 5.18. Sale of Trust Estate............................................ V-12
SECTION 5.19. Action on Bonds................................................. V-14
ARTICLE VI
THE TRUSTEE
SECTION 6.01. Duties of Trustee............................................... VI-1
SECTION 6.02. Notice of Default............................................... VI-2
SECTION 6.03. Rights of Trustee............................................... VI-3
SECTION 6.04. Not Responsible for Recitals or Issuance of Bonds............... VI-5
SECTION 6.05. May Hold Bonds.................................................. VI-5
SECTION 6.06. Money Held in Trust............................................. VI-5
SECTION 6.07. Compensation and Reimbursement.................................. VI-5
SECTION 6.08. Eligibility; Disqualification................................... VI-6
SECTION 6.09. Trustee's Capital and Surplus................................... VI-7
SECTION 6.10. Resignation and Removal; Appointment of Successor............... VI-7
SECTION 6.11. Acceptance of Appointment by Successor.......................... VI-8
SECTION 6.12. Merger, Conversion, Consolidation or Succession
to Business of Trustee.......................................... VI-9
SECTION 6.13. Preferential Collection of Claim Against Issuer................. VI-9
SECTION 6.14. Co-trustees and Separate Trustees............................... VI-9
SECTION 6.15. Authenticating Agents........................................... VI-11
SECTION 6.16. Review of Mortgage Documents.................................... VI-12
SECTION 6.17. Payment of Certain Insurance Premiums........................... VI-13
SECTION 6.18. Substitution of Insurance Policies, Etc.; Notification of
Rating Agencies................................................. VI-13
ARTICLE VII
BONDHOLDERS' LISTS AND REPORTS
</TABLE>
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<PAGE> 11
<TABLE>
<S> <C> <C>
SECTION 7.01. Issuer to Furnish Trustee Names and Addresses of Bondholders.... VII-1
SECTION 7.02. Preservation of Information; Communications to Bondholders...... VII-1
SECTION 7.03. Reports by Trustee.............................................. VII-1
SECTION 7.04. Reports by Issuer............................................... VII-2
SECTION 7.05. Notice to the Rating Agencies [and to Bond Insurer.]............ VII-2
ARTICLE VIII
ACCOUNTS, PAYMENTS OF INTEREST AND PRINCIPAL, AND RELEASES
SECTION 8.01. Collection of Moneys............................................ VIII-1
SECTION 8.02. Distribution Account............................................ VIII-1
SECTION 8.03. General Provisions Regarding Pledged Accounts................... VIII-2
SECTION 8.04. Purchases of Defective Pledged Mortgages........................ VIII-3
SECTION 8.05. Grant of Replacement Pledged Mortgage........................... VIII-5
SECTION 8.06. Reports by Trustee to Bondholders............................... VIII-5
SECTION 8.07. Reports by Trustee.............................................. VIII-7
SECTION 8.08. Trust Estate; Release and Delivery of Mortgage Documents........ VIII-8
SECTION 8.09. Amendments to the Master Servicing Agreement.................... VIII-9
SECTION 8.10. Servicers and Master Servicer as Agents and Bailees of Trustee.. VIII-9
SECTION 8.11. Opinion of Counsel.............................................. VIII-10
SECTION 8.12. Release of Pledged Mortgages.................................... VIII-10
ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.01. Supplemental Indentures Without Consent of Bondholders.......... IX-1
SECTION 9.02. Supplemental Indentures With Consent of Bondholders............. IX-2
SECTION 9.03. Execution of Supplemental Indentures............................ IX-4
SECTION 9.04. Effect of Supplemental Indentures............................... IX-4
SECTION 9.05. Conformity with Trust Indenture Act............................. IX-4
SECTION 9.06. Reference in Bonds to Supplemental Indentures................... IX-5
SECTION 9.07. Amendments to Deposit Trust Agreement or Master
Servicing Agreement............................................. IX-5
ARTICLE X
REDEMPTION OF BONDS
</TABLE>
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<PAGE> 12
<TABLE>
<S> <C> <C>
SECTION 10.01. Special Redemption; Redemption.................................. X-1
SECTION 10.02. Form of Redemption Notice....................................... X-1
SECTION 10.03. Bonds Payable on Optional Redemption Date....................... X-2
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Compliance Certificates and Opinions............................ XI-1
SECTION 11.02. Form of Documents Delivered to Trustee.......................... XI-1
SECTION 11.03. Acts of Bondholders............................................. XI-3
SECTION 11.04. Notices, etc. to Trustee and Issuer............................. XI-3
SECTION 11.05. Notices and Reports to Bondholders; Waiver of Notices........... XI-4
SECTION 11.06. Rules by Trustee and Agents..................................... XI-5
SECTION 11.07. Conflict with Trust Indenture Act............................... XI-5
SECTION 11.08. Effect of Headings and Table of Contents........................ XI-5
SECTION 11.09. Successors and Assigns.......................................... XI-5
SECTION 11.10. Separability.................................................... XI-5
SECTION 11.11. Benefits of Indenture........................................... XI-6
SECTION 11.12. Legal Holidays.................................................. XI-6
SECTION 11.13. Governing Law................................................... XI-6
SECTION 11.14. Counterparts.................................................... XI-6
SECTION 11.15. Recording of Indenture.......................................... XI-6
SECTION 11.16. Issuer Obligation............................................... XI-6
SECTION 11.17. Inspection...................................................... XI-7
SECTION 11.18. Usury........................................................... XI-7
SECTION 11.19. No Petition..................................................... XI-8
ARTICLE XII
THE BOND INSURER
SECTION 12.01. Certain Matters Regarding the Bond Insurer and The Bond
Insurance Policy................................................ XII-1
</TABLE>
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<PAGE> 13
<TABLE>
<S> <C>
TESTIMONIUM..................................................................... S-1
SIGNATURES AND SEALS............................................................ S-1
ACKNOWLEDGMENTS................................................................. S-3
SCHEDULE A - Schedule of Pledged Mortgages...................................... A-1
</TABLE>
EXHIBIT I - Letter Agreement with the Depository
EXHIBIT II - Form of Senior Bond
EXHIBIT III - Form of Class B-1 Bond
EXHIBIT IV - Form of Class B-2 Bond
EXHIBIT V - Form of Class R-LT Certificate
EXHIBIT VI - Form of Class R-UT Certificate
EXHIBIT VII - Form of Investment Letter for Holder of Class R-LT and R-UT
Certificate
EXHIBIT VIII - Form of Bond Insurance Policy
EXHIBIT IX - Form of Transfer Affidavit for Class R-LT or Class R-UT Certificate
EXHIBIT X - ERISA Representation Letter
-xii-
<PAGE> 14
PARTIES
INDENTURE, dated as of ___________ ___, 200__ (as amended or
supplemented from time to time as permitted hereby, the "Indenture"), between
Sequoia Mortgage Trust 200_-_ (herein, together with its permitted successors
and assigns, called the "Issuer"), a statutory business trust created under the
Deposit Trust Agreement (as defined herein), and _____________________________,
a _____________ corporation, as trustee (together with its permitted successors
in the trusts hereunder, the "Trustee").
PRELIMINARY STATEMENT
The Issuer has duly authorized the execution and delivery of this
Indenture to provide for its Collateralized Mortgage Bonds, (the "Bonds"),
issuable as provided in this Indenture. All covenants and agreements made by the
Issuer herein are for the benefit and security of the Holders of the Bonds. The
Issuer is entering into this Indenture, and the Trustee is accepting the trusts
created hereby, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged.
All things necessary to make this Indenture a valid agreement of the
Issuer in accordance with its terms have been done.
GRANTING CLAUSE
The Issuer hereby Grants to the Trustee, for the exclusive benefit
of the Holders of the Bonds [and the Bond Insurer], all of the Issuer's right,
title and interest in and to (a) the Pledged Mortgages identified in Schedule A
to this Indenture, including the related Mortgage Documents, which the Issuer
has caused to be delivered to the Trustee herewith, and all interest and
principal received or receivable by the Issuer on or with respect to the Pledged
Mortgages after the Cut-Off Date and all interest and principal payments on the
Pledged Mortgages received prior to the Cut-off Date in respect of installments
of interest and principal due thereafter, but not including payments of interest
and principal due and payable on the Pledged Mortgages on or before the Cut-off
Date, and all other proceeds received in respect of such Pledged Mortgages, (b)
the Issuer's rights under the Master Servicing Agreement, (c) the Insurance
Policies, (d) all cash, instruments or other property held or required to be
deposited in the Bond Account or the Distribution Account (exclusive of any
earnings on investments made with funds deposited in the Distribution Account or
the Bond Account) and (e) all proceeds of the conversion, voluntary or
involuntary, of any of the foregoing into cash or other liquid assets,
including, without limitation, all Insurance Proceeds, Liquidation Proceeds and
condemnation awards. Such Grants are made, however, in trust, to secure the
Bonds equally and ratably without prejudice, priority or distinction between any
Bond and any other Bond by reason of difference in time of issuance or
otherwise, and to secure (i) the payment of all amounts due on the Bonds in
accordance with their terms, (ii) the payment of all other sums payable under
this Indenture with respect to the Bonds and (iii) compliance with the
provisions of this Indenture, all as provided in this
<PAGE> 15
Indenture. All terms used in the foregoing granting clauses that are defined in
Section 1.01 are used with the meanings given in said Section.
The Trustee acknowledges such Grant, accepts the trusts hereunder in
accordance with the provisions of this Indenture and agrees to perform the
duties herein required to the best of its ability to the end that the interests
of the Holders of the Bonds [and the Bond Insurer] may be adequately and
effectively protected.
[The Trustee agrees that it will hold any proceeds of any claim made
upon the Bond Insurance Policy, solely for the use and benefit of the
Bondholders in accordance with the terms hereof and of the Bond Insurance
Policy.]
ARTICLE I
DEFINITIONS
SECTION 1.01. GENERAL DEFINITIONS.
Except as otherwise specified or as the context may otherwise
require, the following terms have the respective meanings set forth below for
all purposes of this Indenture, and the definitions of such terms are applicable
to the singular as well as to the plural forms of such terms and to the
masculine as well as to the feminine and neuter genders of such terms. Whenever
reference is made herein to an Event of Default or a Default known to the
Trustee or of which the Trustee has notice or knowledge, such reference shall be
construed to refer only to an Event of Default or Default of which the Trustee
is deemed to have notice or knowledge pursuant to Section 6.01(d). All other
terms used herein which are defined in the Trust Indenture Act (as hereinafter
defined), either directly or by reference therein, have the meanings assigned to
them therein.
"ACCOUNTANT": A Person engaged in the practice of accounting who
(except when this Indenture provides that an Accountant must be Independent) may
be employed by or affiliated with the Issuer or an Affiliate of the Issuer.
"ACCRUAL DATE": The date upon which interest begins accruing on the
Bonds, such date being ____________ ___, 200__.
"ACT": With respect to any Bondholder, as defined in Section 11.03.
"ADJUSTED NET MORTGAGE RATE": As to each Pledged Mortgage and at any
time, the per annum rate equal to the Mortgage Rate less the sum of the Master
Servicing Fee Rate and the related Servicing Fee Rate.
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<PAGE> 16
"ADJUSTMENT DATE": As to any Pledged Mortgage, the date on which the
related Mortgage Rate adjusts [annually] after a period of ___ year[s] following
origination, in accordance with the terms of the related Mortgage Note.
"ADVANCE": The payment required to be made by the Master Servicer
with respect to any Payment Date pursuant to Section 4 of the Master Servicing
Agreement, the amount of any such payment being equal to the aggregate of the
payments of principal and interest (net of the Master Servicing Fee and the
applicable Servicing Fee and net of any net income in the case of any REO
Property) on the Pledged Mortgages that were due on the related Due Date and not
received as of the close of business on the related Determination Date, less the
aggregate amount of any such delinquent payments that the Master Servicer has
determined would constitute a Nonrecoverable Advance if advanced.
"AFFILIATE": With respect to any Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"AGENT": Any Bond Registrar, Paying Agent or Authenticating Agent.
"ALTERNATE BOND RATE: As to any Payment Date, the weighted average
of the Net Mortgage Rates of all Mortgage Loans applicable as of the Due Date of
the month preceding the month of such Payment Date, weighted on the basis of
their outstanding Principal Balances (after giving effect to the Monthly
Payments due on or before such Due Date and Principal Prepayments received prior
to such Due Date) at such time.
"APPRAISED VALUE": With respect to any Pledged Mortgage, the
Appraised Value of the related Mortgaged Property shall be: (i) with respect to
a Pledged Mortgage other than a Refinancing Pledged Mortgage, the lesser of (a)
the value of the Mortgaged Property based upon the appraisal made at the time of
the origination of such Pledged Mortgage and (b) the sales price of the
Mortgaged Property at the time of the origination of such Pledged Mortgage; (ii)
with respect to a Refinancing Pledged Mortgage, the value of the Mortgaged
Property based upon the appraisal made at the time of the origination of such
Refinancing Pledged Mortgage.
"ASSIGNMENTS": Collectively (i) the original instrument of
assignment of a Mortgage, including any interim assignments from the originator
or any other holder of any Pledged Mortgage, and (ii) the original instrument of
assignment of such Mortgage, made by the Issuer to the Trustee (which in either
case may, to the extent permitted by the laws of the state in which the related
Mortgaged Property is located, be a blanket instrument of assignment covering
other Mortgages as well and which may also, to the extent permitted by the laws
of the state in
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<PAGE> 17
which the related Mortgaged Property is located, be an instrument of assignment
running directly from the mortgagee of record under the related Mortgage to the
Trustee).
"AUTHENTICATING AGENT": The Person, if any, appointed as
Authenticating Agent by the Trustee at the request of the Issuer pursuant to
Section 6.15, until any successor Authenticating Agent for the Bonds is named,
and thereafter "Authenticating Agent" shall mean such successor.
"AUTHORIZED OFFICER": Any officer of the Owner Trustee who is
authorized to act for the Owner Trustee in respect of the Issuer and whose name
appears on a list of such authorized officers furnished by the Owner Trustee to
the Trustee, as such list may be amended or supplemented from time to time, and
any officer of the Issuer who is authorized to act pursuant to the Deposit Trust
Agreement and whose name appears on a list furnished by the Depositor to the
Owner Trustee and the Trustee, as such list may be amended or supplemented from
time to time.
"AVAILABLE FUNDS": As defined in Section 1 of the Master Servicing
Agreement.
"BANK": ________________________, a Delaware banking corporation, in
its individual capacity and not as Owner Trustee.
"BANKRUPTCY CODE": The United States Bankruptcy Reform Act of 1978,
as amended.
"BENEFICIAL OWNER": With respect to a Book Entry Bond, the Person
who is the beneficial owner of such Book Entry Bond.
"BOND ACCOUNT": The separate Eligible Account or Accounts created
and maintained by the Master Servicer pursuant to Section 3(h)(v) of the Master
Servicing Agreement with a depository institution in the name of the Master
Servicer for the benefit of the Trustee on behalf of Bondholders and designated
"Sequoia Mortgage Holdings, Inc. in trust for the registered holders of Sequoia
Mortgage Trust 200_-_ Collateralized Mortgage Bonds, Series 200_-_".
"BOND DISTRIBUTION AMOUNT": As to any Payment Date, an amount equal
to the sum of (i) the Senior Interest Payment Amount, (ii) the Senior Principal
Payment Amount, (iii) the Class B-1 Interest Payment Amount, (iv) the Class B-1
Principal Payment Amount, (v) the Class B-2 Interest Payment Amount and (vi) the
Class B-2 Principal Payment Amount.
"BOND PAYMENT AMOUNT": As to any Payment Date, an amount equal to
the sum of (i) the Senior Interest Payment Amount, (ii) the Senior Principal
Payment Amount, (iii) the Class B-1 Interest Payment Amount, (iv) the Class B-1
Principal Payment Amount, (v)
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<PAGE> 18
the Class B-2 Interest Payment Amount and (vi) the Class B-2 Principal Payment
Amount, in each case for such Payment Date.
"BONDHOLDER" OR "HOLDER": The Person in whose name a Bond is
registered in the Bond Register.
"BOND INSURANCE POLICY": Any financial guaranty insurance policy
covering any Bonds or Class of Bonds of any Series.
"BOND INSURER": The issuer of any Bond Insurance Policy.
"BOND INTEREST RATE": The Senior Bond Interest Rate, the Class B-1
Bond Interest Rate or the Class B-2 Bond Interest Rate, as applicable.
"BOND REGISTER" AND "BOND REGISTRAR": As defined in Section 2.07.
"BONDS": Any bonds authorized by, and authenticated and delivered
under, this Indenture.
"BOOK ENTRY BONDS": The Bonds shall be registered in the name of the
Depository or its nominee, ownership of which is reflected on the books of the
Depository or on the books of a Person maintaining an account with such
Depository (directly or as an indirect participant in accordance with the rules
of such Depository).
"BUSINESS DAY": Any day other than (i) a Saturday or a Sunday, or
(ii) a day on which banking institutions in the City of New York, New York or
the State of California or the city in which the Corporate Trust Office of the
Trustee is located are authorized or obligated by law or executive order to be
closed.
"CERTIFICATE INTEREST RATE": As defined in Section 1 of the Master
Servicing Agreement.
"CLASS": Collectively, all of the Bonds bearing the same class
designation. The Bonds are divided into Classes as provided in Section 2.03.
"CLASS B-1 INTEREST CARRYOVER SHORTFALL": The amount by which the
sum of (i) the interest at the Class B-1 Bond Interest Rate on the Class B-1
Principal Amount and (ii) the interest at the Class B-1 Bond Interest Rate on
any Class B-1 Principal Carryover Shortfall, on each prior Payment Date,
exceeded the amount actually distributed as interest on such prior Payment Dates
and not subsequently distributed.
"CLASS B-1 BOND INTEREST RATE": With respect to any Interest Accrual
Period, the annual rate at which interest accrues on the Class B-1 Bonds as
specified in such Bonds and in Section 2.03(c).
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<PAGE> 19
"CLASS B-1 INTEREST PAYMENT AMOUNT": As to any Payment Date, the sum
of (i) interest at the Class B-1 Bond Interest Rate on the Class B-1 Principal
Amount, (ii) interest at the Class B-1 Bond Interest Rate on any Class B-1
Principal Carryover Shortfall, (iii) the Class B-1 Interest Carryover Shortfall
and (iv) interest at the Class B-1 Bond Interest Rate on any Class B-1 Interest
Carryover Shortfall.
"CLASS B-1 PERCENTAGE": As to any Payment Date, the percentage
equivalent of a fraction the numerator of which is the Class B-1 Principal
Amount immediately prior to such date and the denominator of which is the sum of
(i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount,
(iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case
immediately prior to such date.
"CLASS B-1 PRINCIPAL AMOUNT": As to any Payment Date is the lesser
of (i) the aggregate of the Stated Principal Balances of the Pledged Mortgages,
less the Senior Class Principal Amount immediately prior to such date, and (ii)
the Original Class B-1 Principal Amount reduced by all amounts previously
distributed to holders of the Class B-1 Bonds as payments of principal.
"CLASS B-1 PRINCIPAL CARRYOVER SHORTFALL": As to any Payment Date,
the excess of (i) the Original Class B-1 Principal Amount reduced by all amounts
previously distributed to holders of the Class B-1 Bonds as payments of
principal or Class B-1 Principal Carryover Shortfall, over (ii) the Class B-1
Principal Amount immediately prior to such date.
"CLASS B-1 PRINCIPAL PAYMENT AMOUNT": As to any Payment Date, the
sum of (i) the Class B-1 Percentage of the sum of (a) the principal portion of
the Schedules Payment due on each Pledged Mortgage [on the related Due Date],
(b) the principal portion of the purchase price of each Pledged Mortgage that
was purchased by Redwood Trust or another person pursuant to the Mortgage Loan
Purchase Agreement [or by the Master Servicer in connection with any optional
purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such
Payment Date, (c) the Substitution Adjustment Amount in connection with any
Deleted Pledged Mortgage received with respect to such Payment Date, (d) any
Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal
of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received
during the [calendar month] preceding the month of such Payment Date, (e) with
respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage
during the [calendar month] preceding the month of such Payment Date, the Stated
Principal Balance of such Pledged Mortgage and (f) all partial and full
principal prepayments by borrowers received during the related Prepayment Period
and (ii) any Class B-1 Principal Carryover Shortfall.
CLASS B-2 BOND INTEREST RATE": With respect to any Interest Accrual
Period, the annual rate at which interest accrues on the Class B-2 Bonds as
specified in such Bonds and in Section 2.03(c).
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<PAGE> 20
"CLASS B-2 INTEREST CARRYOVER SHORTFALL": The amount by which sum of
(i) the interest at the Class B-2 Bond Interest Rate on the Class B-2 Principal
Amount and (ii) the interest at the Class B-2 Bond Interest Rate on any Class
B-2 Principal Carryover Shortfall, on each prior Payment Date, exceeded the
amount actually distributed as interest on such prior Payment Dates and not
subsequently distributed.
"CLASS B-2 INTEREST PAYMENT AMOUNT": As to any Payment Date, the sum
of (i) interest at the Class B-2 Bond Interest Rate on the Class B-2 Principal
Amount, (ii) interest at the Class B-2 Bond Interest Rate on any Class B-2
Principal Carryover Shortfall, (iii) the Class B-2 Interest Carryover Shortfall
and (iv) interest at the Class B-2 Bond Interest Rate on any Class B-2 Interest
Carryover Shortfall.
"CLASS B-2 PERCENTAGE": As to any Payment Date, the percentage
equivalent of a fraction the numerator of which is the Class B-2 Principal
Amount immediately prior to such date and the denominator of which is the sum of
(i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount,
(iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case
immediately prior to such date.
"CLASS B-2 PRINCIPAL AMOUNT": As to any Payment Date is the lesser
of (i) the aggregate of the Stated Principal Balances of the Pledged Mortgages,
less the sum of the Senior Class Principal Amount and the Class B-1 Principal
Amount, in each case immediately prior to such date, and (ii) the Original Class
B-2 Principal Amount reduced by all amounts previously distributed to holders of
the Class B-2 Bonds as payments of principal.
"CLASS B-2 PRINCIPAL CARRYOVER SHORTFALL": As to any Payment Date,
the excess of (i) the Original Class B-2 Principal Amount reduced by all amounts
previously distributed to holders of the Class B-2 Bonds as payments of
principal or Class B-2 Principal Carryover Shortfall, over (ii) the Class B-2
Principal Amount immediately prior to such date.
"CLASS B-2 PRINCIPAL PAYMENT AMOUNT": As to any Payment Date, the
sum of (i) the Class B-2 Percentage of the sum of (a) the principal portion of
the Scheduled Payment due on each Pledged Mortgage [on the related Due Date],
(b) the principal portion of the purchase price of each Pledged Mortgage that
was purchased by Redwood Trust or another person pursuant to the Mortgage Loan
Purchase Agreement [or by the Master Servicer in connection with any optional
purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such
Payment Date, (c) the Substitution Adjustment Amount in connection with any
Deleted Pledged Mortgage received with respect to such Payment Date, (d) any
Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal
of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received
during the [calendar month] preceding the month of such Payment Date, (e) with
respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage
during the [calendar month] preceding the month of such Payment Date, the Stated
Principal Balance of such Pledged Mortgage and (f) all partial and full
principal
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<PAGE> 21
prepayments by borrowers received during the related Prepayment Period and (ii)
any Class B-2 Principal Carryover Shortfall.
"CLASS INTEREST SHORTFALL": As to any Payment Date, the Senior
Interest Shortfall, the Class B-1 Interest Carryover Shortfall or the Class B-2
Interest Carryover Shortfall, as applicable.
"CLASS PRINCIPAL AMOUNT": The Senior Class Principal Amount, the
Class B-1 Principal Amount or the Class B-2 Principal Amount, as applicable.
"CLASS R CERTIFICATES": Pertaining to either the Class R-LT or the
Class R-UT Certificates, as the case may be.
"CLASS R-LT CERTIFICATE": Any one of the Certificates executed and
authenticated by the Trustee substantially in the form set forth in Exhibit V.
"CLASS R-LT DISTRIBUTION AMOUNT": As to any Payment Date, the
aggregate amount distributed to the Class R-LT Holder on such Payment Date
pursuant to Section 2.03
"CLASS R-UT CERTIFICATE": Any one of the Certificates executed and
authenticated by the Trustee substantially in the form set forth in Exhibit VI.
"CLASS R-UT DISTRIBUTION AMOUNT": As to any Payment Date, the
aggregate amount distributed to the Class R Holder on such Payment Date pursuant
to Section 2.03.
"CLOSING DATE": ____________ ___, 200__.
"CODE": The Internal Revenue Code of 1986, including any successor
or amendatory provisions.
"COMMISSION": Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, or if at
any time such Commission is not existing and performing the duties now assigned
to it under the Trust Indenture Act, then the body performing such duties at
such time under the Trust Indenture Act or similar legislation replacing the
Trust Indenture Act.
"CONTROLLING CLASS": The Class A-1 Bonds or, if the Class A-1 Bonds
are no longer Outstanding, the most senior Class of Subordinated Bonds then
Outstanding.
"COOPERATIVE LOAN": As defined in Section 1 of the Master Servicing
Agreement.
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<PAGE> 22
"COOPERATIVE SHARES": As defined in Section 1 of the Master
Servicing Agreement.
"CORPORATE TRUST OFFICE": The principal corporate trust office of
the Trustee located at ___________________________________________________, or
at such other address as the Trustee may designate from time to time by notice
to the Bondholders and the Issuer, or the principal corporate trust office of
any successor Trustee.
"CORRESPONDING CLASSES OF BONDS": With respect to each Lower-Tier
Regular Interest, the Class or Classes of Certificates appearing opposite such
Lower-Tier Regular Interest in Section 2.18.
"CUT-OFF DATE": _____________ ___, 200__.
"DEBT SERVICE REDUCTION": With respect to any Pledged Mortgage, a
reduction by a court of competent jurisdiction in a proceeding under the
Bankruptcy Code in the Scheduled Payment for such Pledged Mortgage which became
final and non-appealable, except such a reduction resulting from a Deficient
Valuation or any reduction that results in a permanent forgiveness of principal.
"DEFAULT": Any occurrence which is, or with notice or the lapse of
time or both would become, an Event of Default.
"DEFAULTED PLEDGED MORTGAGE": The meaning specified in Section
8.04(e).
"DEFICIENT VALUATION": With respect to any Pledged Mortgage, a
valuation by a court of competent jurisdiction of the Mortgaged Property in an
amount less than the then outstanding indebtedness under the Pledged Mortgage,
or any reduction in the amount of principal to be paid in connection with any
Scheduled Payment that results in a permanent forgiveness of principal, which
valuation or reduction results from an order of such court which is final and
non-appealable in a proceeding under the Bankruptcy Code.
"DEFINITIVE BONDS": Bonds other than Book Entry Bonds.
"DELETED PLEDGED MORTGAGE": As defined in Section 5 of the Master
Servicing Agreement.
"DENOMINATION": With respect to each Bond, the amount set forth on
the face thereof as the "Initial Principal Amount of this Bond".
"DEPOSITOR": Sequoia Mortgage Funding Corporation, a Delaware
corporation.
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<PAGE> 23
"DEPOSITORY": The initial Depository with respect to each Class of
Book Entry Bonds shall be The Depository Trust Company of New York, the nominee
for which is Cede & Co. The Depository shall at all times be a "clearing
corporation" as defined in Section 8-102(3) of the Uniform Commercial Code of
the State of New York.
"DEPOSITORY PARTICIPANTS": A broker, dealer, bank or other financial
institution or other Person for whom from time to time a Depository effects
book-entry transfers and pledges of securities deposited with the Depository.
"DEPOSIT TRUST AGREEMENT": The Amended and Restated Deposit Trust
Agreement, dated as of ____________ _ _, 200__, between the Bank and the
Depositor, creating the Issuer, as such Deposit Trust Agreement may be amended
or supplemented from time to time.
"DETERMINATION DATE": As to any Payment Date, the ___th day of each
month or if such ___th day is not a Business Day the next succeeding Business
Day; provided, however, that if such next succeeding Business Day is less than
two Business Days prior to the related Payment Date, then the Determination Date
shall be the next Business Day preceding the ___th day of such month.
"DISTRIBUTION ACCOUNT": The separate Eligible Account created and
maintained by the Trustee pursuant to Section 8.02 in the name of the Trustee
for the benefit of the Bondholders and designated "____________________ in trust
for registered holders of Sequoia Mortgage Trust 200_-_, Collateralized Mortgage
Bonds. Funds in the Distribution Account shall be held in trust for the
Bondholders for the uses and purposes set forth in this Indenture.
"DISTRIBUTION ACCOUNT DEPOSIT DATE": As to any Payment Date, [12:30
p.m. Pacific time] on the Business Day immediately preceding such Payment Date.
"DUE DATE": The first day of each month.
"ELIGIBLE ACCOUNT": Any of (i) an account or accounts maintained
with a federal or state chartered depository institution or trust company the
short-term unsecured debt obligations of which (or, in the case of a depository
institution or trust company that is the principal subsidiary of a holding
company, the debt obligations of such holding company) have the highest
short-term ratings of each Rating Agency at the time any amounts are held on
deposit therein, or (ii) an account or accounts in a depository institution or
trust company in which such accounts are insured by the FDIC or the SAIF (to the
limits established by the FDIC or the SAIF) and the uninsured deposits in which
accounts are otherwise secured such that, as evidenced by an Opinion of Counsel
delivered to the Trustee and to each Rating Agency, the Bondholders have a claim
with respect to the funds in such account or a perfected first priority security
interest against any collateral (which shall be limited to Permitted
Investments) securing such funds that is superior to claims of any other
depositors or creditors of the depository institution or trust
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<PAGE> 24
company in which such account is maintained, or (iii) a trust account or
accounts maintained with the trust department of a federal or state chartered
depository institution or trust company, acting in its fiduciary capacity or
(iv) any other account acceptable to each Rating Agency. Eligible Accounts may
bear interest, and may include, if otherwise qualified under this definition,
accounts maintained with the Trustee.
"ESCROW ACCOUNT": As defined in Section 1 of the Master Servicing
Agreement.
"EVENT OF DEFAULT": The meaning specified in Section 5.01.
"EXPENSE RATE": As to each Pledged Mortgage, the sum of the related
Servicing Fee Rate, the Master Servicing Fee Rate and Trustee Fee Rate.
"FDIC": The Federal Deposit Insurance Corporation, or any successor
thereto.
"FHLMC": The Federal Home Loan Mortgage Corporation, a corporate
instrumentality of the United States created and existing under Title III of the
Emergency Home Finance Act of 1970, as amended, or any successor thereto.
"FIRREA": The Financial Institutions Reform, Recovery and
Enforcement Act of 1989.
["FITCH": Fitch Investors Service, L.P., or any successor thereto.
For purposes of Section 11.04 the address for notices to Fitch shall be Fitch
Investors Service, L.P., One State Street Plaza, New York, New York 10004,
Attention: Residential Mortgage Surveillance Group, or such other address as
Fitch may hereafter furnish to the Issuer and the Master Servicer.]
"FNMA": The Federal National Mortgage Association, a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act, or any successor thereto.
"GRANT": To grant, bargain, sell, warrant, alienate, remise,
release, convey, assign, transfer, mortgage, pledge, create and grant a security
interest in, deposit, set-over and confirm. A Grant of a Pledged Mortgage and
related Mortgage Documents, a Permitted Investment, the Master Servicing
Agreement, an Insurance Policy, or any other instrument shall include all
rights, powers and options (but none of the obligations) of the Granting party
thereunder, including, without limitation, the immediate and continuing right to
claim for, collect, receive and give receipts for principal and interest
payments thereunder, Insurance Proceeds, condemnation awards, purchase prices
and all other moneys payable thereunder and all proceeds thereof, to give and
receive notices and other communications, to make waivers or other agreements,
to exercise all rights and options, to bring Proceedings in the name of the
Granting party or otherwise, and generally to do and receive anything which the
Granting party is or may be entitled to do or receive thereunder or with respect
thereto.
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"HIGHEST LAWFUL RATE": The meaning specified in Section 11.18.
"HOLDER": The holder of Bonds or Class R Certificates issued
pursuant to this Indenture.
"INDENTURE" or "THIS INDENTURE": This instrument as originally
executed and, if from time to time supplemented or amended by one or more
indentures supplemental hereto entered into pursuant to the applicable
provisions hereof, as so supplemented or amended. All references in this
instrument to designated "Articles", "Sections", "Subsections" and other
subdivisions are to the designated Articles, Sections, Subsections and other
subdivisions of this instrument as originally executed. The words "herein",
"hereof" and "hereunder" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section, Subsection or
other subdivision.
"INDEPENDENT": When used with respect to any specified Person means
such a Person who (i) is in fact independent of the Issuer and any other obligor
upon the Bonds, (ii) does not have any direct financial interest or any material
indirect financial interest in the Issuer or in any such other obligor or in an
Affiliate of the Issuer or such other obligor and (iii) is not connected with
the Issuer or any such other obligor as an officer, employee, promoter,
underwriter, trustee, partner, director or person performing similar functions.
Whenever it is herein provided that any Independent Person's opinion or
certificate shall be furnished to the Trustee, such Person shall be appointed by
an Issuer Order and with the approval of the Trustee, which approval shall not
be unreasonably withheld, and such opinion or certificate shall state that the
signer has read this definition and that the signer is Independent within the
meaning hereof.
"INDEX": As to (a) each Pledged Mortgage, the index from time to
time in effect for the adjustment of the Mortgage Rate set forth as such on the
related Mortgage Note and (b) either Bond Interest Rate and any Payment Date,
the weekly average yield on United States Treasury Securities adjusted to a
constant maturity of one year as made available by the Federal Reserve Board and
most recently available as of 45 days prior to the first day of the month
preceding the month in which such Payment Date occurs.
"INDIRECT PARTICIPANT": A broker, dealer, bank or other financial
institution or other Person that clears through or maintains a custodial
relationship with a Depository Participant.
"INDIVIDUAL BOND": A Bond of an original principal amount of $1,000;
a Bond of an original principal amount in excess of $1,000 shall be deemed to be
a number of Individual Bonds equal to the quotient obtained by dividing such
original principal amount by $1,000.
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"INSURANCE POLICY": With respect to any Pledged Mortgage, any
insurance policy, including all riders and endorsements thereto in effect,
including any replacement policy or policies for any Insurance Policies.
"INSURANCE PROCEEDS": Proceeds paid by an insurer pursuant to any
Insurance Policy, in each case other than any amount included in such Insurance
Proceeds in respect of Insured Expenses.
"INSURED EXPENSES": Expenses covered by an Insurance Policy or any
other insurance policy with respect to the Pledged Mortgages.
"INTEREST ACCRUAL PERIOD": With respect to each Class of Bonds and
any Payment Date, the calendar month prior to the month of such Payment Date.
"INTEREST CONVERSION DATE": As to the Pledged Mortgages, the date on
which the first Adjustment Date occurs.
"INTEREST PAYMENT AMOUNT": The Senior Interest Payment Amount, the
Class B-1 Interest Payment Amount, the Class B-2 Interest Payment Amount or the
Certificate Interest Payment Amount, as applicable.
"INVESTED AMOUNT": As of any Payment Date, the lesser of (i) the
aggregate of the Stated Principal Balances of the Pledged Mortgages, less the
sum of (x) the Senior Class Principal Amount, (y) the Class B-1 Principal Amount
and (z) the Class B-2 Principal Amount, in each case immediately prior to such
date, and (ii) the Original Invested Amount reduced by all amounts previously
distributed to the holder of the Class R Certificate in reduction of the
Invested Amount.
"INVESTOR PERCENTAGE": As of any Payment Date, the difference
between 100% and the sum of the Senior Percentage, the Class B-1 Percentage and
the Class B-2 Percentage for such date.
"ISSUER": Sequoia Mortgage Trust 200_-_ formed pursuant to the
Deposit Trust Agreement.
"ISSUER ORDER" and "ISSUER REQUEST": A written order or request that
is dated and signed in the name of the Issuer by an Authorized Officer and
delivered to the Trustee.
"LETTER AGREEMENT": With respect to the Book Entry Bonds, the letter
agreement among the Issuer, the Trustee and the Depository governing book entry
transfers of, and certain other matters with respect to, such Book Entry Bonds
and attached as Exhibit I hereto.
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"LIQUIDATED PLEDGED MORTGAGE": With respect to any Payment Date, a
defaulted Pledged Mortgage (including any REO Property) which was liquidated in
the calendar month preceding the month of such Payment Date and as to which the
Master Servicer has certified (in accordance with the Master Servicing
Agreement) that it has received all amounts it expects to receive in connection
with the liquidation of such Pledged Mortgage including the final disposition of
an REO Property.
"LIQUIDATION PROCEEDS": Amounts, including Insurance Proceeds,
received in connection with the partial or complete liquidation of defaulted
Pledged Mortgages, whether through trustee's sale, foreclosure sale or otherwise
or amounts received in connection with any condemnation or partial release of a
Mortgaged Property and any other proceeds received in connection with an REO
Property, less the sum of related unreimbursed Master Servicing Fees, Servicing
Advances and Advances.
"LOAN-TO-VALUE RATIO": With respect to any Pledged Mortgage and as
to any date of determination, the fraction (expressed as a percentage) the
numerator of which is the principal balance of the related Pledged Mortgage at
such date of determination and the denominator of which is the Appraised Value
of the related Mortgaged Property.
"LOWER-TIER A PRINCIPAL BALANCE": At any time, an amount equal to
the Class A Principal Balance.
"LOWER-TIER B PRINCIPAL BALANCE": At any time, an amount equal to
the Class B Principal Balance.
"LOWER-TIER INTEREST": Any one of the Lower-Tier Regular Interests
or the Lower-Tier Interest R.
"LOWER-TIER INTEREST A": An uncertificated "regular interest" in the
Lower-Tier REMIC which is held as an asset of the Upper-Tier REMIC.
"LOWER-TIER INTEREST B": An uncertificated "regular interest" in the
Lower-Tier REMIC which is held as an asset of the Upper-Tier REMIC.
"LOWER-TIER INTEREST R": The sole class of "residual interest" in
the Lower-Tier REMIC and the beneficial ownership of which is evidenced by the
Class R-LT Certificate.
"LOWER-TIER PASS-THROUGH RATE": For the Lower-Tier Interest A and
the Lower-Tier Interest B, the per annum rate set forth or calculated in the
manner described in Section [2.08.]
"LOWER-TIER REGULAR INTERESTS": Lower-Tier Interest A or Lower-Tier
Interest B.
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"LOWER-TIER REMIC": As described in Section 2.15.
"MARGIN": As to each Pledged Mortgage, the percentage amount set
forth on the related Mortgage Note added to the Index in calculating the
Mortgage Rate thereon.
"MASTER SERVICER": _________________________________, a ____________
corporation, as Master Servicer under the Master Servicing Agreement, and its
permitted successors and assigns thereunder.
"MASTER SERVICING AGREEMENT": The master servicing agreement dated
as of _____________ , 200__, among the Issuer, the Trustee and the Master
Servicer, pursuant to which the Master Servicer will be obligated to manage and
supervise the administration and servicing of the Pledged Mortgages securing the
Bonds and each Servicer of the Pledged Mortgages, or its successors or assigns,
as such agreement may be amended or supplemented from time to time as permitted
thereby.
"MASTER SERVICING FEE": As to each Pledged Mortgage and any Payment
Date, an amount equal to one month's interest at the related Master Servicing
Fee Rate on the Stated Principal Balance of such Pledged Mortgage or, in the
event of any payment of interest which accompanies a Principal Prepayment in
Full made by the Mortgagor, interest at the Master Servicing Fee Rate on the
Stated Principal Balance of such Pledged Mortgage for the period covered by such
payment of interest, subject to reduction as provided in Section 5(a) of the
Master Servicing Agreement.
"MASTER SERVICING FEE RATE": With respect to each Mortgage Loan,
_____% per annum.
"MATURITY": With respect to any Bond, the date on which the entire
unpaid principal amount of such Bond becomes due and payable as therein or
herein provided, whether at the Stated Maturity of the final installment of such
principal or by declaration of acceleration, call for redemption or otherwise.
"MAXIMUM RATE": As to any Pledged Mortgage, the maximum rate set
forth on the related Mortgage Note at which interest can accrue on such Pledged
Mortgage.
["MOODY'S": Moody's Investors Service, Inc., or any successor
thereto. For purposes of Section 11.04 the address for notices to Moody's shall
be Moody's Investors Service, Inc., 99 Church Street, New York, New York 10007,
Attention: ____________ or such other address as Moody's may hereafter furnish
to the Issuer and the Master Servicer.]
"MORTGAGE": The mortgage, deed of trust or other instrument creating
a first lien on an estate in fee simple or leasehold interest in real property
securing a Mortgage Note.
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"MORTGAGE DOCUMENTS": The mortgage documents listed in Section
2(a)(i) of the Master Servicing Agreement pertaining to a particular Pledged
Mortgage and any additional documents delivered to the Trustee to be added to
the Mortgage Documents pursuant to the Master Servicing Agreement.
"MORTGAGE NOTE": The original executed note or other evidence of
indebtedness evidencing the indebtedness of a Mortgagor under a Pledged
Mortgage.
"MORTGAGE RATE": The annual rate of interest borne by a Mortgage
Note from time to time.
"MORTGAGED PROPERTY": The underlying property securing a Pledged
Mortgage, which, with respect to a Cooperative Loan, is the related Cooperative
Shares and Proprietary Lease.
"MORTGAGOR": The obligor(s) on a Mortgage Note.
"NET MORTGAGE RATE": As to any Pledged Mortgage and Payment Date,
the related Mortgage Rate as of the Due Date in the month preceding the month of
such Payment Date reduced by the related Expense Rate.
"NET INTEREST SHORTFALLS": As to any Payment Date, the amount by
which the sum of (i) the amount of interest which would otherwise have been
received with respect to any Pledged Mortgage that was the subject of a Relief
Act Reduction and (ii) any Prepayment Interest Shortfalls, in each case during
the [calendar month] preceding the month of such Payment Date, exceeds the sum
of (i) the Master Servicing Fee for such period and (ii) the Certificate
Interest Payment Amount, the Invested Amount Payment and any other amounts
payable to the holder of the Class R Certificate described in [ ].
"NONRECOVERABLE ADVANCE": Any portion of an Advance or Servicer
Advance previously made or proposed to be made by the Master Servicer or the
related Servicer, as the case may be, that, in the good faith judgment of the
Master Servicer or such Servicer, will not be ultimately recoverable by the
Master Servicer from the related Mortgagor, related Liquidation Proceeds or
otherwise.
"OFFICERS' CERTIFICATE": A certificate signed by two Authorized
Officers.
"OFFICER'S CERTIFICATE OF THE MASTER SERVICER": A certificate (i)
signed by the Chairman of the Board, the Vice Chairman of the Board, the
President, a Managing Director, a Vice President (however denominated), an
Assistant Vice President, the Treasurer, the Secretary, or one of the Assistant
Treasurers or Assistant Secretaries of the Master Servicer, or (ii) if provided
for herein, signed by a Servicing Officer, as the case may be, and delivered to
the Trustee, as required hereby.
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"OPERATIVE AGREEMENTS": The meaning ascribed thereto in the Deposit
Trust Agreement.
"OPINION OF COUNSEL": A written opinion of counsel who may, except
as otherwise expressly provided in this Indenture, be counsel for the Issuer,
and who shall be reasonably satisfactory to the Trustee.
"OPTIONAL REDEMPTION DATE": With respect to the Bonds which are
subject to optional redemption, the date on which Bonds may be redeemed pursuant
to Section 10.01.
"OPTIONAL REDEMPTION RECORD DATE": The meaning specified in Section
10.02.
"ORIGINAL CLASS B-1 PRINCIPAL AMOUNT": $____________.
"ORIGINAL CLASS B-2 PRINCIPAL AMOUNT": $____________.
"ORIGINAL INVESTED AMOUNT": $____________.
"ORIGINAL PLEDGED MORTGAGES": The Pledged Mortgages listed on the
Pledged Mortgage Schedule and granted to the Trustee on the Closing Date.
"ORIGINAL SENIOR CLASS PRINCIPAL AMOUNT": ___________________.
"ORIGINAL SUBORDINATION AMOUNT": The sum of the Original
Subordinated Class Principal Amount and the Original Invested Amount.
"OTS": The Office of Thrift Supervision.
"OUTSTANDING": As of the date of determination, all Bonds
theretofore authenticated and delivered under this Indenture except:
(i) Bonds theretofore cancelled by the Bond Registrar or delivered
to the Bond Registrar for cancellation;
(ii) Bonds or portions thereof for whose payment or redemption money
in the necessary amount has been theretofore deposited with the Trustee or any
Paying Agent (other than the Issuer) in trust for the Holders of such Bonds;
provided, however, that if such Bonds are to be redeemed, notice of such
redemption has been duly given pursuant to this Indenture or provision therefor,
satisfactory to the Trustee, has been made;
(iii) Bonds in exchange for or in lieu of which other Bonds have
been authenticated and delivered pursuant to this Indenture unless proof
satisfactory to the Trustee is
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presented that any such Bonds are held by a bona fide purchaser (as defined by
the Uniform Commercial Code of the applicable jurisdiction); and
(iv) Bonds alleged to have been destroyed, lost or stolen for which
replacement Bonds have been issued as provided for in Section 2.08;
provided, however, that in determining whether the Holders of the requisite
percentage of the aggregate Class Principal Amount of the Outstanding Bonds have
given any request, demand, authorization, direction, notice, consent or waiver
hereunder, Bonds owned by the Issuer, any other obligor upon the Bonds or any
Affiliate of the Issuer or such other obligor shall be disregarded and deemed
not to be Outstanding, except that, in determining whether the Trustee shall be
protected in relying upon any such request, demand, authorization, direction,
notice, consent or waiver, only Bonds which the Trustee knows to be so owned
shall be so disregarded. Bonds so owned which have been pledged in good faith
may be regarded as Outstanding if the pledgee establishes to the satisfaction of
the Trustee the pledgee's right so to act with respect to such Bonds and that
the pledgee is not the Issuer, any other obligor upon the Bonds or any Affiliate
of the Issuer or such other obligor.
"OUTSTANDING PLEDGED MORTGAGE": As of any Due Date, a Pledged
Mortgage with a Stated Principal Balance greater than zero which was not the
subject of a Principal Prepayment in Full prior to such Due Date and which did
not become a Liquidated Pledged Mortgage prior to such Due Date.
"OWNER": The meaning ascribed thereto in the Deposit Trust
Agreement.
"OWNER TRUSTEE": Wilmington Trust Company, a Delaware banking
corporation, not in its individual capacity but solely as Owner Trustee under
the Deposit Trust Agreement, until a successor Person shall have become the
Owner Trustee pursuant to the applicable provisions of the Deposit Trust
Agreement, and thereafter "Owner Trustee" shall mean such successor Person.
"PAYING AGENT": The Trustee or any other depository institution or
trust company that is authorized by the Issuer pursuant to Section 3.03 to pay
the principal of, or interest on, any Bonds on behalf of the Issuer.
"PAYMENT DATE": The ___th day of each [calendar month] after the
initial issuance of the Bonds or, if such ___th day is not a Business Day, the
next succeeding Business Day, commencing in ____________ 200__.
"PAYMENT DATE STATEMENT": The meaning specified in Section 8.06.
["PERIODIC RATE CAP": As to any Pledged Mortgage and any Adjustment
Date, the maximum percentage increase or decrease to the related Mortgage Note
on any such Adjustment Date, as specified in the related Mortgage Note.]
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"PERMITTED ENCUMBRANCE": Any lien, charge, security interest,
mortgage or other encumbrance Granted by the Issuer in the Trust Estate,
provided that:
(i) such lien, charge, security interest, mortgage or encumbrance
extends only to a portion of the Trust Estate which is limited to cash
deliverable or payable to the Issuer pursuant to Section 8.01 or Section
8.02(d);
(ii) such lien, charge, security interest, mortgage or other
encumbrance secures indebtedness which the Issuer is permitted to incur under
the terms of this Indenture; and
(iii) the beneficiary of such lien, charge, security interest,
mortgage or other encumbrance has agreed that in connection with the enforcement
thereof it will not bring any Proceeding seeking, or which would result in, the
sale of any portion of the Trust Estate and will not file any petition for the
commencement of insolvency proceedings with respect to the Issuer under the
federal bankruptcy laws, as now or hereafter in effect, or any other present or
future federal or state bankruptcy, insolvency or similar law, or for the
appointment of any receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of the Issuer or of any of its property,
or seeking an order for the winding up or liquidation of the affairs of the
Issuer.
"PERMITTED INVESTMENTS": At any time, any one or more of the
following obligations and securities:
(i) obligations of the United States or any agency thereof, provided
that such obligations are backed by the full faith and credit of the United
States;
(ii) general obligations of or obligations guaranteed by any state
of the United States or the District of Columbia receiving the highest long-term
debt rating of each Rating Agency, or such lower rating as will not result in
the downgrading or withdrawal of the ratings then assigned to the Bonds by the
Rating Agencies, as evidenced by a signed writing delivered by each Rating
Agency;
(iii) commercial or finance company paper which is then receiving
the highest commercial or finance company paper rating of each Rating Agency, or
such lower rating as will not result in the downgrading or withdrawal of the
ratings then assigned to the Bonds by the Rating Agencies, as evidenced by a
signed writing delivered by each Rating Agency;
(iv) certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust company incorporated
under the laws of the United States or of any state thereof and subject to
supervision and examination by federal and/or state banking authorities,
provided that the commercial paper and/or long-term unsecured debt obligations
of such depository institution or trust company (or in the case of the principal
depository institution in a holding company system, the commercial paper or
long-term
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<PAGE> 33
unsecured debt obligations of such holding company, but only if Moody's
Investor's service, Inc. is not the applicable Rating Agency) are then rated one
of the two highest long-term and the highest short-term ratings of each Rating
Agency for such securities, or such lower ratings as will not result in the
downgrading or withdrawal of the ratings then assigned to the Bonds by the
Rating Agencies, as evidenced by a signed writing delivered by each Rating
Agency;
(v) demand or time deposits or certificates of deposit issued by any
bank or trust company or savings institution to the extent that such deposits
are fully insured by the FDIC;
(vi) guaranteed reinvestment agreements issued by any bank,
insurance company or other corporation acceptable to the Rating Agencies at the
time of the issuance of such agreements, as evidenced by a signed writing
delivered by each Rating Agency;
(vii) repurchase obligations with respect to any security described
in clauses (i) and (ii) above, in either case entered into with a depository
institution or trust company (acting as principal) described in clause (iv)
above;
(viii) securities (other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of the face amount
thereof) bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any state thereof which, at
the time of such investment, have one of the two highest ratings of each Rating
Agency (except if the Rating Agency is Moody's, such rating shall be the highest
commercial paper rating of Moody's for any such series), or such lower rating as
will not result in the downgrading or withdrawal of the ratings then assigned to
the Bonds by the Rating Agencies, as evidenced by a signed writing delivered by
each Rating Agency;
(ix) interests in any money market fund which at the date of
acquisition of the interests in such fund and throughout the time such interests
are held in such fund has the highest applicable rating by each Rating Agency or
such lower rating as will not result in a change in the rating then assigned to
the Bonds by each Rating Agency;
(x) short-term investment funds sponsored by any trust company or
national banking association incorporated under the laws of the United States or
any state thereof which on the date of acquisition has been rated by each
applicable Rating Agency in their respective highest applicable rating category
or such lower rating as will not result in a change in the rating then specified
stated maturity and bearing interest or sold at a discount acceptable to each
Rating Agency as will not result in the downgrading or withdrawal of the ratings
then assigned to the Bonds by the Rating Agencies; and
(xi) such other investments having a specified stated maturity and
bearing interest or sold at a discount acceptable to the Rating Agencies as will
not result in the downgrading or withdrawal of the ratings then assigned to the
Bonds by the Rating Agencies;
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provided, that no such instrument shall be a Permitted Investment if (i) such
instrument evidences the right to receive interest only payments with respect to
the obligations underlying such instrument or (ii) such instrument would require
the Issuer to register as an investment company under the Investment Company Act
of 1940, as amended.
"PERSON": Any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"PLEDGED ACCOUNTS": The Bond Account and the Distribution Account
(exclusive of any earnings on investments made with funds deposited in the
Distribution Account or the Bond Account).
"PLEDGED MORTGAGE SCHEDULE": The list of Pledged Mortgages (as from
time to time amended by the Master Servicer to reflect the addition of
Replacement Pledged Mortgages and the deletion of Deleted Pledged Mortgages
pursuant to the provisions of the Master Servicing Agreement) Granted to the
Trustee pursuant to the provisions hereof as part of the Trust Estate and from
time to time subject to this Agreement, attached hereto as Schedule I.
"PLEDGED MORTGAGES": Such of the mortgage loans Granted to the
Trustee pursuant to the provisions hereof as from time to time are held as a
part of the Trust Estate (including any REO Property), the mortgage loans so
held being identified in the Pledged Mortgage Schedule, notwithstanding
foreclosure or other acquisition of title of the related Mortgaged Property.
"POOL STATED PRINCIPAL BALANCE": As to any Payment Date, the
aggregate of the Stated Principal Balances of the Pledged Mortgages which were
Outstanding Pledged Mortgages on the Due Date in the month preceding the month
of such Payment Date.
"PREDECESSOR BONDS": With respect to any particular Bond of a Class,
every previous Bond of that Class evidencing all or a portion of the same debt
as that evidenced by such particular Bond; and, for the purpose of this
definition, any Bond authenticated and delivered under Section 2.08 in lieu of a
lost, destroyed or stolen Bond shall be deemed to evidence the same debt as the
lost, destroyed or stolen Bond.
"PREPAYMENT INTEREST SHORTFALL": As to any Payment Date, Pledged
Mortgage and Principal Prepayment, the amount, if any, by which one month's
interest at the related Mortgage Rate on such Principal Prepayment exceeds the
amount of interest paid in connection with such Principal Prepayment.
"PREPAYMENT PERIOD": As to any Payment Date, the [calendar month]
preceding the month of such Payment Date.
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"PRIMARY MORTGAGE INSURANCE POLICY": Each policy of primary mortgage
guaranty insurance or any replacement policy therefor with respect to any
Pledged Mortgage.
"PRINCIPAL PREPAYMENT": Any payment of principal by a Mortgagor on a
Pledged Mortgage that is received in advance of its scheduled Due Date and is
not accompanied by an amount representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"PRINCIPAL PREPAYMENT IN FULL": Any Principal Prepayment made by a
Mortgagor of the entire principal balance of a Pledged Mortgage.
"PROCEEDING": Any suit in equity, action at law or other judicial or
administrative proceeding.
"PROPRIETARY LEASE": As defined in Section 1 of the Master Servicing
Agreement.
"PROSPECTUS SUPPLEMENT": The Prospectus Supplement dated _________
___, 200__ relating to the Bonds.
"PURCHASE PRICE": With respect to any Pledged Mortgage required to
be purchased by the Master Servicer pursuant to Section 2(a)(ii) or 2(d)(iii) of
the Master Servicing Agreement or purchased at the option of the Master Servicer
pursuant to Section 3(n) of the Master Servicing Agreement, an amount equal to
the sum of (i) 100% of the unpaid principal balance of the Pledged Mortgage on
the date of such purchase, and (ii) accrued interest thereon at the applicable
Adjusted Net Mortgage Rate from the date through which interest was last paid by
the Mortgagor to the Due Date in the month in which the Purchase Price is to be
distributed to Bondholders.
"RATING AGENCY": Each of [ ] and [ ]. If either such organization or
a successor is no longer in existence, "Rating Agency" shall be such nationally
recognized statistical rating organization, or other comparable Person, as is
designated by the Issuer, notice of which designation shall be given to the
Trustee. References herein to a given rating or rating category of a Rating
Agency shall mean such rating category without giving effect to any modifiers.
"REALIZED LOSS": With respect to each Liquidated Pledged Mortgage,
an amount (not less than zero or more than the Stated Principal Balance of the
Pledged Mortgage) as of the date of such liquidation, equal to (i) the Stated
Principal Balance of the Liquidated Pledged Mortgage as of the date of such
liquidation, plus (ii) interest at the Net Mortgage Rate from the Due Date as to
which interest was last paid or advanced (and not reimbursed) to Bondholders up
to the Due Date in the month in which Liquidation Proceeds are required to be
distributed on the Stated Principal Balance of such Liquidated Pledged Mortgage
from time to
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time, minus (iii) the Liquidation Proceeds, if any, received during the month in
which such liquidation occurred, to the extent applied as recoveries of interest
at the Adjusted Net Mortgage Rate and to principal of the Liquidated Pledged
Mortgage. With respect to each Pledged Mortgage which has become the subject of
a Deficient Valuation, if the principal amount due under the related Mortgage
Note has been reduced, the difference between the principal balance of the
Pledged Mortgage outstanding immediately prior to such Deficient Valuation and
the principal balance of the Pledged Mortgage as reduced by the Deficient
Valuation. With respect to each Pledged Mortgage which has become the subject of
a Debt Service Reduction and any Payment Date, the amount, if any, by which the
principal portion of the related Scheduled Payment has been reduced.
"RECORD DATE": With respect to any Payment Date, the date on which
the Persons entitled to receive any payment of principal of, or interest on, any
Bonds (or notice of a payment in full of principal) due and payable on such
Payment Date are determined; such date shall be the last day of the month
preceding the month of such Payment Date.
"REDEMPTION DATE": Any Optional Redemption Date or any Payment Date
on which Bonds may be redeemed.
"REDEMPTION PRICE": With respect to any Class of Bonds to be
redeemed, an amount equal to 100% of the related Class Principal Amount of the
Bonds (including, in the case of the Subordinated Bonds, any unpaid Subordinated
Principal Carryover Shortfall) to be so redeemed, together with interest on such
amount at the applicable Bond Interest Rate through the last day of the month
immediately preceding the month in which such Redemption Date occurs, together
with any unpaid Class Interest Shortfalls.
"REFINANCING PLEDGED MORTGAGE": Any Pledged Mortgage originated in
connection with the refinancing of an existing mortgage loan.
"RELIEF ACT": The Soldiers' and Sailors' Civil Relief Act of 1940,
as amended.
"RELIEF ACT REDUCTIONS": With respect to any Payment Date and any
Pledged Mortgage as to which there has been a reduction in the amount of
interest collectible thereon for the most recently ended calendar month as a
result of the application of the Relief Act, the amount, if any, by which (i)
interest collectible on such Pledged Mortgage for the most recently ended
calendar month is less than (ii) interest accrued thereon for such month
pursuant to the Mortgage Note.
"REMIC": A "real estate mortgage investment conduit," as such term
is defined in the Code.
"REMIC PROVISIONS": Provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at Section
860A through 860G of
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Subchapter M of Chapter 1 of the Code, and related provisions, and regulations
promulgated thereunder, as the foregoing may be in effect from time to time.
"REO PROPERTY": A Mortgaged Property acquired by the Trustee through
foreclosure or deed-in-lieu of foreclosure in connection with a defaulted
Pledged Mortgage.
"REPLACEMENT PLEDGED MORTGAGE": A Mortgage Loan substituted by the
Master Servicer for a Deleted Mortgage Loan which must, on the date of such
substitution, as confirmed in a Request for Release, substantially in the form
of Exhibit C to the Master Servicing Agreement, (i) have a Stated Principal
Balance, after deduction of the principal portion of the Scheduled Payment due
in the month of substitution, not in excess of, and not more than 10% less than,
the Stated Principal Balance of the Deleted Mortgage Loan; (ii) be accruing
interest at a rate no lower than and not more than 1% per annum higher than,
that of the Deleted Mortgage Loan; (iii) have a Loan-to-Value Ratio no higher
than that of the Deleted Mortgage Loan; (iv) have a Mortgage Rate based upon the
same Index and a Margin at least equal to and not greater than 50 basis points
higher than that of the Deleted Mortgage Loan; (v) have a Mortgage Rate subject
to a Periodic Rate Cap and Maximum Rate that are no less than those applicable
to the Deleted Mortgage Loan; (vi) have Adjustment Dates that are no more or
less frequent than the Deleted Mortgage Loan; (vii) have a remaining term to
maturity no greater than (and not more than one year less than that of) the
Deleted Mortgage Loan; (viii) not be a Cooperative Loan unless the Deleted
Mortgage Loan was a Cooperative Loan; (ix) comply with each representation and
warranty set forth in Section 2(d)(ii) of the Master Servicing Agreement; and
(x) shall be accompanied by an Opinion of Counsel that such Replacement Pledged
Mortgage would not adversely affect the REMIC status of the Trust Estate or
would not otherwise be prohibited by this Indenture.
"REQUEST FOR RELEASE": The Request for Release submitted by the
Master Servicer to the Trustee, substantially in the form of Exhibits C and D to
the Master Servicing Agreement, as appropriate.
"RESPONSIBLE OFFICER": With respect to the Trustee, any officer in
the corporate trust department or similar group of the Trustee and also, with
respect to a particular corporate trust matter, any other officer to whom such
matter is referred because of his or her knowledge of and familiarity with the
particular subject.
"S&P": Standard & Poor's Ratings Group, a division of McGraw-Hill
Inc. For purposes of Section 11.04 the address for notices to S&P shall be
Standard & Poor's Ratings Group, 26 Broadway, 15th Floor, New York, New York
10004, Attention: Mortgage Surveillance Monitoring, or such other address as S&P
may hereafter furnish to the Issuer and the Master Servicer.
"SAIF": The Savings Association Insurance Fund, or any successor
thereto.
"SALE": The meaning specified in Section 5.18(a).
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"SCHEDULED PAYMENT": The scheduled monthly payment on a Pledged
Mortgage due on any Due Date allocable to principal and/or interest on such
Pledged Mortgage which, unless otherwise specified in the Master Servicing
Agreement, shall give effect to any related Debt Service Reduction and any
Deficient Valuation that affects the amount of the monthly payment due on such
Pledged Mortgage.
"SECURITIES ACT": The Securities Act of 1933, as amended.
"SENIOR BOND INTEREST RATE": With respect to any Interest Accrual
Period, the annual rate at which interest accrues on the Senior Bonds as
specified in such Bonds and in Section 2.03(c).
"SENIOR BONDS": The Class A-1 Bonds.
"SENIOR CLASS PRINCIPAL AMOUNT": As of any Payment Date, the
Original Senior Class Principal Amount reduced by all amounts previously
distributed to Holders of the Senior Bonds as payments of principal.
"SENIOR INTEREST PAYMENT AMOUNT": As to any Payment Date, the sum of
(i) one month's interest accrued during the related Interest Accrual Period at
the Senior Bond Interest Rate on the Senior Class Principal Amount, subject to
reduction pursuant to Section 2.03(d) and (ii) the sum of the amounts, if any,
by which the amount described in clause (i) above on each prior Payment Date
exceeded the amount actually distributed as interest on such prior Payment Dates
and not subsequently distributed.
"SENIOR INTEREST SHORTFALL": As to any Payment Date, the amount by
which the amount described in clause (i) of the definition of Senior Interest
Payment Amount exceeds the amount of interest actually paid on the Senior Bonds
on such Payment Date pursuant to such clause (i).
"SENIOR PERCENTAGE": As to any Payment Date, the percentage
equivalent of a fraction the numerator of which is the Senior Class Principal
Amount immediately prior to such date and the denominator of which is the sum of
(i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount,
(iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case
immediately prior to such date.
"SENIOR PRINCIPAL PAYMENT AMOUNT": As to each Payment Date, the
Senior Percentage of the sum of (a) the principal portion of the Scheduled
Payment due on each Pledged Mortgage [on the related Due Date], (b) the
principal portion of the purchase price of each Pledged Mortgage that was
purchased by Redwood Trust or another person pursuant to the Mortgage Loan
Purchase Agreement [or any optional purchase by the Master Servicer of a
defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution
Adjustment Amount in connection with any Deleted Pledged Mortgage received with
respect to such Payment Date,
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(d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of
principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages
received during the [calendar month] preceding the month of such Payment Date,
(e) with respect to each Pledged Mortgage that became a Liquidated Pledged
Mortgage during the [calendar month] preceding the month of such Payment Date,
the Stated Principal Balance of such Pledged Mortgage, and (f) all partial and
full principal prepayments by borrowers received during the related Prepayment
Period.
"SERVICER": Any person with which the Master Servicer has entered
into a Servicing Agreement for the servicing of all or a portion of the Pledged
Mortgages pursuant to Section 3(b) of the Master Servicing Agreement.
"SERVICER ADVANCE": The meaning ascribed to such term in Section
3(h)(iv) of the Master Servicing Agreement.
"SERVICING ADVANCES": All customary, reasonable and necessary "out
of pocket" costs and expenses incurred in the performance by the Master Servicer
of its servicing obligations, including, but not limited to, the cost of (i) the
preservation, restoration and protection of a Mortgaged Property, (ii) any
expenses reimbursable to the Master Servicer pursuant to Section 3(n) of the
Master Servicing Agreement and any enforcement or judicial proceedings,
including foreclosures, (iii) the management and liquidation of any REO Property
and (iv) compliance with the obligations under Section 3(l) of the Master
Servicing Agreement.
"SERVICING AGREEMENT": Any agreement between the Master Servicer and
related Servicer relating to servicing and/or administration of certain Pledged
Mortgages as provided in Section 3(b) of the Master Servicing Agreement.
"SERVICING DEFAULT": As defined in the Master Servicing Agreement.
"SERVICING FEE": As to each Pledged Mortgage and any Payment Date,
an amount equal to one month's interest at the applicable Servicing Fee Rate on
the Stated Principal Balance of such Pledged Mortgage.
"SERVICING FEE RATE": With respect to any Pledged Mortgage, the per
annum rate set forth in the Pledged Mortgage Schedule for such Pledged Mortgage.
"SERVICING OFFICER": Any officer of the Master Servicer involved in,
or responsible for, the administration and servicing of the Pledged Mortgages
whose name and facsimile signature appear on a list of servicing officers
furnished to the Trustee by the Master Servicer on the Closing Date pursuant to
the Master Servicing Agreement, as such list may from time to time be amended.
"STATED MATURITY": With respect to any and all Bonds
_________________.
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"STATED PRINCIPAL BALANCE": As to any Pledged Mortgage and Due Date,
the unpaid principal balance of such Pledged Mortgage as of such Due Date as
specified in the amortization schedule at the time relating thereto (before any
adjustment to such amortization schedule by reason of any moratorium or similar
waiver or grace period) after giving effect to any previous partial Principal
Prepayments and Liquidation Proceeds allocable to principal (other than with
respect to any Liquidated Pledged Mortgage) and to the payment of principal due
on such Due Date and irrespective of any delinquency in payment by the related
Mortgagor.
"SUBORDINATED BOND INTEREST RATE": With respect to any Interest
Accrual Period, the annual rate at which interest accrues on the Subordinated
Bonds as specified in such Bonds and in Section 2.03(c).
"SUBORDINATED BONDS": The Class B-1 and the Class B-2 Bonds.
"SUBORDINATED CLASS PRINCIPAL AMOUNT": As of any Payment Date, the
Original Class B-1 and Class B-2 Principal Amounts reduced by all amounts
previously distributed to Holders of the Subordinated Bonds as payments of
principal.
"SUBSTITUTION ADJUSTMENT AMOUNT": The meaning ascribed to such term
pursuant to Section 2(d)(iv) of the Master Servicing Agreement.
"SUCCESSOR MASTER SERVICER": A Person appointed by the Trustee who
succeeds either the Trustee or the Master Servicer, pursuant to the applicable
provisions of the Master Servicing Agreement.
"TRUST ESTATE": All money, instruments and other property subject or
intended to be subject to the lien of this Indenture for the benefit of the
Bondholders as of any particular time (including, without limitation, all
property and interests Granted to the Trustee), including all proceeds thereof.
"TRUST INDENTURE ACT" OR "TIA": The Trust Indenture Act of 1939, as
amended, as in force at the Closing Date, unless otherwise specifically
provided.
"TRUSTEE": ______________________________, a banking corporation
organized and existing under the laws of _________________________________, and
any Person succeeding as Trustee hereunder pursuant to Section 6.12 or any other
applicable provision hereof.
"TRUSTEE FEE": As to any Payment Date, an amount equal to
one-twelfth of the Trustee Fee Rate multiplied by the Pool Stated Principal
Balance with respect to such Payment Date.
"TRUSTEE FEE RATE": With respect to each Pledged Mortgage, the per
annum rate agreed upon in writing on or prior to the Closing Date by the Trustee
and the Issuer.
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<PAGE> 41
"TRUSTEE MORTGAGE FILE": With respect to each Pledged Mortgage, the
original documents and instruments relating thereto to be retained in the
custody and possession of the Trustee, as set forth and enumerated in Section
2(a) of the Master Servicing Agreement.
"UPPER-TIER INTEREST R": The sole class of "residual interest" in
the Upper-Tier REMIC and the beneficial ownership of which is evidenced by the
Class R-UT Certificate.
"UPPER-TIER REMIC": As described in Section 2.15.
"WITHDRAWAL DATE": The ___th day of each month, or if such day is
not a Business Day, the next preceding Business Day.
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<PAGE> 42
ARTICLE II
THE BONDS
SECTION 2.01. FORMS GENERALLY.
The Bonds and the Trustee's certificate of authentication shall be
in substantially the form required by this Article II, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange on which the Bonds
may be listed, or as may, consistently herewith, be determined by the officers
executing such Bonds, as evidenced by their execution thereof. Any portion of
the text of any Bond may be set forth on the reverse thereof with an appropriate
reference on the face of the Bond.
The Definitive Bonds may be produced in any manner determined by the
officers executing such Bonds, as evidenced by their execution thereof;
provided, however, that in the event the Bonds are listed on any securities
exchange, the Bonds shall be produced in accordance with the rules of any
securities exchange on which the Bonds may be listed.
SECTION 2.02. FORMS OF BONDS AND CERTIFICATE OF AUTHENTICATION.
(a) The form of Bond which is a Senior Bond is attached hereto as
Exhibit II.
(b) The form of Bond which is a Class B-1 Bond is attached hereto as
Exhibit III.
(c) The form of Bond which is a Class B-2 Bond is attached hereto as
Exhibit IV.
(d) The form of Class R Certificate which is a Class R-LT
Certificate is attached hereto as Exhibit V.
(e) The form of Class R Certificate which is a Class R-UT
Certificate is attached hereto as Exhibit VI.
(f) The form of the Trustee's certificate of authentication is as
follows:
"This is one of the Bonds referred to in the within mentioned
Indenture. as Trustee
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By:
Authorized Signatory"
(g) The form of assignment is as follows:
"FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto _________________________________________________________________
________________________________________________________________________________
(Please insert Social Security or other Identifying Number of Assignee)
________________________________________________________________________________
________________________________________________________________________________
(Please print or type name and address of Assignee)
________________________________________________________________________________
the within Bond of Sequoia Mortgage Trust 200_-_, and does hereby irrevocably
constitute and appoint __________ Attorney to transfer such Bond on the books of
the within named trust, with full power of substitution in the premises.
Dated: _________________________________________________________________________
Notice: The signature to this assignment must correspond with the
name as written upon the face of this Bond in every particular
without alteration or enlargement or any change whatever. The
signature must be guaranteed by a member of a signature guaranty
medallion program. Notarized or witnessed signatures are not
acceptable."
[(h) The Bonds shall have a Statement of Insurance printed thereon
or attached thereto which essentially sets forth the terms of the Bond Insurance
Policy.]
SECTION 2.03. BONDS ISSUABLE IN CLASSES; PROVISIONS WITH RESPECT TO PRINCIPAL
AND INTEREST PAYMENTS.
(a) General.
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The Bonds shall be designated generally as the Sequoia Mortgage
Trust _________, "Collateralized Mortgage Bonds" of the Issuer. Each Bond shall
bear upon the face thereof the designation so selected for the Class to which it
belongs.
Bonds of each Class shall constitute Book Entry Bonds as defined in
Section 2.13 hereof. The aggregate principal amount of Bonds that may be
authenticated and delivered under the Indenture is unlimited.
All of the Bonds shall be issued in the appropriate forms attached
as Exhibits hereto with such additions and completions as are appropriate for
each such Class.
The Class A-1 Bonds shall constitute the sole Class of Senior Bonds
and the Class B-1 Bonds and the Class B-2 Bonds shall constitute the sole
Classes of Subordinated Bonds.
The final installments of principal of the Classes of Bonds shall
have the Stated Maturity specified above. The principal of each Bond shall be
payable in installments ending no later than the Stated Maturity of the final
installment of the principal thereof unless the unpaid principal of such Bond
becomes due and payable at an earlier date by declaration of acceleration or
call for redemption or otherwise. All payments made with respect to any Bond
shall be applied first to the interest then due and payable on such Bond and
then to the principal thereof.
(b) Payments of Principal of and Interest on the Bonds.
On each Payment Date, the Trustee shall withdraw the Bond Payment
Amount from the Distribution Account and apply such funds to payments on the
Bonds in the following order of priority and, in each case, to the extent of
funds remaining:
(i) to the Senior Bonds, an amount allocable to interest equal to
the Senior Interest Payment Amount for such Payment Date;
(ii) to the Senior Bonds, an amount allocable to principal equal to
the Senior Principal Payment Amount for such Payment Date;
(iii) to the Class B-1 Bonds, an amount allocable to interest equal
to the Class B-1 Interest Payment Amount for such Payment Date;
(iv) to the Class B-1 Bonds, an amount allocable to principal equal
to the Class B-1 Principal Payment Amount for such Payment Date;
(v) to the Class B-2 Bonds, an amount allocable to interest equal to
the Class B-2 Interest Payment Amount for such Payment Date; and
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<PAGE> 45
(vi) to the Class B-2 Bonds, an amount allocable to principal to the
Class B-2 Principal Payment Amount for such Payment Date.
(vii) to the Class R Holders, pro rata, any remaining balance;
provided, however, that any balance remaining for distribution after the
exercise by the Class R-LT Holder of its option to terminate the Trust Estate
under Section 10.01 shall be distributed to the Class R-LT Holder; and provided
further that the aggregate amounts distributed on account of principal to the
Senior and Subordinated Bondholders (whether out of the Bond Distribution Amount
or the Bond Insurance Policy) shall not exceed the Original Senior Class, Class
B-1 and Class B-2 Amount, respectively.
(c) Calculation of the Bond Interest Rate.
(i) The Bond Interest Rate for the Senior Bonds (the "Senior Bond
Interest Rate") and any Interest Accrual Period will equal ______________;
(ii) The Bond Interest Rate for the Class B-1 Bonds (the "Class B-1
Bond Interest Rate") and any Interest Accrual Period will equal
___________________;
(iii) The Bond Interest Rate for the Class B-2 Bonds (the "Class B-2
Bond Interest Rate") and any Interest Accrual Period will equal _______________;
and
(iv) The Senior Interest Payment Amount, the Class B-1 Interest
Payment Amount and the Class B-2 Interest Payment Amount shall each be
calculated on the basis of a 360-day year of twelve 30-day months.
(d) Reduction of Interest Payment Amounts.
With respect to each Payment Date, the amounts referred to in clause
(i) of the definition of Senior Interest Payment Amount and clauses (i) and (ii)
of the definitions of Class B-1 Interest Payment Amount and Class B-2 Interest
Payment Amount, as applicable, for such Payment Date shall be reduced by the
applicable Class' pro rata share (based on the Interest Payment Amount for such
Class before reduction pursuant to this Section 2.03(d)) of Net Interest
Shortfalls.
(e) Pro Rata Payments.
All payments on the Bonds of any Class shall be made pro rata among
all Bonds of such Class.
(f) Payments to the Senior Bondholders provided for in (b) of this
Section 2.03 shall be paid, on each Payment Date after the Subordinated Class
Principal Amount and the Invested Amount have been reduced to zero and where the
Senior Interest Payment Amount and the Senior Principal Payment Amount exceed
the Available Funds, by the Bond Insurer.
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<PAGE> 46
SECTION 2.04. DENOMINATIONS.
Each Class of Book Entry Bonds shall be evidenced initially by a
single Bond representing the entire aggregate Class Principal Amount of such
Class of Bonds as of the Closing Date, beneficial ownership of which may be held
in denominations of $25,000 and increments of $1,000 in excess thereof for all
Bonds. All of the Book Entry Bonds shall be initially registered on the Bond
Register in the name of Cede & Co., the nominee of the Depository, and no
Beneficial Owner will receive a Definitive Bond representing such Beneficial
Owner's interest in the Book Entry Bonds, except in the event of Book Entry
Termination. The minimum beneficial ownership which may be held for a Class R-LT
or Class R-UT Certificate shall be 100% of the amount specified on the face
thereof.
SECTION 2.05. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
The Bonds shall be executed by an Authorized Officer of the Issuer.
The signature of such officer on the Bonds may be manual or facsimile.
Bonds bearing the manual or facsimile signature of an individual who
was at any time an Authorized Officer shall bind the Issuer, notwithstanding
that such individual has ceased to hold such office prior to the authentication
and delivery of such Bonds or did not hold such office at the date of such
Bonds.
At any time and from time to time after the execution and delivery
of this Indenture, the Issuer may deliver Bonds executed on behalf of the Issuer
to the Trustee for authentication; and the Trustee shall authenticate and
deliver such Bonds as in this Indenture provided and not otherwise.
Each Bond authenticated on the Closing Date shall be dated the
Closing Date. All other Bonds which are authenticated after the Closing Date for
any other purpose hereunder shall be dated the date of their authentication.
No Bond shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose, unless there appears on such Bond a
certificate of authentication substantially in the form provided for herein
executed by the Trustee or by any Authenticating Agent by the manual signature
of one of its authorized officers or employees, and such certificate upon any
Bond shall be conclusive evidence, and the only evidence, that such Bond has
been duly authenticated and delivered hereunder.
SECTION 2.06. TEMPORARY BONDS.
So long as the Book Entry Bonds are held by the Depository for the
Participants in book-entry form, they may be typewritten or in any other form
acceptable to the Issuer, the Trustee and the Depository. At any time during
which the Book Entry Bonds are not held by the
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<PAGE> 47
Depository for the Participants in book-entry form, the Definitive Bonds shall
be lithographed or printed with steel engraved borders.
Pending the preparation of Definitive Bonds, the Issuer may execute,
and upon Issuer Order the Trustee shall authenticate and deliver, temporary
Bonds which are printed, lithographed, typewritten, mimeographed or otherwise
produced, in any authorized denomination, substantially of the tenor of the
definitive Bonds in lieu of which they may be so issued and with such variations
as the officers executing such Bonds may determine, as evidenced by their
execution of such Bonds.
If temporary Bonds are issued, the Issuer will cause definitive
Bonds to be prepared without unreasonable delay. After the preparation of
definitive Bonds, the temporary Bonds shall be exchangeable for definitive Bonds
upon surrender of the temporary Bonds at the office or agency of the Issuer to
be maintained as provided in Section 3.02, without charge to the Holder. Upon
surrender or cancellation of any one or more temporary Bonds, the Issuer shall
execute and the Trustee shall authenticate and deliver and exchange therefor a
like principal amount of definitive Bonds of the same Class and of authorized
denominations. Until so exchanged, the temporary Bonds shall in all respects be
entitled to the same benefits under this Indenture as Definitive Bonds of the
same Class.
SECTION 2.07. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE.
(a) The Issuer shall cause to be kept a register (the "Bond
Register") in which, subject to such reasonable regulations as it may prescribe,
the Issuer shall provide for the registration of Bonds and the registration of
transfers of Bonds. The Trustee is hereby initially appointed "Bond Registrar"
for the purpose of registering Bonds and transfers of Bonds as herein provided.
Upon any resignation of any Bond Registrar appointed by the Issuer, the Issuer
shall promptly appoint a successor or, in the absence of such appointment, shall
assume the duties of Bond Registrar.
(b) At any time the Trustee is not also the Bond Registrar, the
Trustee shall be a co-Bond Registrar. The Issuer shall cause each co-Bond
Registrar to furnish the Bond Registrar, promptly after each authentication of a
Bond by it, appropriate information with respect thereto for entry by the Bond
Registrar into the Bond Register. If the Trustee shall at any time not be
authorized to keep and maintain the Bond Register, the Trustee shall have the
right to inspect such Bond Register at all reasonable times and to rely
conclusively upon a certificate of the Person in charge of the Bond Register as
to the names and addresses of the Holders of the Bonds and the principal amounts
and numbers of such Bonds so held.
(c) Upon surrender for registration of transfer of any Bond at the
office or agency of the Issuer to be maintained as provided in Section 3.02, the
Issuer shall execute, and the Trustee shall authenticate and deliver, in the
name of the designated transferee or transferees,
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<PAGE> 48
one or more new Bonds of any authorized denominations and of a like aggregate
principal amount and Class.
(d) At the option of the Holder, Bonds may be exchanged for other
Bonds of any authorized denominations, and of a like aggregate initial principal
amount and Class, upon surrender of the Bonds to be exchanged at such office or
agency. Whenever any Bonds are so surrendered for exchange, the Issuer shall
execute, and the Trustee shall authenticate and deliver, the Bonds which the
Bondholder making the exchange is entitled to receive.
(e) All Bonds issued upon any registration of transfer or exchange
of Bonds shall be the valid obligations of the Issuer, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the Bonds surrendered
upon such registration of transfer or exchange.
(f) Every Bond presented or surrendered for registration of transfer
or exchange shall be duly endorsed, or be accompanied by a written instrument of
transfer in form satisfactory to the Trustee duly executed by the Holder thereof
or his attorney duly authorized in writing.
(g) No service charge shall be made for any registration of transfer
or exchange of Bonds, but the Issuer may require payment of a sum sufficient to
cover any tax or other governmental charge as may be imposed in connection with
any registration of transfer or exchange of Bonds, other than exchanges pursuant
to Section 2.08 not involving any transfer.
(h) No transfer of a Class B Bond or a Class R-LT or Class R-UT
Certificate shall be made unless such transfer is made pursuant to an effective
registration statement or in accordance with an exemption from the requirements
under the Securities Act of 1933, as amended (the "Act"). If such a transfer is
to be made in reliance upon an exemption from the Act, (i) the Trustee shall, if
not otherwise directed by the Depositor, require a written Opinion of Counsel
acceptable to and in form and substance satisfactory to the Trustee that such
transfer may be made pursuant to an exemption, describing the applicable
exemption and the basis therefor, from the Act or is being made pursuant to the
Act, which Opinion of Counsel shall not be an expense of the Trustee, the
Depositor or the Master Servicer, and (ii) the Trustee shall require the
transferee to execute a certification, substantially in the form of Exhibit IX
hereto, acceptable to and in form and substance satisfactory to the Trustee
setting forth the facts surrounding such transfer; provided that such Opinion of
Counsel shall not be required in the case of transfers by or to the Depositor,
Redwood Trust, Inc., RWT Holdings or any of their wholly-owned subsidiaries.
Such Opinion of Counsel and certification shall not be an expense of the
Trustee, the Depositor or the Master Servicer. The Trustee, the Master Servicer
and the Depositor may, without the consent of any Bondholder, add provisions
(which shall include a form of certificate to be attached hereto as an exhibit
that must be delivered by the proposed transferee) to this Section 2.07(h) to
permit transfers pursuant to Rule 144A of the Securities and Exchange
Commission, in which case transfers pursuant to such provisions shall not
require an Opinion of Counsel.
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<PAGE> 49
(i) No transfer (exclusive of any transfer to a Depository or a
securitization trustee) of a Class B Bond or a Class R-LT or Class R-UT
Certificate shall be made unless the Trustee shall have received either (i) a
representation letter (substantially in the form attached hereto as Exhibit X)
from the transferee of such Class R Certificate, acceptable to and in form and
substance satisfactory to the Trustee, to the effect that such transferee is not
an employee benefit plan or other retirement plan or arrangement subject to
Section 406 of ERISA or Section 4975 of the Code, nor a Person acting on behalf
of any such plan or arrangement or acquiring such Class R Certificate with funds
of such a plan or arrangement (including without limitation any insurance
company using funds that may constitute "plan assets"), which representation
letter shall not be an expense of the Trustee, the Depositor or the Master
Servicer, or (ii) in the case of any such Class R Certificate presented for
registration in the name of an employee benefit plan or other retirement plan or
arrangement subject to ERISA or Section 4975 of the Code (or comparable
provisions of any subsequent enactments), or a trustee of any such plan or
arrangement, an Opinion of Counsel satisfactory to the Trustee to the effect
that the purchase or holding of such Class R Certificate is permissible under
applicable law, will not constitute or result in a non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
Trustee, the Depositor or the Master Servicer to any obligation in addition to
those undertaken in this Indenture, which Opinion of Counsel shall not be an
expense of the Trustee, the Depositor or the Master Servicer.
(j) Notwithstanding anything to the contrary contained herein,
unless and until the Trustee shall have received an Opinion of Counsel that is
Independent, satisfactory in form and substance to the Trustee, to the effect
that the absence of the transfer restrictions contained in this Section 2.07(j)
would not result in the imposition of federal income tax upon the Trust Estate
or cause the Trust Estate to fail to qualify as two REMICs, no transfer, sale or
other disposition of the Class R-LT or Class R-UT Certificate (including a
beneficial interest therein) may be made without the express written consent of
the Trustee.
(k) As a condition to the granting of the consent referred to in
Section 2.07(j), prior to the transfer, sale or other disposition of the Class
R-LT or Class R-UT Certificate, the Trustee shall require that the proposed
transferee deliver to the Trustee an affidavit stating that as of the date of
such transfer (i) such transferee is not and has no intention of becoming either
(A) the United States, any state or political subdivision thereof, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing (other than an instrumentality that is a corporation all of
whose activities are subject to tax under the Code and, except in the case of
the FHLMC, a majority of the board of directors of which corporation is not
selected by the United States, any state or political subdivision thereof), (B)
any organization that is exempt from any tax imposed by Chapter 1 of Subtitle A
of the Code, other than (x) a tax-exempt farmers' cooperative within the meaning
of section 521 of the Code or (y) an organization that is subject to the tax
imposed by section 511 of the Code on "unrelated business income" or (C) a
corporation operating on a cooperative basis that is engaged in furnishing
electric energy or providing telephone service to persons in rural areas (within
the meaning of section 1381(a)(2)(C) of the Code) (any Person described in (A),
(B), or (C) being
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referred to herein as a "Disqualified Organization"), (ii) such transferee is
not acquiring such Class R Certificates as an agent, broker, nominee, or
middleman for a Disqualified Organization and (iii) such transferee is not a
Non-U.S. Person. A Responsible Officer of the Trustee shall not grant the
consent referred to in Section 2.07(j) if it has actual knowledge that any
statement made in the affidavit issued pursuant to the preceding sentence is not
true. Notwithstanding any transfer, sale or other disposition of such Class R
Certificates to a Disqualified Organization or Non-U.S. Person, such transfer,
sale or other disposition shall be deemed to be of no legal force or effect
whatsoever and such Disqualified Organization or Non-U.S. Person shall not be
deemed to be a Holder of such Class R Certificates for any purpose hereunder,
including, but not limited to, the receipt of distributions on such Class R
Certificates. If any purported transfer shall be in violation of the provisions
of Section 2.07(j), then the prior Holder of such Class R Certificates shall,
upon discovery that the transfer of such Class R Certificates was not in fact
permitted in Section 2.07(j), be restored to all rights as a Holder thereof
retroactive to the date of the purported transfer of such Class R Certificates.
The Trustee, the Depositor and the Master Servicer shall be under no liability
to any Person for any registration or transfer of a Class R Certificate that is
not permitted by Section 2.07(j) or for the Payment Agent making payments due on
any such Class R Certificate to the purported Holder thereof or taking any other
action with respect to such purported Holder under the provisions of this
Indenture so long as the transfer was registered under the written certification
of the Trustee as described in Section 2.07(j). The prior Holder shall be
entitled to recover from any purported Holder of any such Class R Certificate
that was in fact not a permitted transferee under Section 2.07(j) at the time it
became a Holder all payments made on such Class R Certificate; provided that
neither the Depositor, the Master Servicer nor the Trustee shall be responsible
for such recovery if they otherwise made a good faith effort to comply with this
Section 2.07(k). Each such Class R Holder, by the acceptance of a Class R-LT or
Class R-UT Certificate, shall be deemed for all purposes to have consented to
the provisions of Section 2.07(j) and to any amendment of this Indenture deemed
necessary by counsel of the Trustee, as evidenced by an Opinion of Counsel, to
ensure that either such Class R Certificate is not transferred to a Disqualified
Organization or Non-U.S. Person and that any transfer of such Class R
Certificate will not cause the imposition of a tax upon the Trust Estate or
cause the Trust Estate to fail to qualify as two REMICs. The restrictions on
transfer of either such Class R Certificate will cease to apply and be void upon
receipt by the Trustee of the Opinion of Counsel as described in Section 2.07(j)
or shall be modified as indicated in such Opinion of Counsel. If any Person that
is not permitted to acquire any beneficial interest in a Class R-LT or Class
R-UT Certificate under this Section 2.07(k) acquires any beneficial interest in
a Class R-LT or Class R-UT Certificate in violation of the restrictions in this
Section 2.07(k), then the Trustee, based on information provided to it by the
Master Servicer and/or the Depositor, will provide to the Internal Revenue
Service, and to the persons specified in Section 860E(e)(3) and (6) of the Code,
information needed to compute the tax imposed under Section 860E(e)(5) of the
Code on transfers of residual interests to disqualified organizations. The
Trustee shall be entitled to be reimbursed by such Person for the cost of
providing such information.
SECTION 2.08. MUTILATED, DESTROYED, LOST OR STOLEN BONDS.
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If (1) any mutilated Bond is surrendered to the Trustee or the
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Bond and (2) there is delivered to the Trustee such security or indemnity
as may be required by the Trustee to save the Issuer and the Trustee harmless,
then, in the absence of notice to the Issuer or the Trustee that such Bond has
been acquired by a bona fide purchaser, the Issuer shall execute and upon its
request the Trustee shall authenticate and deliver, in exchange for or in lieu
of any such mutilated, destroyed, lost or stolen Bond, a new Bond or Bonds of
the same tenor, aggregate initial principal amount and Class bearing a number
not contemporaneously outstanding. If, after the delivery of such new Bond, a
bona fide purchaser of the original Bond in lieu of which such new Bond was
issued presents for payment such original Bond, the Issuer and the Trustee shall
be entitled to recover such new Bond from the person to whom it was delivered or
any person taking therefrom, except a bona fide purchaser, and shall be entitled
to recover upon the security or indemnity provided therefor to the extent of any
loss, damage, cost or expenses incurred by the Issuer or the Trustee in
connection therewith. If any such mutilated, destroyed, lost or stolen Bond
shall have become or shall be about to become due and payable, or shall have
become subject to redemption in full, instead of issuing a new Bond, the Issuer
may pay such Bond without surrender thereof, except that any mutilated Bond
shall be surrendered.
Upon the issuance of any new Bond under this Section, the Issuer may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other reasonable expenses
(including the fees and expenses of the Trustee) connected therewith.
Every new Bond issued pursuant to this Section in lieu of any
destroyed, lost or stolen Bond shall constitute an original additional
contractual obligation of the Issuer, whether or not the destroyed, lost or
stolen Bond shall be at any time enforceable by anyone, and shall be entitled to
all the benefits of this Indenture equally and proportionately with any and all
other Bonds duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Bonds.
SECTION 2.09. PAYMENTS OF PRINCIPAL AND INTEREST.
(a) Each payment of principal of and interest on a Book Entry Bond
shall be paid to the Depository, which shall credit the amount of such payments
to the accounts of its Depository Participants in accordance with its normal
procedures. Each Depository Participant shall be responsible for disbursing such
payments to the Beneficial Owners of the Book Entry Bonds that it represents and
to each indirect participating brokerage firm (a "brokerage firm" or "indirect
participating firm") for which it acts as agent. Each brokerage firm shall be
responsible for disbursing funds to the Beneficial Owners of the Book Entry
Bonds that it represents. All such credits and disbursements are to be made by
the Depository and the Depository Participants
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in accordance with the provisions of the Bonds. Neither the Trustee, the Bond
Registrar nor the Issuer shall have any responsibility for such credits and
disbursements.
Each payment of principal of and interest on a Definitive Bond shall
be paid to the Person in whose name such Bond (or one or more Predecessor Bonds)
is registered at the close of business on the Record Date or Optional Redemption
Record Date, for such Payment Date or Optional Redemption Date, by check mailed
to such Person's address as it appears in the Bond Register on such Record Date
or the Optional Redemption Record Date, except for the final installment of
principal payable with respect to such Bond, which shall be payable as provided
in Section 2.09(b).
All payments of principal of and interest on the Bonds shall be made
only from the Trust Estate and any other assets of the Issuer, and each Holder
of the Bonds, by its acceptance of the Bonds, agrees that it will have recourse
solely against such Trust Estate and such other assets of the Issuer and that
neither the Owner Trustee in its individual capacity, the Owner nor any of their
respective partners, beneficiaries, agents, officers, directors, employees or
successors or assigns shall be personally liable for any amounts payable, or
performance due, under the Bonds or this Indenture.
(b) All reductions in the principal amount of a Bond (or one or more
Predecessor Bonds) effected by payments of installments of principal made on any
Payment Date or Optional Redemption Date shall be binding upon all Holders of
such Bond and any Bond issued upon transfer thereof or in exchange therefor or
in lieu thereof. The final installment of principal of each Bond (including the
Redemption Price of any Bond called for optional redemption, if such optional
redemption will result in payment of the entire unpaid principal amount of any
such Bond) shall be payable only upon presentation and surrender thereof on or
after the Payment Date or Optional Redemption Date therefor at the office or
agency of the Issuer maintained by it for such purpose in the Borough of
Manhattan, the City of New York, State of New York, pursuant to Section 3.02.
Whenever the Trustee expects that the entire remaining unpaid principal amount
of any Bond will become due and payable on the next Payment Date, it shall, no
later than five days prior to such Payment Date, mail or cause to be mailed to
the Holder of each Bond as of the close of the business on such otherwise
applicable Record Date a notice to the effect that:
(i) the Trustee expects that funds sufficient to pay such final
installment will be available in the Distribution Account on such Payment Date;
and
(ii) if such funds are available, such final installment will be
payable on such Payment Date, but only upon presentation and surrender of such
Bond at the office or agency of the Issuer maintained for such purpose pursuant
to Section 3.02 (the address of which shall be set forth in such notice).
Notices in connection with optional redemptions of Bonds shall be
mailed to Holders in accordance with Section 10.02.
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SECTION 2.10. PERSONS DEEMED OWNERS.
Prior to due presentment for registration of transfer of any Bond,
the Issuer, [the Bond Insurer], the Trustee, any Agent and any other agent of
the Issuer, [the Bond Insurer], or the Trustee shall treat the Person in whose
name any Bond is registered as the owner of such Bond (a) on the applicable
Record Date or Optional Redemption Record Date for the purpose of receiving
payments of the principal of, and interest on, such Bond and (b) on any other
date for all other purposes whatsoever, whether or not such Bond is overdue, and
neither the Issuer, [the Bond Insurer], the Trustee, any Agent nor any other
agent of the Issuer or the Trustee shall be affected by notice to the contrary.
SECTION 2.11. CANCELLATION.
All Bonds surrendered for payment, registration of transfer,
exchange or redemption shall, if surrendered to any Person other than the
Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The
Issuer may at any time deliver to the Trustee for cancellation any Bond
previously authenticated and delivered hereunder which the Issuer may have
acquired in any manner whatsoever, and all Bonds so delivered shall be promptly
cancelled by the Trustee. No Bonds shall be authenticated in lieu of or in
exchange for any Bonds cancelled as provided in this Section, except as
expressly permitted by this Indenture. All cancelled Bonds held by the Trustee
shall be held by the Trustee in accordance with its standard retention policy,
unless the Issuer shall direct by an Issuer Order that they be destroyed or
returned to it.
SECTION 2.12. AUTHENTICATION AND DELIVERY OF BONDS.
The Bonds may be executed by the Issuer and delivered to the Trustee
for authentication, and thereupon the same shall be authenticated and delivered
by the Trustee, upon Issuer Request and upon receipt by the Trustee of the
following:
(a) an Issuer Order authorizing the execution, authentication and
delivery of the Bonds and specifying the Classes, the Stated Maturity of the
final installment of principal, the principal amount and the Bond Interest Rate,
of each Class of such Bonds to be authenticated and delivered;
(b) an Issuer Order authorizing the execution and delivery of this
Indenture;
(c) One or more Opinions of Counsel addressed to the Trustee,
complying with the requirements of Section 11.01, reasonably satisfactory in
form and substance to the Trustee, and to the effect that:
(i) all instruments furnished to the Trustee by the Issuer
pursuant to this Section 2.12 in connection with the Bonds conform in all
material respects to the requirements of
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this Indenture and constitute all the documents required to be delivered under
this Section 2.12 for the Trustee to authenticate and deliver the Bonds (counsel
rendering such opinion or opinions need not express any opinion as to whether
the Pledged Mortgages Granted to the Trustee as security conform to the
requirements of this Indenture);
(ii) all conditions precedent provided for in this Indenture
relating to the authentication and delivery of the Bonds have been complied with
in all material respects (counsel rendering such opinion or opinions need not
express any opinion as to the matters set forth in the parenthetical clause at
the end of paragraph (i) above or as to whether the amount of cash or other
collateral, if any, delivered to the Trustee pursuant to any subsection of this
Section 2.12 is the requisite amount);
(iii) the Bank has corporate power to execute and deliver the
Deposit Trust Agreement, the Deposit Trust Agreement authorizes the Issuer to
execute and deliver the Bonds and this Indenture, and to issue the Bonds, and
the Owner Trustee has duly taken all necessary action under the Deposit Trust
Agreement for those purposes;
(iv) the Issuer is a statutory business trust created under
the laws of the State of Delaware and duly authorized by the Deposit Trust
Agreement;
(v) assuming due authorization, execution and delivery thereof
by the Trustee, this Indenture will be the legally valid and binding obligation
of the Issuer, enforceable against the Issuer in accordance with its terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws and equitable principles relating to or limiting creditors'
rights generally and such counsel need express no opinion as to the availability
of equitable remedies;
(vi) the Bonds, when issued, delivered, authenticated and paid
for, will be the legally valid and binding obligations of the Issuer, entitled
to the benefits of this Indenture, and enforceable against the Issuer in
accordance with their terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws and equitable principles relating to
or limiting creditors' rights generally and such counsel need express no opinion
as to the availability of equitable remedies;
(vii) assuming due execution and delivery thereof by the
Trustee and by the Master Servicer, the Master Servicing Agreement constitutes
the legally valid and binding obligation of the Master Servicer and of the
Issuer, respectively, enforceable against the Master Servicer and the Issuer in
accordance with its terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws and equitable principles relating to
or limiting creditors' rights generally and such counsel need express no opinion
as to the availability of equitable remedies;
(viii) the Mortgage Notes included in the Original Pledged
Mortgages have been duly and validly assigned, delivered and pledged to the
Trustee to the extent
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contemplated by this Indenture, and this Indenture together with such
assignment, delivery and pledge to the Trustee, creates as security for the
Bonds a valid and perfected security interest of first priority in such Mortgage
Notes, except to the extent limited in the event (A) the Trustee relinquishes
possession of any such Mortgage Note, (B) the Depositor, the Issuer, the Master
Servicer or any Servicer transfers any such Mortgage Note or the related
Mortgage to a bona fide purchaser for value without notice prior to notification
to the Mortgagor of the assignment to the Trustee of such Mortgage Note or due
recordation of the Assignment to the Trustee of the related Mortgage or (C) the
Depositor, the Issuer, the Master Servicer or any Servicer discharges any such
Mortgage Note or the related Mortgage prior to such notification or recordation;
the Mortgages delivered to the Trustee with the Original Mortgage Notes will
continue to secure the Mortgage Notes included in the Original Pledged
Mortgages, as though, and to the same extent as if, such Mortgage Notes had not
been assigned, delivered and pledged; and it is not necessary to record or file
this Indenture or to take any other action, except as set forth above, in order
to make effective the lien and security interest created by this Indenture in
the Mortgage Notes included in the Original Pledged Mortgages;
(ix) this Indenture has been duly qualified under the TIA; and
(x) the Issuer's registration statement with respect to the
Bonds has become effective under the Securities Act of 1933, as amended, and, to
the best of such counsel's knowledge, no stop order suspending the effectiveness
of such registration statement has been issued and is in effect under such act
and no proceedings for that purpose have been instituted or are pending under
such act.
In rendering the opinions set forth above, such counsel may rely
upon officers' certificates of the Depositor, the Owner Trustee, the Issuer, any
Servicer, the Master Servicer and the Trustee, without independent confirmation
or verification, as to the following matters and as to such other matters as
shall be reasonably acceptable to the Trustee: (A) the accuracy of the
descriptions of the Mortgage Notes included in the Original Pledged Mortgages
and the conformity thereof to the descriptions in this Indenture, (B) the
ownership by Sequoia Mortgage Funding Corporation, the Depositor and the Issuer
of such Mortgage Notes free and clear of any lien, claim, charge or interest of
any kind of any third party, (C) the physical delivery of such Mortgage Notes to
the Trustee, (D) the absence of any evidence appearing on any such Mortgage Note
of any right or interest inconsistent with the opinions expressed, and (E) the
form of endorsement approved by such counsel having been made on each such
Mortgage Note. In rendering the opinions set forth above, such counsel need
express no opinion as to (A) the perfection of the security interest in any
collateral not governed by Article 9 of the Uniform Commercial Code of the State
of California, (B) the existence of, or the priority of the security interest
created by the Indenture against, any liens or other interests which arise by
operation of law and which do not require any filing or similar action in order
to take priority over a perfected security interest or (C) the priority of the
security interest created by this Indenture with respect to any claim or lien in
favor of the United States or any agency or instrumentality thereof (including
federal tax liens and liens arising under Title IV of the Employee Retirement
Income Security Act of 1974, as amended).
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(d) an Officers' Certificate complying with the requirements of
Section 11.01 and stating that:
(i) the Issuer is not in Default under this Indenture and the
issuance of the Bonds will not result in any breach of any of the terms,
conditions or provisions of, or constitute a default under, the Deposit Trust
Agreement or any indenture, mortgage, deed of trust or other agreement or
instrument to which the Issuer is a party or by which it is bound, or any order
of any court or administrative agency entered in any proceeding to which the
Issuer is a party or by which it may be bound or to which it may be subject, and
that all conditions precedent provided in this Indenture relating to the
authentication and delivery of the Bonds have been complied with;
(ii) the Issuer is the owner of each Original Pledged
Mortgage, free and clear of any lien, security interest or charge, has not
assigned any interest or participation in any such Pledged Mortgage (or, if any
such interest or participation has been assigned, it has been released) and has
the right to Grant each such Original Pledged Mortgage to the Trustee;
(iii) the information set forth in the Pledged Mortgage
Schedule attached as Schedule A to this Indenture is true and correct in all
material respects as of the Closing Date;
(iv) the Issuer has Granted to the Trustee all of its right,
title and interest in each Pledged Mortgage;
(v) as of the Closing Date, no lien in favor of the United
States described in Section 6321 of the Code, or lien in favor of the Pension
Benefit Guaranty Corporation described in Section 4068(a) of the Employee
Retirement Income Security Act of 1974, as amended, has been filed as described
in subsections 6323(f) and 6323(g) of the Code upon any property belonging to
the Issuer; and (vi) attached thereto is a true and correct copy of letters
signed by the Rating Agencies confirming that the Senior Bonds have been rated
AAA by [ ] and [ ] and that the Class B-1 Bonds have been rated [ ] by [ ].
(e) An executed counterpart of the Master Servicing Agreement.
(f) A certificate of one or more Independent Persons, whose regular
business activity includes valuing securities and mortgage loans similar to the
Original Pledged Mortgages, of the fair value of the Original Pledged Mortgages,
which fair value, as so certified, will be equal to or in excess of the sum of
the Original Senior Class Principal Amount and the Original Subordinated Class
Principal Amount, and which determination of fair value shall be as of a date
not earlier than three Business Days prior to the Closing Date.
SECTION 2.13. MATTERS RELATING TO BOOK ENTRY BONDS.
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(a) If the Bonds are listed on any stock exchange at any time after
the Closing Date, the Issuer shall, if required as a condition to such listing,
prepare and deliver to the Trustee Bonds in substantially the same form as the
Bonds issued on the Closing Date, but with such other additional features and
such modifications, if any, as shall be necessary or appropriate in order to
comply with the requirements of such stock exchange for the listing of the Bonds
on such exchange. Bonds in the form issued on the Closing Date shall thereafter
be exchangeable for Bonds in such revised form to the same extent as temporary
Bonds are exchangeable for Definitive Bonds pursuant to Section 2.06.
(b) Each Class of Book Entry Bonds will be issued in the form of a
single typewritten bond certificate (each, a "DTC Certificate") to be delivered
to the Depository by the Issuer substantially in the respective forms for each
such Class attached as Exhibits hereto. The DTC Certificate for each such Class
of Book Entry Bonds shall be initially registered on the Bond Register in the
name of the nominee of such Depository and no Beneficial Owner will receive a
certificate representing its interests in any Class of Book Entry Bonds except
in the event that the Trustee issues Definitive Bonds, as provided in Section
2.14. Pursuant to the Letter Agreement, while each Class of the Book Entry Bonds
remains outstanding and such Depository remains the Holder, it will agree to
make book-entry transfers among the Depository Participants and receive and
transmit payments of principal and interest on the Book Entry Bonds until and
unless the Trustee authenticates and delivers Definitive Bonds to the Beneficial
Owners of the Book Entry Bonds or their nominees, as described in Section 2.14.
(c) Prior to Book Entry Termination, each Class of Book Entry Bonds
will remain registered in the name of the Depository or its nominee and at all
times: (i) registration of the Book Entry Bonds may not be transferred by the
Trustee or the Bond Registrar except to another Depository; (ii) the Depository
shall maintain book-entry records with respect to the Beneficial Owners and with
respect to ownership and transfers of such Book Entry Bonds; (iii) ownership and
transfers of registration of the Book Entry Bonds on the books of the Depository
shall be governed by applicable rules established by the Depository; (iv) the
Depository may collect its usual and customary fees, charges and expenses from
its Depository Participants; (v) the Trustee shall deal with the Depository,
Depository Participants and interest participating firms as representatives of
the Beneficial Owners of the Book Entry Bonds for purposes of exercising the
rights of holders under the Indenture, and requests and directions for and votes
of such representatives shall not be deemed to be inconsistent if they are made
with respect to different Beneficial Owners; and (vi) the Trustee may rely and
shall be fully protected in relying upon information furnished by the Depository
with respect to its Depository Participants and furnished by the Depository
Participants with respect to indirect participating firms and Persons shown on
the books of such indirect participating firms as direct or indirect Beneficial
Owners.
All transfers by Beneficial Owners of Book Entry Bonds shall be made
in accordance with the procedures established by the Depository Participant or
brokerage firm representing such Beneficial Owner. Each Depository Participant
shall only transfer Book Entry Bonds of Beneficial Owners it represents or of
brokerage firms for which it acts as agent in accordance with the Depository's
normal procedures.
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SECTION 2.14. TERMINATION OF BOOK ENTRY SYSTEM.
(a) The book entry system through the Depository with respect to any
Class of Book Entry Bonds may be terminated upon the happening of any of the
following:
(i) The Depository or the Issuer advises the Trustee in writing that
the Depository is no longer willing or able to properly discharge its
responsibilities as Depository and the Issuer is unable to locate a qualified
successor clearing agency satisfactory to the Trustee and the Issuer;
(ii) The Issuer at its option advises the Trustee in writing that it
elects to terminate the book entry system through the Depository; or
(iii) After the occurrence of an Event of Default (at which time the
Trustee shall use all reasonable efforts to promptly notify each Beneficial
Owner through the Depository of such Event of Default when such notice shall be
given pursuant to Section 6.02), the Beneficial Owners of a majority in
aggregate Class Principal Amount of the Book Entry Bonds together advise the
Trustee and the Depository through the Depository Participants in writing that
the continuation of a book entry system through the Depository is no longer in
the best interests of the Beneficial Owners.
(b) Upon the occurrence of any event described in subsection (a)
above, the Trustee shall notify all Beneficial Owners, through the Depository,
of the occurrence of any such event and of the availability of Definitive Bond
certificates to Beneficial Owners requesting the same, in an aggregate Class
Principal Amount representing the interest of each, making such adjustments and
allowances as it may find necessary or appropriate as to accrued interest, if
any, and previous calls for redemption. Definitive Bond certificates shall be
issued only upon surrender to the Trustee of the Book Entry Bond by the
Depository, accompanied by registration instructions for the Definitive Bond
certificates. Neither the Issuer nor the Trustee shall be liable for any delay
in delivery of such instructions and may conclusively rely on, and shall be
protected in relying on, such instructions. Upon issuance of the Definitive Bond
certificates, all references herein to obligations imposed upon or to be
performed by the Depository shall cease to be applicable and the provisions
relating to Definitive Bonds shall be applicable.
SECTION 2.15. REMIC ELECTIONS
The Depositor hereby directs the Trustee to sign two initial tax
returns which shall cause the Trust Estate to elect for federal income tax
purposes to consist of two REMICs. This Indenture shall be construed so as to
carry out the intention of this Indenture that the Lower-Tier REMIC shall
consist of all of the assets constituting the Trust Estate and shall be
evidenced by the Lower-Tier Regular Interests (which will be uncertificated and
will represent the "regular interests" in the Lower-Tier REMIC for purposes of
the REMIC Provisions) and the Lower-Tier Interest R (which will represent the
single "residual interest" in the Lower-Tier REMIC for
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purposes of the REMIC Provisions). In addition, the Upper-Tier REMIC at all
times prior to the date on which final payment is made (or made available on
demand) to the Holders of any [Class A and Class B] Bonds shall consist of the
Lower-Tier Regular Interests and shall be evidenced by the [Class A and Class B]
Bonds (which will represent the "regular interests" in the Upper-Tier REMIC for
purposes of the REMIC Provisions) and the Upper-Tier Interest R (which will
represent the single "residual interest" in the Upper-Tier REMIC for purposes of
the REMIC Provisions). The Class R-LT Certificate shall represent beneficial
ownership of the Lower-Tier Interest R and the Class R-UT Certificate shall
represent beneficial ownership of the Upper-Tier Interest R. The Closing Date is
hereby designated as the "startup day" of such REMIC within the meaning of
Section 860G(a)(9) of the Code. The Trustee will apply for an Employee
Identification Number for the Upper-Tier REMIC and for the Lower-Tier REMIC from
the Internal Revenue Service on Form SS-4 or any other acceptable method for all
tax entities.
SECTION 2.16. REMIC TAX ACCOUNTING MATTERS
The tax year of the Upper-Tier REMIC and the Lower-Tier REMIC shall
be the calendar year, and the Trust Estate shall use the accrual method of
reporting income and loss.
SECTION 2.17. REMIC CERTIFICATE MATURITY DATE
All regular interests in the Lower-Tier and Upper-Tier REMICs
created hereby will be retired on or before the Payment Date in [______ 20__.]
SECTION 2.18. LOWER-TIER REMIC
Principal of and interest on the Lower-Tier Regular Interests and
the Lower-Tier Interest R shall be allocated to the Corresponding Class of Bonds
in the manner set forth in the following table:
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ARTICLE III
COVENANTS
SECTION 3.01. PAYMENT OF BONDS.
The Issuer will pay or cause to be duly and punctually paid the
principal of, and interest on, the Bonds in accordance with the terms of the
Bonds and this Indenture.
SECTION 3.02. MAINTENANCE OF OFFICE OR AGENCY.
The Issuer will maintain in the Borough of Manhattan, the City of
New York, the State of New York an office or agency where Bonds may be presented
or surrendered for payment or may be surrendered for registration of transfer or
exchange, and where notices and demands to or upon the Issuer in respect of the
Bonds and this Indenture may be served. The Issuer will give prompt written
notice to the Trustee of the location and any change in the location, of such
office or agency. Until written notice of any change in the location of such
office or agency is delivered to the Trustee or if at any time the Issuer shall
fail to maintain any such required office or agency or shall fail to furnish the
Trustee with the address thereof, Bonds may be so presented and surrendered, and
such notices and demands may be made or served, at the office of
___________________________________________ at ________________________________.
The Issuer may also from time to time designate one or more other
offices or agencies (in or outside the City of New York) where the Bonds may be
presented or surrendered for any or all such purposes and may from time to time
rescind such designations; provided, however, that (i) no such designation or
rescission shall in any manner relieve the Issuer of its obligation to maintain
an office or agency in the Borough of Manhattan, the City of New York, the State
of New York, for the purposes set forth in the preceding paragraph, (ii)
presentations or surrenders of Bonds for payment may be made only in the City of
New York, the State of New York or at the Corporate Trust Office of the Trustee
and (iii) any designation of an office or agency for payment of Bonds shall be
subject to Section 3.03. The Issuer will give prompt written notice to the
Trustee of any such designation or rescission and of any change in the location
of any such other office or agency.
SECTION 3.03. MONEY FOR BOND PAYMENTS TO BE HELD IN TRUST.
All payments of amounts due and payable with respect to any Bonds
which are to be made from amounts withdrawn from the Distribution Account
pursuant to Section 8.02(c) or Section 5.08 shall be made on behalf of the
Issuer by the Trustee or by a Paying Agent, and no amounts so withdrawn from the
Distribution Account for payments of Bonds shall be paid over to the Issuer
under any circumstances except as provided in this Section 3.03 or in Section
5.08.
If the Issuer shall have a Paying Agent that is not also the Bond
Registrar, it shall furnish, or cause the Bond Registrar to furnish, no later
than
(a) the fifth calendar day after each Record Date, and
(b) the first Business Day after the Optional Redemption Record Date
applicable to the Optional Redemption Date,
a list, in such form as such Paying Agent may reasonably require, of the names
and addresses of the Holders of Bonds and of the number of Individual Bonds of
each Class held by each such Holder.
Whenever the Issuer shall have a Paying Agent other than the
Trustee, it will, on or before the Business Day next preceding each Payment Date
and Optional Redemption Date, direct the Trustee to deposit with such Paying
Agent an aggregate sum sufficient to pay the amounts then becoming due (to the
extent funds are then available for such purpose in the Distribution Account),
such sum to be held in trust for the benefit of the Persons entitled thereto.
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Any moneys deposited with a Paying Agent in excess of an amount sufficient to
pay the amounts then becoming due on the Bonds with respect to which such
deposit was made shall, upon Issuer Order, be paid over by such Paying Agent to
the Trustee for application in accordance with Article VIII.
Any Paying Agent shall be appointed by Issuer Order. The Issuer
shall not appoint any Paying Agent which is not, at the time of such
appointment, a depository institution or trust company whose obligations would
be Permitted Investments pursuant to clause (iv) of the definition of the term
"Permitted Investments". The Issuer will cause each Paying Agent other than the
Trustee to execute and deliver to the Trustee an instrument in which such Paying
Agent shall agree with the Trustee (and if the Trustee acts as Paying Agent, it
hereby so agrees), subject to the provisions of this Section, that such Paying
Agent will:
(1) allocate all sums received for payment to the Holders of Bonds
on each Payment Date and Optional Redemption Date among such Holders in the
proportion specified in the applicable Payment Date Statement, as the case may
be, in each case to the extent permitted by applicable law;
(2) hold all sums held by it for the payment of amounts due with
respect to the Bonds in trust for the benefit of the Persons entitled thereto
until such sums shall be paid to such Persons or otherwise disposed of as herein
provided and pay such sums to such Persons as herein provided;
(3) if such Paying Agent is not the Trustee, immediately resign as a
Paying Agent and forthwith pay to the Trustee all sums held by it in trust for
the payment of the Bonds if at any time it ceases to meet the standards set
forth above required to be met by a Paying Agent at the time of its appointment;
(4) if such Paying Agent is not the Trustee, give the Trustee notice
of any Default by the Issuer (or any other obligor upon the Bonds) in the making
of any payment required to be made with respect to any Bonds for which it is
acting as Paying Agent;
(5) if such Paying Agent is not the Trustee, at any time during the
continuance of any such Default, upon the written request of the Trustee,
forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and
(6) comply with all requirements of the Code, and all regulations
thereunder, with respect to the withholding from any payments made by it on any
Bonds of any applicable withholding taxes imposed thereon and with respect to
any applicable reporting requirements in connection therewith; provided,
however, that with respect to withholding and reporting requirements applicable
to original issue discount (if any) on any Class of Bonds, the Issuer has
provided the calculations pertaining thereto to the Trustee.
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The Issuer may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or any other purpose, by Issuer
Order direct any Paying Agent, if other than the Trustee, to pay to the Trustee
all sums held in trust by such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by such Paying
Agent; and upon such payment by any Paying Agent to the Trustee, such Paying
Agent shall be released from all further liability with respect to such money.
Subject to applicable escheat laws, any money held by the Trustee or
any Paying Agent in trust for the payment of any amount due with respect to any
Bond and remaining unclaimed for six years after such amount has become due and
payable to the Holder of such Bond shall be discharged from such trust and, upon
its written request, paid to the Issuer; and the Holder of such Bond shall
thereafter, as an unsecured general creditor, look only to the Issuer for
payment thereof (but only to the extent of the amounts so paid to the Issuer),
and all liability of the Trustee or such Paying Agent with respect to such trust
money shall thereupon cease. The Trustee may, but shall not be required to,
adopt and employ, at the expense of the Issuer, any reasonable means of
notification of such repayment (including, but not limited to, mailing notice of
such repayment to Holders whose Bonds have been called but have not been
surrendered for redemption or whose right to or interest in moneys due and
payable but not claimed is determinable from the records of the Trustee or any
Agent, at the last address of record for each such Holder).
SECTION 3.04. CORPORATE EXISTENCE OF OWNER TRUSTEE.
(a) Subject to subsections (b) and (c) below, the Owner Trustee will
keep in full effect its existence, rights and franchises as a bank and trust
company under the laws of the state of its incorporation.
(b) Any corporation into which the Owner Trustee may be merged or
with which it may be consolidated, or any corporation resulting from any merger
or consolidation to which the Owner Trustee shall be a party, shall be the
successor Owner Trustee under this Indenture without the execution or filing of
any paper, instrument or further act to be done on the part of the parties
hereto, anything herein, or in any agreement relating to such merger or
consolidation, by which any such Owner Trustee may seek to retain certain
powers, rights and privileges therefore obtaining for any period of time
following such merger or consolidation, to the contrary notwithstanding.
(c) Any successor to the Owner Trustee appointed pursuant to Section
10.01 of the Deposit Trust Agreement shall be the successor Owner Trustee under
this Indenture without the execution or filing of any paper, instrument or
further act to be done on the part of the parties hereto.
(d) Upon any consolidation or merger of or other succession to the
Owner Trustee in accordance with this Section 3.04, the Person formed by or
surviving such consolidation or merger (if other than the Issuer) or the Person
succeeding to the Owner Trustee
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under the Deposit Trust Agreement may exercise every right and power of the
Owner Trustee, on behalf of the Issuer, under this Indenture with the same
effect as if such Person had been named as the Owner Trustee herein.
SECTION 3.05. PROTECTION OF TRUST ESTATE.
(a) The Issuer will from time to time execute and deliver all such
supplements and amendments hereto and all such financing statements,
continuation statements, instruments of further assurance and other instruments,
and will take such other action as may be necessary or advisable to:
(i) Grant more effectively all or any portion of the Trust Estate;
(ii) maintain or preserve the lien of this Indenture or carry out
more effectively the purposes hereof;
(iii) perfect, publish notice of or protect the validity of any
Grant made or to be made by this Indenture;
(iv) enforce any of the Mortgage Documents; or
(v) preserve and defend title to the Trust Estate and the rights of
the Trustee, and of the Bondholders, in the Pledged Mortgages and the other
property held as part of the Trust Estate against the claims of all Persons and
parties.
The Issuer hereby designates the Trustee its agent and
attorney-in-fact to execute any financing statement, continuation statement or
other instrument required pursuant to this Section 3.05; provided, however, that
such designation shall not be deemed to create a duty in the Trustee to monitor
the compliance of the Issuer with the foregoing covenants; and provided further,
however, that the duty of the Trustee to execute any instrument required
pursuant to this Section 3.05 shall arise only if the Trustee has knowledge
pursuant to Section 6.01(d) of the occurrence of a failure of the Issuer to
comply with provisions of this Section 3.05.
(b) Except as permitted by Section 8.08, the Trustee shall not
remove any portion of the Trust Estate that consists of money or is evidenced by
an instrument, certificate or other writing from the jurisdiction in which it
was held at the date of the most recent Opinion of Counsel delivered pursuant to
Section 3.06 (or from the jurisdiction in which it was held, or to which it is
intended to be removed, as described in the Opinion of Counsel delivered at the
Closing Date pursuant to Section 2.12(c), if no Opinion of Counsel has yet been
delivered pursuant to Section 3.06) or cause or permit ownership or the pledge
of any portion of the Trust Estate that consists of book-entry securities to be
recorded on the books of a Person located in a different jurisdiction from the
jurisdiction in which such ownership or pledge was recorded at such time unless
the Trustee shall have first received an Opinion of Counsel to the effect that
the
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lien and security interest created by this Indenture with respect to such
property will continue to be maintained after giving effect to such action or
actions.
SECTION 3.06. OPINIONS AS TO TRUST ESTATE.
On or before February 15 in each calendar year, beginning with [the
first calendar year commencing more than three months after the Closing Date,
the Issuer shall furnish to the Trustee an Opinion of Counsel reasonably
satisfactory in form and substance to the Trustee either stating that, in the
opinion of such counsel, such action has been taken as is necessary to maintain
the lien and security interest created by this Indenture and reciting the
details of such action or stating that in the opinion of such counsel no such
action is necessary to maintain such lien and security interest. Such Opinion of
Counsel shall also describe all such actions, if any, that will, in the opinion
of such counsel, be required to be taken to maintain the lien and security
interest of this Indenture with respect to the Trust Estate until May 15 in the
following calendar year.
SECTION 3.07. PERFORMANCE OF OBLIGATIONS; MASTER SERVICING AGREEMENT.
(a) The Issuer shall punctually perform and observe all of its
obligations and agreements contained in the Deposit Trust Agreement. The Issuer
and the Trustee shall punctually perform and observe all of their respective
obligations and agreements contained in the Master Servicing Agreement.
(b) The Issuer shall not take any action and will use its reasonable
good faith efforts not to permit any action to be taken by others that would
release any Person from any of such Person's covenants or obligations under any
of the Mortgage Documents or under any instrument included in the Trust Estate,
or that would result in the amendment, hypothecation, subordination, termination
or discharge of, or impair the validity or effectiveness of, any of the Mortgage
Documents, except as expressly provided or permitted in this Indenture and the
Master Servicing Agreement or such Mortgage Document or other instrument or
unless such action will not adversely affect the interests of the Holders of the
Bonds.
(c) The Issuer shall monitor the performance of the Master Servicer
under the Master Servicing Agreement, and shall use its reasonable good faith
efforts to cause the Master Servicer duly and punctually to perform all of its
duties and obligations thereunder. Upon the occurrence of a Servicing Default of
which an Authorized Officer of the Issuer has actual knowledge under the Master
Servicing Agreement, the Issuer shall promptly notify the Trustee thereof, and
shall specify in such notice the action, if any, the Issuer is taking in respect
of such Servicing Default. So long as any such Servicing Default shall be
continuing, the Trustee may (i) terminate all of the rights and powers of the
Master Servicer pursuant to the applicable provisions of the Master Servicing
Agreement; (ii) exercise any rights it may have to enforce the Master Servicing
Agreement against the Master Servicer; and/or (iii) waive any such Servicing
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Default under the Master Servicing Agreement or take any other action with
respect to such Servicing Default as is permitted thereunder.
(d) Upon any termination by the Trustee of the Master Servicer's
rights and powers pursuant to the Master Servicing Agreement, the rights and
powers of the Master Servicer with respect to the Pledged Mortgages shall vest
in the Trustee and the Trustee shall be the successor in all respects to the
Master Servicer in its capacity as Master Servicer with respect to such Pledged
Mortgages under the Master Servicing Agreement, until the Trustee shall have
appointed, with the consent of the Issuer, such consent not to be unreasonably
withheld, and the Rating Agencies, and in accordance with the applicable
provisions of the Master Servicing Agreement a new FNMA- or FHLMC-approved
Person to serve as successor to the Master Servicer. With such consent, the
Trustee may elect to continue to serve as successor Master Servicer under the
Master Servicing Agreement. Upon appointment of a successor Master Servicer, the
Trustee and such successor Master Servicer shall enter into a master servicing
agreement in a form substantially similar to the Master Servicing Agreement. In
connection with any such appointment, the Trustee may make such arrangements for
the compensation of such successor as it and such successor shall agree, but in
no event shall such compensation of any successor Master Servicer (including the
Trustee) be in excess of that payable to the Master Servicer under the Master
Servicing Agreement.
(e) Upon any termination of the Master Servicer's rights and powers
pursuant to the Master Servicing Agreement, the Trustee shall promptly notify
the Issuer and the Rating Agencies, specifying in such notice that the Trustee
or any successor Master Servicer, as the case may be, has succeeded the Master
Servicer under the Master Servicing Agreement, which notice shall also specify
the name and address of any such successor Master Servicer.
SECTION 3.08. INVESTMENT COMPANY ACT.
The Issuer shall at all times conduct its operations so as not to be
subject to the Investment Company Act of 1940, as amended (or any successor
statute), and the rules and regulations thereunder.
SECTION 3.09. NEGATIVE COVENANTS.
The Issuer shall not:
(a) sell, transfer, exchange or otherwise dispose of any portion of
the Trust Estate except as expressly permitted by this Indenture or the Master
Servicing Agreement;
(b) claim any credit on, or make any deduction from, the principal
of, or interest on, any of the Bonds by reason of the payment of any taxes
levied or assessed upon any portion of the Trust Estate;
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(c) engage in any business or activity other than in connection
with, or relating to, the issuance of the Bonds and the Class R Certificates
pursuant to this Indenture and the Deposit Trust Agreement, respectively, or
amend Section 2.03 or Section 11.01 of the Deposit Trust Agreement as in effect
on the Closing Date without, in each case, the consent of the Holders of 66 2/3%
of the aggregate Class Principal Amount of the Bonds then Outstanding;
(d) incur any indebtedness or assume or guaranty any indebtedness of
any Person, except for such indebtedness as may be incurred by the Issuer in
connection with the issuance of the Bonds pursuant to this Indenture;
(e) dissolve or liquidate in whole or in part; or
(f) (i) permit the validity or effectiveness of this Indenture or
any Grant to be impaired, or permit the lien of this Indenture to be amended,
hypothecated, subordinated, terminated or discharged, or permit any Person to be
released from any covenants or obligations under this Indenture, except as may
be expressly permitted hereby, (ii) permit any lien, charge, security interest,
mortgage or other encumbrance (other than the lien of this Indenture, the lien
created by Section 8.04 of the Deposit Trust Agreement, as in effect on the
Closing Date, or any Permitted Encumbrance) to be created on or extended to or
otherwise arise upon or burden the Trust Estate or any part thereof or any
interest therein or the proceeds thereof or (iii) permit the lien of this
Indenture not to constitute a valid perfected first priority security interest
in the Trust Estate.
SECTION 3.10. ANNUAL STATEMENT AS TO COMPLIANCE.
On or before 120 days after the end of the first fiscal year of the
Issuer which ends more than three months after the Closing Date, and each fiscal
year thereafter, the Issuer shall deliver to the Trustee a written statement,
signed by an Authorized Officer, stating that:
(1) a review of the fulfillment by the Issuer during such year of
its obligations under this Indenture has been made under such officer's
supervision; and
(2) to the best of such officer's knowledge, based on such review,
the Issuer has fulfilled all of its obligations under this Indenture throughout
such year, or, if there has been a Default in the fulfillment of any such
obligation, specifying each such Default known to such officer and the nature
and status thereof.
SECTION 3.11. RECORDING OF ASSIGNMENTS.
The Issuer shall cause the Assignments of the Pledged Mortgages
securing the Bonds to be duly recorded in the manner specified in Section
2(a)(i) of the Master Servicing Agreement. If the Issuer fails to cause the
Assignment to be recorded within the time limit provided thereunder, the Issuer
shall cause the Master Servicer to purchase such corresponding
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Pledged Mortgage pursuant to Section 8.04 and the applicable provisions of the
Master Servicing Agreement.
SECTION 3.12. LIMITATION OF LIABILITY OF .
It is expressly understood and agreed by the parties hereto that (a)
this Indenture is executed and delivered by _________________________, not
individually or personally but solely as owner trustee of Sequoia Mortgage Trust
200_-_ under the Deposit Trust Agreement, in the exercise of the powers and
authority conferred and vested in it, (b) each of the representations,
undertakings and agreements herein made on the part of the Issuer is made and
intended not as personal representations, undertakings and agreements by
________________________, but is made and intended for the purpose for binding
only the Issuer, (c) nothing herein contained shall be construed as creating any
liability on ___ _____________________, other than any liability arising out of
its gross negligence, bad faith or wilful misconduct, and (d) under no
circumstances shall ________________________ be personally liable for the
payment of any indebtedness or expenses of the Issuer or be liable for the
breach or failure of any obligation, representation, warranty or covenant made
or undertaken by the Issuer under this Indenture or the other Operative
Agreements.
SECTION 3.13. REMIC-RELATED COVENANTS.
For as long as the Trust Estate shall exist, the parties to this Indenture
shall act in accordance herewith to assure continued treatment of the Trust
Estate as two REMICs. In particular:
(a) The Master Servicer will not create, or permit the creation of,
any "interests" in the Trust Estate within the meaning of Section 860G of the
Code other than the interests referred to in Section 2.15;
(b) As of all times as may be required by the Code, the Master
Servicer (with respect to the Mortgage Loans) and the Trustee (with respect to
investments) will ensure that substantially all of the assets of the Trust
Estate will consist of "qualified mortgages" as defined in Section 860G(a)(3) of
the Code and "permitted investments" as defined in Section 860G(a)(5) of the
Code. The Master Servicer will maintain records that are sufficient to indicate
the Trust Estate's compliance with applicable requirements of the Code (or
applicable Treasury Regulations) relating to the assets held by the Trust
Estate. Further, the Trustee shall not accept the transfer or substitution of
any Mortgage Loan two (2) years or more after the Closing Date unless the Master
Servicer and the Trustee shall have received an Opinion of Counsel, which shall
be an expense of the Depositor, that such transfer or substitution would not
adversely affect the REMIC status of the Trust Estate or would not otherwise be
prohibited by this Indenture;
(c) The Depositor, the Trustee and the Master Servicer, each to the
extent of their respective activities and/or obligations hereunder, shall ensure
that the Trust Estate does not receive a fee or other compensation for services
and that the Trust Estate does not receive any income from assets other than
"qualified mortgages" within the meaning of Section 860G(a)(3)
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of the Code or "permitted investments" within the meaning of Section 860G(a)(5)
of the Code, and shall take whatever action it deems necessary to avoid any
material tax imposed by the Code on the Trust Estate;
(d) The Trustee shall not sell or permit the sale of all or any
portion of the Mortgage Loans or of any Eligible Account unless such sale is as
a result of a repurchase of the Mortgage Loans by the Class R-LT Holder, [RWT
Holdings], or the Depositor pursuant to the Indenture or the Trustee has
received an Opinion of Counsel to the effect that such sale (i) is in accordance
with a qualified liquidation as defined in Section 860F(a)(4) of the Code and as
described in [Section 10.01 or 10.04] hereof, or (ii) would not be treated as a
prohibited transaction within the meaning of Section 860F(a)(2) of the Code,
which prohibited transaction results in the realization of a material amount of
gain or loss for federal income tax purposes; and
(e) Notwithstanding anything to the contrary in this Indenture, the
Master Servicer and the Trustee, at the direction and expense of the Master
Servicer (with respect to individual Mortgage Loans) or the Depositor (with
respect to the entire Mortgage Pool or all of the Bonds), will take any other
action or omit to take any action otherwise required where the Master Servicer
or the Depositor deems such action or inaction reasonably necessary to preserve
or ensure the REMIC status of the Trust Estate.
SECTION 3.14. PROHIBITED TRANSACTIONS AND OTHER TAXES.
In the event that any tax is imposed on the Trust Estate (including
"prohibited transactions" of the Trust Estate as defined in Section 860F of the
Code), such tax shall be charged first against amounts distributable to the
Class R-LT and Class R-UT Holders and then sequentially against amounts
otherwise distributable to the [Class B] Bondholders on a pro rata basis within
each Class. The Trustee is hereby authorized to direct the Paying Agent to
retain and, upon such direction, the Paying Agent is hereby authorized to retain
from amounts otherwise distributable to the Class R Holder and the [Class B]
Bondholders, as appropriate, sufficient funds to pay or provide for the payments
of, and to actually pay, such tax as is legally owed by the Trust Estate (but
such authorization shall not prevent the Trustee or the Depositor from
contesting any such tax in appropriate proceedings, if it elects to so contest
such tax or proceeding, and withholding payment of such tax, if permitted by
law, pending the outcome of such proceedings).
SECTION 3.15. FEDERAL INFORMATION RETURNS AND REPORTS TO BONDHOLDERS.
(a) The books of the Trust Estate shall reflect all payments made
with respect to the Mortgage Loans, and amounts attributable to the [Class A]
Bondholders, the [Class B] Bondholders, the Class R-LT Holder and the Class R-UT
Holder. The Trust Estate intends to allocate all excess inclusion income to the
Upper-Tier REMIC, and specifically to the Class R-UT Holder. At all times, the
Trustee shall take all actions consistent with this intention. In addition, with
respect to the Lower-Tier REMIC, the Trustee shall account for distributions
made from the Lower-Tier REMIC as made on the first day of each calendar month.
Further, the
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Trustee shall account for income of the Lower-Tier REMIC under the all-OID
method at the Alternate Bond Rate and shall use the aggregation method as
provided in Treasury Regulation Section 1.1275-2(c).
(b) The Trustee shall prepare and file or cause to be filed with the
Internal Revenue Service at the times and in the manner required by the Code or
applicable Treasury Regulations all Federal tax or information returns with
respect to the Upper-Tier REMIC and the Lower-Tier REMIC and the Bonds, which
tax or information returns contain such information as may be required by the
Code or applicable Treasury Regulations. The Class R-LT Holder may, upon
reasonable notice to the Trustee, review such tax or information returns prior
to filing with the Internal Revenue Service. The Trustee also shall furnish to
Holders of Bonds such statements or information at the times and in the manner
as the Code or applicable Treasury Regulations may require such holders to be
furnished, regardless of by whom. For this purpose, the Trustee may, but need
not, rely on any proposed regulations of the United States Department of the
Treasury. The Trustee shall indicate the election to treat the Trust Estate as
two REMICs in such manner as the Code or applicable Treasury regulations may
prescribe. The Trustee shall sign all required tax or information returns;
provided, however, that the Trustee shall have no obligation to prepare, file or
otherwise deal with partnership tax information or returns. In the event that
partnership tax information or returns is required by the Internal Revenue
Service, the Depositor will prepare and file all necessary returns. The initial
Class R-LT Holder is hereby designated as the initial "tax matters person"
(within the meaning of Temp. Treas. Reg. Section 1.860F-4T(d)). In the event
that the Code or applicable Treasury Regulations prohibit the Trustee from
signing tax or information returns or other statements, or the Class R-LT Holder
from acting as tax matters person (as an agent or otherwise), the Trustee shall
take whatever action that in its sole good faith judgment is necessary for the
proper filing of such information returns or for the provision of a tax matters
person, including designation of the Class R-LT Holder to sign such returns. The
Class R-LT Holder and the Class R-UT Holder shall each be bound by this Section
3.15.
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ARTICLE IV
SATISFACTION AND DISCHARGE
SECTION 4.01. SATISFACTION AND DISCHARGE OF INDENTURE.
Whenever the following conditions shall have been satisfied:
(1) either
(A) all Bonds theretofore authenticated and delivered (other than
(i) Bonds which have been destroyed, lost or stolen and which have been replaced
or paid as provided in Section 2.08, and (ii) Bonds for whose payment money has
theretofore been deposited in trust and thereafter repaid to the Issuer, as
provided in Section 3.03) have been delivered to the Trustee for cancellation;
or
(B) all Bonds not theretofore delivered to the Trustee for
cancellation
(i) have become due and payable, or
(ii) will become due and payable at the Stated Maturity of the final
installment of the principal thereof within one year, or
(iii) are to be called for redemption within one year under
irrevocable arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Issuer,
and the Issuer, in the case of clauses (B)(i), (B)(ii) or (B)(iii) above,
has deposited or caused to be deposited with the Trustee, in trust for such
purpose, an amount sufficient to pay and discharge the entire indebtedness on
such Bonds not theretofore delivered to the Trustee for cancellation, for
principal and interest to the Stated Maturity of their entire unpaid principal
amount or to the applicable Redemption Date, as the case may be, and in the case
of Bonds which were not paid at the Stated Maturity of their entire unpaid
principal amount, for all overdue principal and all interest payable on such
Bonds to the next succeeding Payment Date therefor;
(2) the Issuer has paid or caused to be paid all other sums payable
hereunder by the Issuer; and
(3) the Issuer has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel reasonably satisfactory in form and substance to the
Trustee each stating that all conditions precedent herein providing for the
satisfaction and discharge of this Indenture have been complied with;
then, upon Issuer Request, this Indenture and the lien, rights and interests
created hereby shall cease to be of further effect, and the Trustee and each
co-trustee and separate trustee, if any, then acting as such hereunder shall, at
the expense of the Issuer, execute and deliver all such instruments as may be
necessary to acknowledge the satisfaction and discharge of this Indenture and
shall pay, or assign or transfer and deliver, to the Issuer or upon Issuer Order
all Pledged Mortgages, cash, securities and other property held by it as part of
the Trust Estate remaining after satisfaction of the conditions set forth in
clauses (1) and (2) above.
Notwithstanding the satisfaction and discharge of this Indenture,
the obligations of the Issuer to the Trustee under Section 6.07, the obligations
of the Trustee to the Issuer and the Holders of Bonds under Section 3.03, the
obligations of the Trustee to the Holders of Bonds under Section 4.02 and the
provisions of Article II with respect to lost, stolen, destroyed or mutilated
Bonds, registration of transfers of Bonds and rights to receive payments of
principal of, and interest on, the Bonds shall survive.
SECTION 4.02. APPLICATION OF TRUST MONEY.
All money deposited with the Trustee pursuant to Sections 3.03 and
4.01 shall be held in trust and applied by it, in accordance with the provisions
of the Bonds and this Indenture, to the payment, either directly or through any
Paying Agent, as the Trustee may determine, to the Persons entitled thereto, of
the principal and interest for whose payment such money has been deposited with
the Trustee.
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ARTICLE V
DEFAULTS AND REMEDIES
SECTION 5.01. EVENT OF DEFAULT.
"Event of Default", wherever used herein, means, with respect to
Bonds issued hereunder, any one of the following events (whatever the reason for
such Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body):
(1) if the Issuer shall
(A) default in the payment when and as due of any installment of
principal of or interest on any Bond, or
(B) default in the payment of the Redemption Price of any Bond which
has been called for optional redemption pursuant to Article X;
(2) if the Issuer shall breach, or default in the due observance, of
any one or more of the covenants set forth in clauses (a) through (e) of Section
3.09;
(3) if the Issuer shall breach, or default in the due observance or
performance of, any other of its covenants in this Indenture, and such Default
shall continue for a period of 30 days after there shall have been given, by
registered or certified mail, to the Issuer by the Trustee, or to the Issuer and
the Trustee [by the Bond Insurer, or, during the existence of a Bond Insurer
Default] by the Holders of Bonds representing more than 50% of the aggregate
Class Principal Amount of the Controlling Class, a written notice specifying
such Default and requiring it to be remedied and stating that such notice is a
"Notice of Default" hereunder;
(4) if any representation or warranty of the Issuer made in this
Indenture or any certificate or other writing delivered pursuant hereto or in
connection herewith shall prove to be incorrect in any material respect as of
the time when the same shall have been made and, within 30 days after there
shall have been given, by registered or certified mail, written notice thereof
to the Issuer by the Trustee, or to the Issuer and the Trustee by the Holders of
Bonds representing
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more than 50% of the aggregate Class Principal Amount of the Controlling Class,
the circumstance or condition in respect of which such representation or
warranty was incorrect shall not have been eliminated or otherwise cured;
(5) the entry of a decree or order for relief by a court having
jurisdiction in respect of the Issuer in an involuntary case under the federal
bankruptcy laws, as now or hereafter in effect, or any other present or future
federal or state bankruptcy, insolvency or similar law, or appointing a
receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of the Issuer or of any substantial part of its property, or
ordering the winding up or liquidation of the affairs of the Issuer and the
continuance of any such decree or order unstayed and in effect for a period of
60 consecutive days; or
(6) the commencement by the Issuer of a voluntary case under the
federal bankruptcy laws, as now or hereafter in effect, or any other present or
future federal or state bankruptcy, insolvency or similar law, or the consent by
the Issuer to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian, sequestrator or other similar official of the
Issuer or of any substantial part of its property or the making by the Issuer of
an assignment for the benefit of creditors or the failure by the Issuer
generally to pay its debts as such debts become due or the taking of corporate
action by the Issuer in furtherance of any of the foregoing.
(a) Notwithstanding the foregoing, prior to the payment in full of
the Senior Bonds, the failure of the Issuer to pay when and as due any
installment of principal of or interest (regardless of the lapse of any grace
period) on any Subordinated Bond shall not constitute an Event of Default
hereunder. In addition, notwithstanding any applicable provision of this
Indenture, upon payment in full of the Senior Bonds, the prior occurrence of any
such shortfalls attributable to the Subordinated Bonds, which shortfalls have
previously been paid in full, will not constitute an Event of Default hereunder
in respect of the Subordinated Bonds. Subject to the foregoing, Section 5.01 of
the Indenture shall otherwise apply in all respects to the Subordinated Bonds.
(b) Notwithstanding the foregoing, the failure of the Issuer to pay
when and as due any installment of principal of (regardless of the lapse of any
grace period) any Senior Bond shall not constitute an Event of Default hereunder
unless the Senior Class Principal Amount exceeds the aggregate Stated Principal
Balances of the Pledged Mortgages after application of all available amounts on
deposit in the Distribution Account on a Payment Date. Subject to the foregoing,
Section 5.01 of the Indenture shall otherwise apply in all respects to the
Senior Bonds.
SECTION 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default occurs and is continuing with respect to the
Bonds, then and in every such case the Trustee or the Holders of Bonds
representing more than 50% of the aggregate Class Principal Amount of the
Controlling Class may declare all the Bonds to be
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immediately due and payable, by a notice in writing to the Issuer (and to the
Trustee if given by Bondholders), and upon any such declaration such Bonds shall
become immediately due and payable in an amount equal to:
(i) the aggregate Class Principal Amount of all Classes of Bonds,
(ii) accrued and unpaid interest at the respective Bond Interest
Rates on the aggregate Class Principal Amount through the date of acceleration,
and
(iii) in the case of the Senior Bonds, interest (but only to the
extent payment thereof shall be legally enforceable) on any overdue installments
of interest on the Senior Bonds from the Stated Maturity of any such
installments to the date of the acceleration at the Bond Interest Rate at which
such interest accrued or such lower rate at which payment of such interest shall
be legally enforceable.
At any time after such a declaration of acceleration of maturity of
the Bonds has been made and before a judgment or decree for payment of the money
due has been obtained by the Trustee as hereinafter in this Article provided,
the Holders of Bonds representing more than 50% of the aggregate Class Principal
Amount of the Controlling Class, by written notice to the Issuer and the
Trustee, may rescind and annul such declaration and its consequences if:
(1) the Issuer has paid or deposited with the Trustee a sum
sufficient to pay:
(A) all payments of principal of, and interest on, all Bonds and all
other amounts which would then be due hereunder or upon such Bonds if the Event
of Default giving rise to such acceleration had not occurred; and
(B) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel; and
(2) all Events of Default, other than the nonpayment of the
principal of Bonds which have become due solely by such acceleration, have been
cured or waived as provided in Section 5.15.
No such rescission shall affect any subsequent Default or impair any
right consequent thereon.
SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE.
Subject to Section 5.05, the Issuer covenants that if an Event of
Default shall occur and be continuing in respect to the Bonds and the Bonds have
been declared due and payable and such declaration and its consequences have not
been rescinded and annulled, the Issuer will, upon demand of the Trustee, pay to
the Trustee, for the benefit of the Holders of the Bonds:
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(i) the amounts specified in the first paragraph of Section 5.02,
and
(ii) in addition thereto, such further amount as shall be sufficient
to cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel.
If the Issuer fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute a
Proceeding for the collection of the sums so due and unpaid, and may prosecute
such Proceeding to judgment or final decree, and may enforce the same against
the Issuer or any other obligor upon the Bonds and collect, out of the Trust
Estate (as defined in the Deposit Trust Agreement), wherever situated, of the
Issuer, the moneys adjudged or decreed to be payable in the manner provided by
law; provided, however, that neither the Bank nor any of its agents, officers,
directors, employees, successors or assigns shall be personally liable for any
amounts due under the Bonds or this Indenture.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Bondholders by any Proceedings the Trustee deems appropriate to protect and
enforce any such rights, whether for the specific enforcement of any covenant or
agreement in this Indenture or in aid of the exercise of any power granted
herein, or enforce any other proper remedy, including, without limitation,
instituting a Proceeding prior to any declaration of acceleration of the
Maturity of the Bonds for the collection of all amounts then due and unpaid on
such Bonds, prosecuting such Proceeding to final judgment or decree, enforcing
the same against the Issuer and collecting out of the property, wherever
situated, of the Issuer the moneys adjudged or decreed to be payable in the
manner provided by law.
SECTION 5.04. REMEDIES.
If an Event of Default shall have occurred and be continuing and the
Bonds have been declared due and payable and such declaration and its
consequences have not been rescinded and annulled, the Trustee (subject to
Section 5.18, to the extent applicable) may do one or more of the following:
(a) institute Proceedings for the collection of all amounts then
payable on the Bonds, or under this Indenture, whether by declaration or
otherwise, enforce any judgment obtained, and collect from the Issuer moneys
adjudged due;
(b) in accordance with Section 5.18, sell the Trust Estate or any
portion thereof or rights or interest therein, at one or more public or private
Sales called and conducted in any manner permitted by law;
(c) institute Proceedings from time to time for the complete or
partial foreclosure of this Indenture with respect to the Trust Estate; and
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(d) exercise any remedies of a secured party under the Uniform
Commercial Code and take any other appropriate action to protect and enforce the
rights and remedies of the Trustee or the Holders of the Bonds hereunder.
SECTION 5.05. [RESERVED].
SECTION 5.06. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, composition or other
judicial Proceeding relative to the Issuer or any other obligor upon any of the
Bonds or the property of the Issuer or of such other obligor or their creditors,
the Trustee (irrespective of whether the Bonds shall then be due and payable as
therein expressed or by declaration or otherwise and irrespective of whether the
Trustee shall have made any demand on the Issuer for the payment of any overdue
principal or interest) shall be entitled and empowered, by intervention in such
Proceeding or otherwise to:
(i) file and prove a claim for the whole amount of principal and
interest owing and unpaid in respect of the Bonds and file such other papers or
documents and take such other actions as it deems necessary or advisable in
order to have the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel) and of the Bondholders allowed in such Proceeding; and
(ii) collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any receiver,
assignee, trustee, liquidator or sequestrator (or other similar official) in any
such Proceeding is hereby authorized by each Bondholder to make such payments to
the Trustee and, in the event that the Trustee shall consent to the making of
such payments directly to the Bondholders, to pay to the Trustee any amount due
it for the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 6.07.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Bondholder any plan
of reorganization, arrangement, adjustment or composition affecting any of the
Bonds or the rights of any Holder thereof, or to authorize the Trustee to vote
in respect of the claim of any Bondholder in any such Proceeding.
SECTION 5.07. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF BONDS.
All rights of action and claims under this Indenture or any of the
Bonds may be prosecuted and enforced by the Trustee without the possession of
any of the Bonds or the production thereof in any Proceeding relating thereto,
and any such Proceeding instituted by the
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Trustee shall be brought in its own name as trustee of an express trust, and any
recovery of judgment shall be for the ratable benefit of the Holders of the
Bonds in respect of which such judgment has been recovered. Any surplus shall be
available, in accordance with Section 5.08, for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel.
SECTION 5.08. APPLICATION OF MONEY COLLECTED.
If the Bonds have been declared due and payable following an Event
of Default and such declaration and its consequences have not been rescinded and
annulled, any money collected by the Trustee with respect to the Bonds pursuant
to this Article or otherwise and any monies that may then be held or thereafter
received by the Trustee with respect to the Bonds shall be applied, after
payment to the Trustee of such amounts as may be payable to it under Section
6.07, in the order, at the date or dates fixed by the Trustee and, in case of
the distribution of the entire amount due on account of principal of, and
interest on, such Bonds, upon presentation and surrender thereof:
First: To the payment of amounts then due and unpaid to any Servicer
or the Master Servicer in respect of Nonrecoverable Advances made by such
Servicer or the Master Servicer pursuant to the related Servicing Agreement or
the Master Servicing Agreement;
Second: To the payment of amounts of interest and principal then due
and unpaid upon the Outstanding Bonds in accordance with the priorities set
forth in Section 2.03(b); and
Third: To the payment of the remainder, if any, to the Issuer or any
other Person legally entitled thereto.
SECTION 5.09. LIMITATION ON SUITS.
No Holder of a Bond shall have any right to institute any
Proceedings, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless:
(1) such Holder has previously given written notice to the Trustee
of a continuing Event of Default;
(2) the Holders of Bonds representing more than 50% of the aggregate
Class Principal Amount of the Controlling Class shall have made written request
to the Trustee to institute Proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee indemnity in
full against the costs, expenses and liabilities to be incurred in compliance
with such request;
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(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such Proceeding; and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of Bonds
representing more than 50% of the aggregate Class Principal Amount of the
Controlling Class;
it being understood and intended that no one or more Holders of Bonds shall have
any right in any manner whatever by virtue of, or by availing themselves of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other Holders of Bonds or to obtain or to seek to obtain priority or preference
over any other Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all the
Holders of Bonds.
SECTION 5.10. UNCONDITIONAL RIGHTS OF BONDHOLDERS TO RECEIVE PRINCIPAL AND
INTEREST.
Notwithstanding any other provision in this Indenture, other than
the provisions hereof limiting the right to recover amounts due on a Bond to
recovery from the property of the Issuer, the Holder of any Bond shall have the
right, to the extent permitted by applicable law, which right is absolute and
unconditional, to receive payment of each installment of interest on such Bond
on the respective Stated Maturities of such installments of interest, to receive
payment of each installment of principal of such Bond when due (or, in the case
of any Bond called for redemption, on the date fixed for such redemption) and to
institute suit for the enforcement of any such payment, and such right shall not
be impaired without the consent of such Holder.
SECTION 5.11. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Bondholder has instituted any Proceeding to
enforce any right or remedy under this Indenture and such Proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Bondholder, then and in every such case the Issuer, the
Trustee and the Bondholders shall, subject to any determination in such
Proceeding, be restored severally and respectively to their former positions
hereunder, and thereafter all rights and remedies of the Trustee and the
Bondholders shall continue as though no such Proceeding had been instituted.
SECTION 5.12. RIGHTS AND REMEDIES CUMULATIVE.
No right or remedy herein conferred upon or reserved to the Trustee
or to the Bondholders is intended to be exclusive of any other right or remedy,
and every right and remedy shall, to the extent permitted by law, be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The
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assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other appropriate
right or remedy.
SECTION 5.13. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Bond to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Bondholders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Bondholders, as the
case may be.
SECTION 5.14. CONTROL BY BONDHOLDERS.
The Holders of Bonds representing more than 50% of the aggregate
Class Principal Amount of the Controlling Class shall have the right to direct
the time, method and place of conducting any Proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee;
provided, however, that:
(1) such direction shall not be in conflict with any rule of law or
with this Indenture;
(2) any direction to the Trustee to undertake a Sale of the Trust
Estate shall be by the Holders of Bonds representing the percentage of the
aggregate Class Principal Amount of the Controlling Class specified in Section
5.18(b)(1), unless Section 5.18(b)(2) is applicable; and
(3) [Reserved];
(4) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction; provided, however, that,
subject to Section 6.01, the Trustee need not take any action which it
determines might involve it in liability or be unjustly prejudicial to the
Bondholders not consenting.
SECTION 5.15. WAIVER OF PAST DEFAULTS.
The Holders of Bonds representing more than 50% of the aggregate
Class Principal Amount of the Controlling Class may on behalf of the Holders of
all the Bonds of such Class waive any past Default hereunder and its
consequences, except a Default:
(1) in the payment of any installment of principal of, or interest
on, any Bond; or
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(2) in respect of a covenant or provision hereof which under Section
9.02 cannot be modified or amended without the consent of the Holder of each
Outstanding Bond affected.
Upon any such waiver, such Default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereon.
SECTION 5.16. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Bond by
his or her acceptance thereof shall be deemed to have agreed, that any court may
in its discretion require, in any suit for the enforcement of any right or
remedy under this Indenture, or in any suit against the Trustee for any action
taken, suffered or omitted by it as Trustee, the filing by any party litigant in
such suit of an undertaking to pay the costs of such suit, and that such court
may in its discretion assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in such suit, having due regard to the merits
and good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Bondholder, or group of Bondholders,
holding in the aggregate Bonds representing more than 10% of the aggregate Class
Principal Amount of the Controlling Class, or to any suit instituted by any
Bondholder for the enforcement of the payment of any installment of interest on
any Bond on or after the Stated Maturity thereof expressed in such Bond or for
the enforcement of the payment of any installment of principal of any Bond when
due (or, in the case of any Bond called for redemption, on or after the
applicable redemption date).
SECTION 5.17. WAIVER OF STAY OR EXTENSION LAWS.
The Issuer covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay or extension of law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
in, or the performance of, this Indenture; and the Issuer (to the extent that it
may lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
SECTION 5.18. SALE OF TRUST ESTATE.
(a) The power to effect any sale (a "Sale") of any portion of the
Trust Estate pursuant to Section 5.04 shall not be exhausted by any one or more
Sales as to any portion of the Trust Estate remaining unsold, but shall continue
unimpaired until the entire Trust Estate shall have been sold or all amounts
payable on the Bonds and under this Indenture with respect thereto
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shall have been paid. The Trustee may from time to time postpone any public Sale
by public announcement made at the time and place of such Sale. The Trustee
hereby expressly waives its right to any amount fixed by law as compensation for
any Sale.
(b) To the extent permitted by law, the Trustee shall not in any
private Sale sell or otherwise dispose of the Trust Estate, or any portion
thereof, unless:
(1) the Holders of all Controlling Class consent to, or direct the
Trustee to make, such Sale; or
(2) the proceeds of such Sale would be not less than the entire
amount which would be distributable to the Holders of the Bonds, in full payment
thereof in accordance with Section 5.08, on the Payment Date next succeeding the
date of such Sale.
(3) [Reserved]
The purchase by the Trustee of all or any portion of the Trust
Estate at a private Sale shall not be deemed a Sale or disposition thereof for
purposes of this Section 5.18(b).
(c) Unless the Holders of all Controlling Class have otherwise
consented or directed the Trustee, at any public Sale of all or any portion of
the Trust Estate at which a minimum bid equal to or greater than the amount
described in paragraph (2) of subsection (b) of this Section 5.18 has not been
established by the Trustee and no Person bids an amount equal to or greater than
such amount, the Trustee shall bid an amount at least $1.00 more than the
highest other bid.
(d) In connection with a Sale of all or any portion of the Trust
Estate:
(1) any Holder or Holders of Bonds may bid for and purchase the
property offered for Sale, and upon compliance with the terms of sale may hold,
retain and possess and dispose of such property, without further accountability,
and may, in paying the purchase money therefor, deliver any Controlling Class or
claims for interest thereon in lieu of cash up to the amount which shall, upon
distribution of the net proceeds of such Sale, be payable thereon, and such
Bonds, in case the amount so payable thereon shall be less than the amount due
thereon, shall be returned to the Holders thereof after being appropriately
stamped to show such partial payment;
(2) the Trustee may bid for and acquire the property offered for
Sale in connection with any public Sale thereof, and, in lieu of paying cash
therefor, may make settlement for the purchase price by crediting the gross Sale
price against the sum of (A) the amount which would be distributable to the
Holders of the Bonds as a result of such Sale in accordance with Section 5.08 on
the Payment Date next succeeding the date of such Sale and (B) the expenses of
the Sale and of any Proceedings in connection therewith which are reimbursable
to it, without being required to produce the Bonds in order to complete any such
Sale or in order
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for the net Sale price to be credited against such Bonds, and any property so
acquired by the Trustee shall be held and dealt with by it in accordance with
the provisions of this Indenture;
(3) the Trustee shall execute and deliver an appropriate instrument
of conveyance transferring its interest in any portion of the Trust Estate in
connection with a Sale thereof;
(4) the Trustee is hereby irrevocably appointed the agent and
attorney-in-fact of the Issuer to transfer and convey its interest in any
portion of the Trust Estate in connection with a Sale thereof, and to take all
action necessary to effect such Sale; and
(5) no purchaser or transferee at such a Sale shall be bound to
ascertain the Trustee's authority, inquire into the satisfaction of any
conditions precedent or see to the application of any moneys.
(e) Notwithstanding anything in this Indenture to the contrary, if
an Event of Default specified in Section 5.01(1) is the Event of Default, or one
of the Events of Default, on the basis of which the Bonds have been declared due
and payable, then the Trustee may, in its sole discretion, sell the Trust Estate
without compliance with this Section 5.18.
SECTION 5.19. ACTION ON BONDS.
The Trustee's right to seek and recover judgment under this
Indenture shall not be affected by the seeking, obtaining or application of any
other relief under or with respect to this Indenture. Neither the lien of this
Indenture nor any rights or remedies of the Trustee or the Holders of Bonds
shall be impaired by the recovery of any judgment by the Trustee against the
Issuer or by the levy of any execution under such judgment upon any portion of
the Trust Estate.
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ARTICLE VI
THE TRUSTEE
SECTION 6.01. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs.
(b) Except during the continuance of an Event of Default:
(1) The Trustee need perform only those duties that are specifically
set forth in this Indenture and no others and no implied covenants or
obligations shall be read into this Indenture; and
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture. The Trustee shall,
however, examine such certificates and opinions to determine whether they
conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(1) This paragraph does not limit the effect of subsection (b) of
this Section;
(2) The Trustee shall not be liable for any error of judgment made
in good faith by a Responsible Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction received by
it pursuant to Section 5.14 or Section 5.18.
(d) Except with respect to duties of the Trustee prescribed by the
TIA, as to which this Section 6.01(d) shall not apply, for all purposes under
this Indenture, the Trustee shall not be deemed to have notice or knowledge of
any Event of Default described in Section 5.01(2), 5.01(5) or 5.01(6) or any
Default described in Section 5.01(3) or 5.01(4) or any Servicing Default or
default under the Master Servicing Agreement unless a Responsible Officer
assigned to and working in the Trustee's corporate trust department has actual
knowledge thereof or unless written notice of any event which is in fact such an
Event of Default, Servicing Default or default is received by the Trustee at the
Corporate Trust Office, and such notice references the Bonds generally, the
Issuer, the Trust Estate or this Indenture.
(e) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it. In determining that such repayment or indemnity is
not reasonably assured to it, the Trustee must consider not only the likelihood
of repayment or indemnity by or on behalf of the Issuer but also the likelihood
of repayment or indemnity from amounts payable to it from the Trust Estate
pursuant to Sections 6.07 and 8.02(d); provided, however, that, except as
provided in the first sentence of this Section 6.01(e), the Trustee shall not
refuse or fail to perform any of its duties hereunder solely as a result of
nonpayment of its reasonable fees and expenses; and provided further, however,
that nothing in this Section 6.01(e) shall be construed to limit the exercise by
the Trustee of any right or remedy permitted under this Indenture or otherwise
in the event of the Issuer's failure to pay the amounts due the Trustee pursuant
to Section 6.07.
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(f) Every provision of this Indenture that in any way relates to the
Trustee is subject to the provisions of this Section.
(g) Notwithstanding any extinguishment of all right, title and
interest of the Issuer in and to the Trust Estate following an Event of Default
and a consequent declaration of acceleration of the Maturity of the Bonds,
whether such extinguishment occurs through a Sale of the Trust Estate to another
Person, the acquisition of the Trust Estate by the Trustee or otherwise, the
rights, powers and duties of the Trustee with respect to the Trust Estate (or
the proceeds thereof) and the Bondholders and the rights of Bondholders shall
continue to be governed by the terms of this Indenture.
SECTION 6.02. NOTICE OF DEFAULT.
Within 90 days after the occurrence of any Default known to the
Trustee, the Trustee shall transmit by mail to all Holders of Bonds notice of
each such Default, unless such Default shall have been cured or waived;
provided, however, that except in the case of a Default of the type described in
Section 5.01(1), the Trustee shall be protected in withholding such notice if
and so long as the board of directors, the executive committee or a trust
committee of directors and/or Responsible Officers of the Trustee in good faith
determine that the withholding of such notice is in the interests of the Holders
of the Bonds; and provided, further, that in the case of any Default of the
character specified in Section 5.01(3) or 5.01(4) no such notice to Holders of
the Bonds shall be given until at least 30 days after the occurrence thereof.
Concurrently with the mailing of any such notice to the Holders of the Bonds,
the Trustee shall transmit by mail a copy of such notice to the Rating Agencies.
SECTION 6.03. RIGHTS OF TRUSTEE.
Except as otherwise provided in Section 6.01 hereof:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, note or other
paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(b) any request or direction of the Issuer mentioned herein shall be
sufficiently evidenced by an Issuer Request or Issuer Order, and any resolution
of the board of directors may be sufficiently evidenced by a written resolution;
(c) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officers' Certificate or the Officer's Certificate of the Master
Servicer;
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(d) the Trustee may consult with counsel, and the written advice of
such counsel or any Opinion of Counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Bondholders pursuant to this Indenture, unless such Bondholders shall
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction;
(f) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
note or other paper or document, but the Trustee, in its discretion may make
such further inquiry or investigation into such facts or matters as it may see
fit, and if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled, on reasonable prior notice to the Issuer,
to examine the books, records and premises of the Issuer, personally or by agent
or attorney, during the Issuer's normal business hours; provided that the
Trustee shall and shall cause its agents to hold in confidence all such
information except to the extent disclosure may be required by law and except to
the extent that the Trustee, in its sole judgment, may determine that such
disclosure is consistent with its obligations hereunder;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed and supervised with
due care by it hereunder;
(h) the Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers;
(i) prior to the time that one of its Responsible Officers obtains
actual knowledge of a Servicing Default as defined in the Master Servicing
Agreement or a failure by the Master Servicer thereunder which with notice and
the passage of time will become a Servicing Default, the Trustee shall not be
responsible for taking action with respect thereto;
(j) the Trustee shall not be responsible for supervising, monitoring
or reviewing the Master Servicer's performance of its duties under the Master
Servicing Agreement except to the extent of determining (i) that the periodic
reports, certificates and opinions required to be delivered by the Master
Servicer to it thereunder are delivered in timely fashion and conform to the
requirements of the Master Servicing Agreement, (ii) that the amounts received
by it from the Master Servicer for deposit in the Distribution Account during
any month are as shown in the Master Servicer's report for such month, (iii) and
that any Trustee Mortgage File or
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document therein that has been released by the Trustee to the Master Servicer is
returned as provided in the Master Servicing Agreement; and
(k) the provisions of this Section, other than clauses (e), (i) and
(j), and of Sections 6.01(b) and (c) shall apply to the Trustee as it may be
Successor Master Servicer under the Master Servicing Agreement.
SECTION 6.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF BONDS.
The recitals contained herein and in the Bonds, except the
certificates of authentication on the Bonds, shall be taken as the statements of
the Issuer, and the Trustee assumes no responsibility for their correctness. The
Trustee makes no representations with respect to the Trust Estate or as to the
validity or sufficiency of this Indenture or of the Bonds. The Trustee shall not
be accountable for the use or application by the Issuer of the Bonds or the
proceeds thereof or any money paid to the Issuer or upon Issuer Order pursuant
to the provisions hereof.
SECTION 6.05. MAY HOLD BONDS.
The Trustee, any Agent, or any other agent of the Issuer, in its
individual or any other capacity, may become the owner or pledgee of Bonds and,
subject to Sections 6.08 and 6.13, may otherwise deal with the Issuer or any
Affiliate of the Issuer with the same rights it would have if it were not the
Trustee, Agent or such other agent.
SECTION 6.06. MONEY HELD IN TRUST.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by this Indenture or by law. The
Trustee shall be under no liability for interest on any money received by it
hereunder except as otherwise agreed with the Issuer and except to the extent of
income or other gain on investments which are obligations of the Trustee, in its
commercial capacity, and income or other gain actually received by the Trustee
on investments, which are obligations of others.
SECTION 6.07. COMPENSATION AND REIMBURSEMENT.
The Issuer agrees:
(1) subject to any separate written agreement with the Trustee, to
pay the Trustee from time to time reasonable compensation for all services
rendered by it hereunder (which compensation shall not be limited by any
provision of law in regard to the compensation of a trustee of an express
trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and advances
incurred or made by
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the Trustee in connection with the performance of its duties hereunder
(including the reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and
(3) to indemnify the Trustee and its agents for, and to hold them
harmless against, any loss, liability or expense incurred without negligence or
bad faith on their part, arising out of, or in connection with, the acceptance
or administration of this trust, including the costs and expenses of defending
themselves against any claim in connection with the exercise or performance of
any of their powers or duties hereunder, provided that:
(i) with respect to any such claim, the Trustee shall have given the
Issuer written notice thereof promptly after the Trustee shall have knowledge
thereof;
(ii) while maintaining absolute control over its own defense, the
Trustee shall cooperate and consult fully with the Issuer in preparing such
defense; and
(iii) notwithstanding anything to the contrary in this Section
6.07(3), the Issuer shall not be liable for settlement of any such claim by the
Trustee entered into without the prior consent of the Issuer.
As security for the performance of the obligations of the Issuer
under this Section, the Trustee shall have a lien ranking junior to the lien of
the Bonds with respect to which any claim of the Trustee under this Section
arose (but senior to all other liens, if any) upon all property and funds held
or collected as part of the Trust Estate by the Trustee in its capacity as such.
The Trustee shall not institute any Proceeding seeking the enforcement of such
lien against the Trust Estate unless such Proceeding is in connection with a
Proceeding in accordance with Article V for enforcement of the lien of this
Indenture after the occurrence of an Event of Default (other than an Event of
Default arising solely from the Issuer's failure to pay amounts due the Trustee
under this Section 6.07) and a resulting declaration of acceleration of Maturity
of the Bonds which has not been rescinded and annulled.
SECTION 6.08. ELIGIBILITY; DISQUALIFICATION.
Irrespective of whether this Indenture is qualified under the TIA,
this Indenture shall always have a Trustee who satisfies the requirements of TIA
Sections 310(a)(1) and 310(a)(5). The Trustee shall always have a combined
capital and surplus as stated in Section 6.09. The Trustee shall be subject to
TIA Section 310(b).
SECTION 6.09. TRUSTEE'S CAPITAL AND SURPLUS.
The Trustee shall at all times have a combined capital and surplus
of at least $50,000,000 or shall be a member of a bank holding company system,
the aggregate combined capital and surplus of which is at least $50,000,000;
provided, however, that the Trustee's separate capital and surplus shall at all
times be at least the amount required by TIA Section
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310(a)(2) if this Indenture is qualified under the TIA. If the Trustee publishes
annual reports of condition of the type described in TIA Section 310(a)(2), its
combined capital and surplus for purposes of this Section 6.09 shall be as set
forth in the latest such report.
SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 6.11.
(b) The Trustee may resign at any time by giving written notice
thereof to the Issuer. If an instrument of acceptance by a successor Trustee
shall not have been delivered to the Trustee within 30 days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders
representing more than 50% of the aggregate Class Principal Amount of the
Controlling Class, delivered to the Trustee and to the Issuer.
(d) If at any time:
(1) the Trustee shall have a conflicting interest prohibited by
Section 6.08 and shall fail to resign or eliminate such conflicting interest in
accordance with Section 6.08 after written request therefor by the Issuer or by
any Bondholder; provided, however, that this Section 6.10(d)(1) shall not be
operative as part of this Indenture unless and until this Indenture is qualified
under the TIA, and until such qualification this Indenture shall be construed as
if this Section 6.10(d)(1) were not contained herein; or
(2) the Trustee shall cease to be eligible under Section 6.09 or
shall become incapable of acting or shall be adjudged a bankrupt or insolvent,
or a receiver of the Trustee or of its property shall be appointed, or any
public officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation;
then, in any such case, (i) the Issuer by an Issuer Order may remove the Trustee
or (ii) subject to Section 5.16, any Bondholder who has been a bona fide Holder
of a Bond for at least six months may, on behalf of itself and all others
similarly situated, petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee, unless this Indenture
is qualified under the TIA and the Trustee's duty to resign is stayed as
provided in Section 310(b) of the TIA.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of the Trustee for any cause,
the Issuer, by an Issuer Order shall promptly appoint a successor Trustee. If
within one year after such resignation, removal or
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incapability or the occurrence of such vacancy a successor Trustee shall be
appointed by Act of the Holders of Bonds representing more than 50% of the
aggregate Class Principal Amount of the Controlling Class delivered to the
Issuer and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment, become the successor Trustee
and supersede the successor Trustee appointed by the Issuer. If no successor
Trustee shall have been so appointed by the Issuer or Bondholders and shall have
accepted appointment in the manner hereinafter provided, any Bondholder who has
been a bona fide Holder of a Bond for at least six months may, on behalf of
itself and all others similarly situated, petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(f) The Issuer shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to the
Holders of Bonds. Each notice shall include the name of the successor Trustee
and the address of its Corporate Trust Office.
SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Issuer and the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee. Notwithstanding the
foregoing, on request of the Issuer or the successor Trustee, such retiring
Trustee shall, upon payment of its charges, execute and deliver an instrument
transferring to such successor Trustee all the rights, powers and trusts of the
retiring Trustee, and shall duly assign, transfer and deliver to such successor
Trustee all property and money held by such retiring Trustee hereunder subject
nevertheless to its lien, if any, provided for in Section 6.07. Upon request of
any such successor Trustee, the Issuer shall execute and deliver any and all
instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 6.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS OF
TRUSTEE.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Bonds have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee
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may adopt such authentication and deliver the Bonds so authenticated with the
same effect as if such successor Trustee had authenticated such Bonds.
SECTION 6.13. PREFERENTIAL COLLECTION OF CLAIM AGAINST ISSUER.
If this Indenture is qualified under the TIA, the Trustee shall be
subject to TIA Section 311(a), excluding any creditor relationship listed in TIA
Section 311(b), and a Trustee who has resigned or been removed shall be subject
to TIA Section 311(a) to the extent indicated.
SECTION 6.14. CO-TRUSTEES AND SEPARATE TRUSTEES.
At any time or times, for the purpose of meeting the legal
requirements of the TIA or of any jurisdiction in which any of the Trust Estate
may at the time be located, the Issuer and the Trustee shall have power to
appoint, and, upon the written request of the Trustee or of the Holders of Bonds
representing more than 50% of the aggregate Class Principal Amount of the
Controlling Class with respect to which a co-trustee or separate trustee is
being appointed, the Issuer shall for such purpose join with the Trustee in the
execution, delivery and performance of all instruments and agreements necessary
or proper to appoint, one or more Persons approved by the Trustee either to act
as co-trustee, jointly with the Trustee, of all or any part of the Trust Estate,
or to act as separate trustee of any such property, in either case with such
powers as may be provided in the instrument of appointment, and to vest in such
Person or Persons in the capacity aforesaid, any property, title, right or power
deemed necessary or desirable, subject to the other provisions of this Section.
If the Issuer does not join in such appointment within 15 days after the receipt
by it of a request to do so, or in case an Event of Default has occurred and is
continuing, the Trustee alone shall have power to make such appointment.
Should any written instrument from the Issuer be required by any
co-trustee or separate trustee so appointed for more fully confirming to such
co-trustee or separate trustee such property, title, right or power, any and all
such instruments shall, on request, be executed, acknowledged and delivered by
the Issuer. Each notice shall include the name and address of any such
co-trustee or successor trustee.
Every co-trustee or separate trustee shall, to the extent permitted
by law, but to such extent only, be appointed subject to the following terms:
(1) The Bonds shall be authenticated and delivered and all rights,
powers, duties and obligations hereunder in respect of the custody of
securities, cash and other personal property held by, or required to be
deposited or pledged with, the Trustee hereunder, shall be exercised solely by
the Trustee.
(2) The rights, powers, duties and obligations hereby conferred or
imposed upon the Trustee in respect of any property covered by such appointment
shall be conferred or imposed upon and exercised or performed by the Trustee or
by the Trustee and such co-trustee or separate trustee jointly, as shall be
provided in the instrument appointing such co-trustee or
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separate trustee, except to the extent that under any law of any jurisdiction in
which any particular act is to be performed, the Trustee shall be incompetent or
unqualified to perform such act, in which event such rights, powers, duties and
obligations shall be exercised and performed by such co-trustee or separate
trustee.
(3) The Trustee at any time, by an instrument in writing executed by
it, with the concurrence of the Issuer evidenced by an Issuer Order, may accept
the resignation of or remove any co-trustee or separate trustee appointed under
this Section, and, in case of an Event of Default has occurred and is
continuing, the Trustee shall have power to accept the resignation of, or
remove, any such co-trustee or separate trustee without the concurrence of the
Issuer. Upon the written request of the Trustee, the Issuer shall join with the
Trustee in the execution, delivery and performance of all instruments and
agreements necessary or proper to effectuate such resignation or removal. A
successor to any co-trustee or separate trustee which has resigned or has been
removed may be appointed in the manner provided in this Section.
(4) No co-trustee or separate trustee shall be required to satisfy
the eligibility requirements under Sections 6.08 and 6.09. No co-trustee or
separate trustee hereunder shall be personally liable by reason of any act or
omission of the Trustee, or any other such trustee hereunder.
(5) Any Act of Bondholders delivered to the Trustee shall be deemed
to have been delivered to each such co-trustee and separate trustee.
SECTION 6.15. AUTHENTICATING AGENTS.
Upon the request of the Issuer, the Trustee shall appoint an
Authenticating Agent with power to act on its behalf and subject to its
direction in the authentication and delivery of the Bonds designated for such
authentication by the Issuer and containing provisions therein for such
authentication (or with respect to which the Issuer has made other arrangements,
satisfactory to the Trustee and such Authenticating Agent, for notation on the
Bonds of the authority of an Authenticating Agent appointed after the initial
authentication and delivery of such Bonds) in connection with transfers and
exchanges under Sections 2.06 and 2.07, if any, as fully to all intents and
purposes as though the Authenticating Agent had been expressly authorized by
those Sections to authenticate and deliver Bonds. For all purposes of this
Indenture (other than in connection with the authentication and delivery of
Bonds pursuant to Sections 2.05 and 2.12 in connection with their initial
issuance and for purposes of Section 2.08), the authentication and delivery of
Bonds by the Authenticating Agent pursuant to this Section shall be deemed to be
the authentication and delivery of Bonds "by the Trustee". Such Authenticating
Agent shall at all times be a Person that both meets the requirements of Section
6.09 for the Trustee hereunder and has its principal office in the Borough of
Manhattan, City and State of New York.
Any Authenticating Agent shall also serve as Bond Registrar or
co-Bond Registrar, as provided in Section 2.07. Any Authenticating Agent
appointed by the Trustee pursuant to the
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terms of this Section 6.15 or pursuant to the terms of any supplemental
indenture shall deliver to the Trustee as a condition precedent to the
effectiveness of such appointment an instrument accepting the trusts, duties and
responsibilities of Authenticating Agent and of Bond Registrar or co-Bond
Registrar and indemnifying the Trustee for and holding the Trustee harmless
against, any loss, liability or expense (including reasonable attorneys' fees)
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance, administration of the trust or exercise of
authority by such Authenticating Agent, Bond Registrar or co-Bond Registrar.
Any corporation into which any Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, consolidation or conversion to which any Authenticating Agent
shall be a party, or any corporation succeeding to the corporate trust business
of any Authenticating Agent, shall be the successor of the Authenticating Agent
hereunder, if such successor corporation is otherwise eligible under this
Section, without the execution or filing of any further act on the part of the
parties hereto or the Authenticating Agent or such successor corporation.
Any Authenticating Agent may at any time resign by giving written
notice of resignation to the Trustee and the Issuer. The Trustee may at any time
terminate the agency of any Authenticating Agent by giving written notice of
termination to such Authenticating Agent and the Issuer. Upon receiving such a
notice of resignation or upon such a termination, or in case at any time any
Authenticating Agent shall cease to be eligible under this Section, the Trustee
shall promptly appoint a successor Authenticating Agent, shall give written
notice of such appointment to the Issuer and shall mail notice of such
appointment to all Holders of Bonds.
The Trustee agrees, subject to Section 6.01(e), to pay to any
Authenticating Agent from time to time reasonable compensation for its services
and the Trustee shall be entitled to be reimbursed for such payments, subject to
Section 6.07. The provisions of Sections 2.10, 6.04 and 6.05 shall be applicable
to any Authenticating Agent.
SECTION 6.16. REVIEW OF MORTGAGE DOCUMENTS.
The Trustee agrees, for the benefit of the Holders of the Bonds, to
review, within 90 days after the Closing Date, the Mortgage Documents delivered
to it in connection with the Grant of the Original Pledged Mortgages as security
for the Bonds. The Trustee's review shall be limited to a determination that all
documents referred to in the definition of the term Mortgage Documents have been
delivered with respect to each such Pledged Mortgage (other than the documents
related to any Pledged Mortgage so listed which has been subject to a Principal
Prepayment in Full and the proceeds of which have been delivered to the Trustee
in lieu of the applicable Mortgage Documents), that all such documents have been
executed, and that all such documents relate to the Original Pledged Mortgages,
provided that the Trustee shall not be responsible for determining whether any
assignment is in recordable form or for verifying the information with respect
to said loans contained on the Pledged Mortgage Schedule. In performing such
review the Trustee may rely upon the purported genuineness and due execution
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of any such document and on the purported genuineness of any signature thereon.
If the Trustee discovers any defect or omission in the Mortgage Documents or
that any document required to be delivered to it has not been delivered or that
any document so delivered does not relate to any of the Original Pledged
Mortgages, it shall promptly notify the Issuer and the Master Servicer of such
Pledged Mortgage in accordance with the provisions of the Master Servicing
Agreement.
SECTION 6.17. PAYMENT OF CERTAIN INSURANCE PREMIUMS.
Notwithstanding anything to the contrary contained in this
Indenture, the Trustee agrees, for the benefit of the Holders of the Bonds,
that, should it fail to receive notice from the Master Servicer or the
applicable Insurer, within the time period required pursuant to the Master
Servicing Agreement, to the effect that any premiums due with respect to any
Insurance Policies the premiums for which are required to be paid by the
Servicer or the Master Servicer from amounts on deposit in the related Escrow
Account, or required to be advanced by the Master Servicer or the related
Servicer, have been paid in full at the times set forth in the Master Servicing
Agreement, the Trustee shall proceed with diligence to make inquiries of the
Master Servicer, the Issuer and the applicable Insurers as to whether such
premiums have been paid at the times set forth in the Master Servicing
Agreement. In the event such premiums have not been paid and the coverage
provided under the related Insurance Policy may be interrupted or adversely
affected, the Trustee agrees promptly to pay such premiums from amounts on
deposit in the Distribution Account, pursuant to Section 8.02(d) and in
accordance with its obligations under the applicable provisions of the Master
Servicing Agreement.
SECTION 6.18. SUBSTITUTION OF INSURANCE POLICIES, ETC.; NOTIFICATION OF RATING
AGENCIES.
(a) Provided that the conditions set forth in paragraph (b) hereof
have been satisfied, the Issuer may substitute a replacement policy or
instrument for any Bond Insurance Policy.
(b) The Issuer shall notify each Rating Agency rating the Bonds in
the event that any replacement policy or instrument is obtained for any Bond
Insurance Policy and Insurer or other Person other than the Person who issued
such policy or instrument; provided, however, that the Trustee shall not be
required to accept any such replacement policy or instrument unless the Trustee
has received from each Rating Agency rating the Bonds a written instrument to
the effect that such acceptance by the Trustee will not result in the lowering
of the then applicable rating of any Bonds issued pursuant to this Indenture by
such Rating Agency.
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ARTICLE VII
BONDHOLDERS' LISTS AND REPORTS
SECTION 7.01. ISSUER TO FURNISH TRUSTEE NAMES AND ADDRESSES OF BONDHOLDERS.
(a) The Issuer shall furnish or cause to be furnished to the Trustee
(i) semi-annually, not less than 45 days nor more than 60 days after the
Interest Payment Date occurring closest to six months after the Closing Date and
each Interest Payment Date occurring at six-month intervals thereafter, a list,
in such form as the Trustee may reasonably require, of the names and addresses
of the Holders of Bonds and (ii) at such other times, as the Trustee may request
in writing, within 30 days after receipt by the Issuer of any such request, a
list of similar form and content as of a date not more than 10 days prior to the
time such list is furnished; provided, however, that so long as the Trustee is
the Bond Registrar, no such list shall be required to be furnished.
(b) In addition to furnishing to the Trustee the Bondholder lists,
if any, required under subsection (a), the Issuer shall also furnish all
Bondholder lists, if any, required under Section 3.03 at the times required by
Section 3.03.
SECTION 7.02. PRESERVATION OF INFORMATION; COMMUNICATIONS TO BONDHOLDERS.
(a) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of the Holders of Bonds
contained in the most recent list, if any, furnished to the Trustee as provided
in Section 7.01 and the names and addresses of the Holders of Bonds received by
the Trustee in its capacity as Bond Registrar. The Trustee may destroy any list
furnished to it as provided in Section 7.01 upon receipt of a new list so
furnished.
(b) If this Indenture is qualified under the TIA, Bondholders may
communicate pursuant to TIA Section 312(b) with other Bondholders with respect
to their rights under this Indenture or under the Bonds.
(c) If this Indenture is qualified under the TIA, the Issuer, the
Trustee and the Bond Registrar shall have the protection of TIA Section 312(c).
SECTION 7.03. REPORTS BY TRUSTEE.
(a) If this Indenture is qualified under the TIA, then within 30
days after May 15 of each year (the "reporting date"), commencing with the year
after the issuance of the Bonds, (i) in the circumstance required by TIA Section
313(a), the Trustee shall mail to all Holders a brief report dated as of such
reporting date that complies with TIA Section 313(a), (ii) the Trustee shall
also mail to Holders of Bonds with respect to which it has made advances any
reports with respect to such advances that are required by TIA Section 313(b)(2)
and (iii) the Trustee shall also mail to Holders of Bonds any reports required
by TIA Section 313(b)(1). For purposes of the information required to be
included in any such reports pursuant to TIA Sections 313(a)(3), 313(b)(1) (if
applicable) or 313(b)(2), the principal amount of indenture securities
outstanding on the date as of which such information is provided shall be the
aggregate Class
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Principal Amount of the then Controlling Class covered by the report. The
Trustee shall comply with TIA Section 313(c) with respect to any reports
required by this Section 7.03(a).
(b) If this Indenture is qualified under the TIA, a copy of each
report required under this Section 7.03 shall, at the time of such transmission
to Holders of Bonds be filed by the Trustee with the Commission and with each
securities exchange upon which the Bonds are listed. The Issuer will notify the
Trustee when the Bonds are listed on any securities exchange.
SECTION 7.04. REPORTS BY ISSUER.
If this Indenture is qualified under the TIA, the Issuer (a) shall
file with the Trustee, within 15 days after it files them with the Commission,
copies of the annual reports and of the information, documents and other reports
(or copies of such portions of any of the foregoing as the Commission may by
rules and regulations prescribe) which the Issuer is required to file with the
Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 and (b) shall also comply with the other provisions of TIA Section 314(a).
SECTION 7.05. NOTICE TO THE RATING AGENCIES [AND TO BOND INSURER.]
The Issuer shall use its best efforts promptly to provide notice to
the Rating Agencies [and the Bond Insurer] of any of the following events of
which it has actual knowledge:
(a) any material change to or amendment of this Indenture;
(b) the occurrence of any Default or Event of Default that has not
been cured;
(c) the resignation or termination of the Trustee;
(d) the substitution of Pledged Mortgages;
(e) the final payment of Bondholders; and
[(f) any payment or claim made under the Bond Insurance Policy.]
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ARTICLE VIII
ACCOUNTS, PAYMENTS OF INTEREST AND PRINCIPAL, AND RELEASES
SECTION 8.01. COLLECTION OF MONEYS.
Except as otherwise expressly provided herein, the Trustee may
demand payment or delivery of, and shall receive and collect, directly and
without intervention or assistance of any fiscal agent or other intermediary,
all money and other property payable to or receivable by the Trustee pursuant to
this Indenture. The Trustee shall hold all such money and property received by
it as part of the Trust Estate and shall apply it as provided in this Indenture.
Except as otherwise expressly provided herein, if any default occurred in the
making of any payment or performance under any agreement or instrument that is
part of the Trust Estate, the Trustee may take such action as may be appropriate
to enforce such payment or performance, including the institution and
prosecution of appropriate Proceedings. Any such action shall be without
prejudice to any right to claim a Default or Event of Default hereunder and any
right to proceed thereafter as provided in Article V.
SECTION 8.02. DISTRIBUTION ACCOUNT.
(a) On or prior to the Closing Date, the Issuer shall cause the
Master Servicer to establish and maintain, in the name of the Trustee, for the
benefit of the Bondholders and the Holders of the Class R Certificates, the
Pledged Accounts as provided in Section 3(h) of the Master Servicing Agreement.
(b) Except as otherwise provided in the Master Servicing Agreement,
within one Business Day of receipt thereof by the Master Servicer, the Master
Servicer will deposit in the Bond Account all amounts required to be deposited
therein pursuant to Section 3(h) of the Master Servicing Agreement.
(c) The Trustee shall establish and maintain, on behalf of the
Bondholders, the Distribution Account. The Trustee shall, promptly upon receipt,
deposit in the Distribution Account and retain therein the following:
(i) the aggregate amount remitted by the Master Servicer to the
Trustee pursuant to Section 3(h)(vii) of the Master Servicing Agreement; and
(ii) any other amounts deposited hereunder which are required to be
deposited in the Distribution Account.
In the event that the Master Servicer shall remit any amount not
required to be remitted, it may at any time direct the Trustee to withdraw such
amount from the Distribution Account, any provision herein to the contrary
notwithstanding. Such direction may be accomplished by delivering an Officer's
Certificate to the Trustee which describes the amounts deposited in error in the
Distribution Account. All funds deposited in the Distribution Account shall be
held by the Trustee in trust for the Bondholders until disbursed in accordance
with this Indenture or withdrawn in accordance with Section 2.03(b). In no event
shall the Trustee incur liability for withdrawals from the Distribution Account
at the direction of the Master Servicer.
(d) Subject to Sections 5.02 and 5.08, on each Payment Date and
Redemption Date, the Trustee shall distribute all amounts on deposit in the
Distribution Account to
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Bondholders in respect of the Bonds to the extent of amounts due and unpaid on
the Bonds for principal and interest in the amounts and in the order of priority
set forth in Section 2.03(b).
SECTION 8.03. GENERAL PROVISIONS REGARDING PLEDGED ACCOUNTS.
(a) Each Pledged Account shall relate solely to the Bonds, the Class
R Certificates and to the Pledged Mortgages, Permitted Investments and other
property securing the Bonds. Funds and other property in each Pledged Account
shall not be commingled with any other moneys or property of the Issuer or any
Affiliate thereof. Notwithstanding the foregoing, the Trustee may hold any funds
or other property received or held by it as part of a Pledged Account, other
than the Distribution Account, in collective accounts maintained by it in the
normal course of its business and containing funds or property held by it for
other Persons (which may include the Issuer or an Affiliate), provided that such
accounts are under the sole control of the Trustee and the Trustee maintains
adequate records indicating the ownership of all such funds or property and the
portions thereof held for credit to each Pledged Account.
(b) So long as no Default or Event of Default shall have occurred
and be continuing, all or a portion of the funds in the Pledged Accounts shall
be invested in Permitted Investments and reinvested by the Trustee upon written
direction of the Master Servicer, subject to the provisions of Section 3(h) of
the Master Servicing Agreement. Any such Permitted Investment shall mature not
later than the applicable date specified in Section 3(h)(ix) of the Master
Servicing Agreement. All income and gain (net of any losses) realized from any
such investment of funds on deposit in the Pledged Accounts shall be for the
benefit of the Master Servicer as servicing compensation and shall be remitted
to it monthly as provided in the Master Servicing Agreement. The amount of any
realized losses in the Pledged Accounts incurred in respect of any such
investments shall promptly be deposited by the Master Servicer in the applicable
Pledged Account or Pledged Accounts. The Master Servicer will not direct the
Trustee to make any investment of any funds or to sell any investment held in
any of the Pledged Accounts unless the security interest Granted and perfected
in such account will continue to be perfected in such investment or the proceeds
of such sale, in either case without any further action by any Person, and, in
connection with any direction to the Trustee to make any such investment or
sale, if requested by the Trustee, the Master Servicer shall deliver to the
Trustee an Opinion of Counsel, acceptable to the Trustee, to such effect.
(c) Subject to Section 6.01(c), the Trustee shall not in any way be
held liable by reason of any insufficiency in any of the Pledged Accounts
resulting from any loss on any Permitted Investment included therein except for
losses attributable to the Trustee's failure to make payments on such Permitted
Investments issued by the Trustee, in its commercial capacity as principal
obligor and not as trustee, in accordance with their terms.
(d) If (i) the Master Servicer shall have failed to give investment
directions for any funds on deposit in the Pledged Accounts to the Trustee by
11:00 a.m. Eastern Time (or such other time as may be agreed by the Master
Servicer and Trustee) on any Business Day or (ii) a Default or Event of Default
shall have occurred and be continuing with respect to the Bonds but
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the Bonds shall not have been declared due and payable pursuant to Section 5.02
or (iii) if such Bonds shall have been declared due and payable following an
Event of Default, amounts collected or receivable from the Trust Estate are
being applied in accordance with Section 5.05 as if there had not been such a
declaration, then the Trustee shall, to the fullest extent practicable, invest
and reinvest funds in the Pledged Accounts in one or more Permitted Investments.
(e) The Trustee shall, at all times while any Bonds are outstanding,
maintain in its possession, or in the possession of an agent whose actions with
respect to such items are under the sole control of the Trustee, all
certificates or other instruments, if any, evidencing any investment of funds in
a Pledged Account. The Trustee shall relinquish possession of such items, or
direct its agent to do so, only for purposes of collecting the final payment
receivable on such investment or certificate or, in connection with the sale of
any investment held in a Pledged Account, against delivery of the amount
receivable in connection with any sale.
SECTION 8.04. PURCHASES OF DEFECTIVE PLEDGED MORTGAGES.
(a) If at any time the Issuer or the Trustee discovers or is
notified by the Master Servicer (i) that there has been a breach of any of the
Master Servicer's representations and warranties with respect to Pledged
Mortgages contained in the Master Servicing Agreement that materially and
adversely affects the interests of the Bondholders in any Pledged Mortgage, (ii)
that any of the Mortgage Documents for a Pledged Mortgage has not been properly
executed by the Mortgagor or contains a material defect or (iii) that any
Mortgage Documents for a Pledged Mortgage shall not have been received by the
Trustee within the applicable time periods and in the forms set forth in Section
3.11 or Section 6.16, as the case may be, and the Master Servicing Agreement,
then the party discovering such defect or omission or receiving notice thereof
shall promptly notify the other party and the Master Servicer (other than in
cases where the Master Servicer has given notice thereof).
(b) If any defect, misrepresentation or omission described in
subsection (a) of this Section 8.04 materially and adversely affects the
interests of the Bondholders, then the Issuer shall, pursuant to the applicable
provisions of the Master Servicing Agreement, cause the Master Servicer to
either (i) cure any such defect, misrepresentation or omission, (ii) remove such
Pledged Mortgage and substitute in its place a Replacement Pledged Mortgage or
(iii) purchase the affected Pledged Mortgage, in each case at the times and in
the manner set forth in the Master Servicing Agreement. Notwithstanding anything
in this Indenture to the contrary, the Depositor shall not substitute a
Replacement Pledged Mortgage at any time after two (2) years after the Closing
Date.
(c) Upon any such purchase or substitution, the Issuer shall be
entitled to request a release of the defective Pledged Mortgage from the lien of
this Indenture pursuant to Section 8.08(c) and Section 8.12.
(d) If the Master Servicer shall either (i) purchase any Pledged
Mortgage it is required to purchase pursuant to the Master Servicing Agreement
and deposit the Purchase Price
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therefor in the Bond Account or (ii) (a) remove such Pledged Mortgage from the
Trust Estate and substitute in its place a Replacement Pledged Mortgage and (b)
deposit in the Bond Account any related Substitution Adjustment Amount, in each
case in the manner set forth in the Master Servicing Agreement, then the Master
Servicer shall be deemed to have complied with all requirements imposed upon it
by this Section 8.04 with respect to such Pledged Mortgage.
(e) The Master Servicer shall, in its sole discretion, have the
right to purchase for its own account from the Trust Estate any Pledged Mortgage
which is 91 days or more delinquent at a price and in the manner specified in
Section 3(n) of the Master Servicing Agreement. Upon purchase of such Pledged
Mortgage by the Master Servicer, the Master Servicer shall have the right to
treat such Pledged Mortgage (a "Defaulted Pledged Mortgage") as having been the
subject of a Principal Prepayment in Full and request the release thereof from
the lien of this Indenture pursuant to Section 8.12.
SECTION 8.05. GRANT OF REPLACEMENT PLEDGED MORTGAGE.
The Master Servicer shall be permitted to substitute any Pledged
Mortgage for any Original Pledged Mortgage initially Granted to the Trustee on
the Closing Date pursuant to this Indenture as set forth in Sections 2(a)(ii)
and 2(d)(iv) of the Master Servicing Agreement.
SECTION 8.06. REPORTS BY TRUSTEE TO BONDHOLDERS.
On each Payment Date or Optional Redemption Date the Trustee shall
deliver a written report to each Holder of Bonds, setting forth the following:
(a) On or before [noon California time] on the Determination Date,
the Master Servicer shall provide by modem to the Trustee with respect to the
Pledged Mortgages, an electronic data file (accompanied by a hardcopy report) in
a format which is mutually agreed upon by the Master Servicer and the Trustee.
The Trustee shall be under no duty to recalculate, verify or recompute the
information provided to it by the Master Servicer under this Section 8.06(a).
Not later than each Payment Date, the Trustee shall prepare and cause to be
forwarded by first class mail to each Bondholder, the Master Servicer and the
Issuer a statement (each, a "Payment Date Statement") setting forth with respect
to the related distribution:
(i) the amount thereof allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and Liquidation
Proceeds included therein;
(ii) the amount thereof allocable to interest, and (x) any of (a)
the amount by which the aggregate Senior Interest Shortfalls on prior Payment
Dates exceeds the amount paid on the Senior Bonds on prior Payment Dates
pursuant to clause (ii) of the definition of Senior Interest Payment Date, (b)
the amount by which the aggregate Class B-1 Interest Shortfalls on prior Payment
Dates exceeds the amount paid on the Class B-1 Bonds on prior Payment Dates
pursuant to clause (iii) of the definition of Class B-1 Interest Payment Amount
and (c) the amount by which the aggregate Class B-2 Interest Shortfalls on prior
Payment Dates exceeds the
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amount paid on the Class B-2 Bonds on prior Payment Dates pursuant to clause
(iii) of the definition of Class B-2 Interest Payment Amount included in such
distribution and (y) any of the amounts in clauses (a), (b) or (c) above
remaining after giving effect to such distribution.
(iii) if the distribution to the Holders of such Class of Bonds is
less than the full amount that would be distributable to such Holders pursuant
to Section 2.03(b) on such Payment Date if there were sufficient funds available
therefor, the amount of the shortfall and the allocation thereof as between
principal and interest and specifying, in the case of the Subordinated Bonds,
the Class B-2 Principal Carryover Shortfall and/or Class B-1 Principal Carryover
Shortfall;
(iv) the Class Principal Amount of each Class of Bonds and the
Invested Amount after giving effect to the distribution of principal on such
Payment Date;
(v) the Pool Stated Principal Balance for the following Payment
Date;
(vi) the Senior Percentage, the Class B-1 Percentage, the Class B-2
Percentage and the Investor Percentage for the following Payment Date;
(vii) the amount of the Master Servicing Fees and Servicing Fees
paid to or retained by the Master Servicer and the Servicers (with respect to
the Servicers, in the aggregate) with respect to such Payment Date;
(viii) the Bond Interest Rate for each such Class of Bonds and the
Certificate Interest Rate with respect to such Payment Date;
(ix) the amount of Advances included in the distribution on such
Payment Date and the aggregate amount of Advances outstanding as of the close of
business on such Payment Date;
(x) the number and aggregate principal amounts of Pledged Mortgages
(A) delinquent (exclusive of Pledged Mortgages in foreclosure) (1) 1 to 29 days
(2) 30 to 59 days (3) 60 to 89 days and (4) 90 or more days and (B) in
foreclosure and delinquent (1) 1 to 29 days (2) 30 to 59 days (3) 60 to 89 days
and (4) 90 or more days, as of the close of business on the last day of the
calendar month preceding such Payment Date;
(xi) for each of the preceding 12 calendar months, or all calendar
months since the Cut-off Date, whichever is less, the aggregate dollar amount of
the Scheduled Payments (A) due on all Outstanding Pledged Mortgages on each of
the Due Dates in each such month and (B) delinquent 60 days or more on each of
the Due Dates in each such month;
(xii) with respect to any Pledged Mortgage that became an REO
Property during the preceding calendar month, the loan number and Stated
Principal Balance of such Pledged
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Mortgage as of the close of business on the Determination Date preceding such
Payment Date and the date of acquisition thereof;
(xiii) the total number and principal balance of any REO Properties
(and market value, if available) as of the close of business on the
Determination Date preceding such Payment Date;
(xiv) the Senior Percentage, the Class B-1 Percentage, the Class B-2
Percentage and the Investor Prepayment Percentage for the following Payment
Date;
(xv) the aggregate amount of Realized Losses incurred during the
preceding calendar month and aggregate Realized Losses through such Payment
Date;
(xvi) the amount payable to the holder of the Investor Certificate
pursuant to Section 5.01 of the Deposit Trust Agreement; and
[(xvii) any amount payable under the Bond Insurance Policy.]
(b) The Trustee's responsibility for disbursing the above
information to the Bondholders is limited to the availability, timeliness and
accuracy of the information derived from the Master Servicer. The Trustee will
send a copy of each statement provided pursuant to this Section 8.06 to each
Rating Agency.
(c) Within a reasonable period of time after the end of each
calendar year, the Trustee shall cause to be furnished to each Person who at any
time during the calendar year was a Bondholder, a statement containing the
information set forth in clauses (a)(i), (a)(ii) and (a)(vii) of this Section
8.06 aggregated for such calendar year or applicable portion thereof during
which such Person was a Bondholder. Such obligation of the Trustee shall be
deemed to have been satisfied to the extent that substantially comparable
information shall be provided by the Trustee pursuant to any requirements of the
Code as from time to time in effect.
SECTION 8.07. REPORTS BY TRUSTEE.
In addition to any statements required to be delivered or prepared
by the Trustee pursuant to Section 2.09, 8.02, 8.06 or 10.01, the Trustee shall
deliver to the Issuer, within two Business Days after the request of the Issuer,
a written report setting forth the amount of each Pledged Account established
hereunder and the identity of the investments included therein. Without limiting
the generality of the foregoing, the Trustee shall, upon the request of the
Issuer, promptly transmit to the Issuer copies of all accountings of, and
information with respect to, collections furnished to it by the Master Servicer
and shall promptly notify the Issuer if on the second Business Day after any
Distribution Account Deposit Date, the related Bond Distribution Amount or any
portion thereof has not been received by the Trustee.
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SECTION 8.08. TRUST ESTATE; RELEASE AND DELIVERY OF MORTGAGE DOCUMENTS.
(a) The Trustee may, and when required by the provisions of this
Indenture shall, execute instruments in form supplied to it to release property
from the lien of this Indenture, or convey the Trustee's interest in the same,
in a manner and under circumstances which are not inconsistent with the
provisions of this Indenture and the TIA. No party relying upon an instrument
executed by the Trustee as provided in this Article VIII shall be bound to
ascertain the Trustee's authority, inquire into the satisfaction of any
conditions precedent or see to the application of any moneys.
(b) In order to facilitate the servicing of the Pledged Mortgages by
the Servicers, the Master Servicer is authorized under the Master Servicing
Agreement for the benefit of the Trustee, the Bondholders and the Issuer, to
supervise, administer, monitor and oversee the servicing of the Pledged
Mortgages by the Servicers and the observance and performance by the Servicers
of all services, duties, responsibilities and obligations which are to be
observed or performed by each Servicer pursuant to the Seller/Servicer Guide.
(c) Upon request by the Master Servicer accompanied by a Request for
Release in the form of Exhibit D to the Master Servicing Agreement to the effect
that a Pledged Mortgage has been the subject of a Prepayment in Full or has
otherwise been paid in full, together with any other items required under
Section 8.12, the Trustee shall promptly release the related Mortgage Documents
and execute such other documents as the Master Servicer may request to evidence
satisfaction and discharge of such Pledged Mortgage.
(d) In addition, if from time to time and as appropriate for the
servicing or foreclosure of any Pledged Mortgage, or the other purposes set
forth in the Master Servicing Agreement, the Master Servicer requests the
Trustee to release any related Mortgage Documents or other documents contained
in the Trustee Mortgage File relating to such Pledged Mortgage and delivers to
the Trustee a Request for Release in the form of Exhibit C to the Master
Servicing Agreement to the Trustee and signed by a Servicing Officer, the
Trustee shall release the related Mortgage Documents to the Master Servicer if
the applicable requirements of the Master Servicing Agreement have been
satisfied. If such Pledged Mortgage shall be liquidated and the Trustee receives
an Issuer Request accompanied by a Request for Release as provided in subsection
(c) above, together with any other items required under Section 8.12, then the
Trustee shall release any documents with respect to such Pledged Mortgage still
in its possession to or upon the order of the Issuer and shall execute such
other documents as the Master Servicer may request to evidence satisfaction and
discharge of such Pledged Mortgage, as set forth in subsection (c) above.
(e) The Trustee shall, at such time as there are no Bonds
Outstanding, release all of the Trust Estate to the Issuer (other than any cash
held for the payment of the Bonds pursuant to Section 3.03 or Section 4.02),
subject, however, to Section 4.01 and the rights of the Trustee under Section
6.07.
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SECTION 8.09. AMENDMENTS TO THE MASTER SERVICING AGREEMENT.
The Trustee may enter into or consent to any amendment or supplement
to the Master Servicing Agreement or waive any Servicing Default only in
accordance with the applicable provisions of the Master Servicing Agreement. The
Trustee may, in its discretion, decline to enter into or consent to any such
supplement or amendment or make any such waiver (i) unless the Trustee receives
an Opinion of Counsel that the interests of the Holders would not be materially
adversely affected or (ii) if its own rights, duties or immunities would be
adversely affected.
SECTION 8.10. SERVICERS AND MASTER SERVICER AS AGENTS AND BAILEES OF TRUSTEE.
In order to facilitate the servicing of the Pledged Mortgages by the
each Servicer or by the Master Servicer, each Servicer shall deposit in the
Servicing Account proceeds of the Pledged Mortgages in accordance with the
provisions of the Servicing Agreements, the Master Servicing Agreement and this
Indenture, prior to the time they are deposited into the Bond Account. In
addition, on each Withdrawal Date, the Master Servicer shall cause each Servicer
to remit to the Master Servicer for deposit in the Bond Account all funds held
in the Servicing Account that are required to be remitted to the Master Servicer
in accordance with the terms of the Servicing Agreement and the Master Servicing
Agreement. Solely for purposes of perfection under Section 9-305 of the Uniform
Commercial Code or similar provision of law in the state in which such property
is held by the Servicers or the Master Servicer, the Trustee hereby designates
the Master Servicer and each Servicer as its agents and bailees to hold such
funds with respect to the Pledged Mortgages until they are deposited into the
Distribution Account as well as its agents and bailees in holding any Mortgage
Documents or other documents contained in a Trustee Mortgage File released to it
by the Trustee pursuant to Section 8.08(d), and any other items constituting a
part of the Trust Estate which from time to time come into possession of any
Servicer or the Master Servicer. It is intended that, by the Servicers' and
Master Servicer's acceptance of such agency pursuant to the Servicing Agreements
and the Master Servicing Agreement, the Trustee, as secured party, will be
deemed to have possession of such Mortgage Documents, such moneys and such other
items for purposes of Section 9-305 of the Uniform Commercial Code or similar
provision of law of the states in which such property is held by such Servicer
or the Master Servicer.
SECTION 8.11. OPINION OF COUNSEL.
The Trustee shall be entitled to receive at least five Business
Days' notice of any action to be taken pursuant to Section 8.08(a) (other than
in connection with releases of Pledged Mortgages which were the subject of a
Principal Prepayment in Full) accompanied by copies of any instruments involved,
and the Trustee shall be entitled to request an Opinion of Counsel, in form and
substance reasonably satisfactory to the Trustee, stating the legal effect of
any such action, outlining the steps required to complete the same, and
concluding that all conditions
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precedent to the taking of such action have been complied with. Counsel
rendering any such opinion may rely, without independent investigation, on the
accuracy and validity of any certificate or other instrument delivered to the
Trustee in connection with any such action.
SECTION 8.12. RELEASE OF PLEDGED MORTGAGES.
(a) The Issuer shall be entitled to request a release from the lien
of this Indenture of any Pledged Mortgage at any time after such Pledged
Mortgage has been the subject of a Principal Prepayment in Full or in accordance
with the requirements of Section 8.04 if:
(i) the Master Servicer has complied with all requirements imposed
on it by Section 8.04 in connection with such Pledged Mortgage (or is deemed to
have complied with such requirements by reason of the provisions of Section
8.04(e));
(ii) at the time such release is requested, no Default or Event of
Default has occurred and is continuing; provided, however, that if a Pledged
Mortgage has been the subject of a Principal Prepayment in Full, then the
Trustee shall release such Pledged Mortgage from the lien of this Indenture upon
compliance with all other conditions of this subsection (a), notwithstanding the
existence of a Default or Event of Default;
(iii) the Master Servicer delivers to the Trustee an Officers'
Certificate (A) identifying the Pledged Mortgage to be released, (B) requesting
the release thereof, (C) setting forth the amount deposited in the Bond Account
with respect thereto, if any, and (D) certifying that the conditions set forth
in clauses (i) and (ii) above have been satisfied; and
(iv) the Issuer delivers to the Trustee a certificate of fair value
if required by Section 314(d)(1) or Section 314(d)(3) of the TIA.
(b) Upon satisfaction of the conditions specified in subsection (a)
of this Section 8.12, the Trustee shall release from the lien of this Indenture
and deliver to or upon the order of the Master Servicer the Pledged Mortgage to
be released (including all related Mortgage Documents) described in the Master
Servicer's Request for Release.
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ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF BONDHOLDERS.
Without the consent of the Holders of any Bonds, the Issuer and the
Trustee, at any time and from time to time, may enter into one or more
indentures supplemental hereto, in form satisfactory to the Trustee, for any of
the following purposes:
(1) to correct or amplify the description of any property at any
time subject to the lien of this Indenture, or better to assure, convey and
confirm unto the Trustee any property subject or required to be subjected to the
lien of this Indenture, or to subject to the lien of this Indenture additional
property;
(2) to add to the conditions, limitations and restrictions on the
authorized amount, terms and purposes of the issuance, authentication and
delivery of any Bonds, as herein set forth, additional conditions, limitations
and restrictions thereafter to be observed;
(3) to evidence the succession of another Person to the Issuer, and
the assumption by any such successor of the covenants of the Issuer herein and
in the Bonds contained;
(4) to add to the covenants of the Issuer, for the benefit of the
Holders of all Bonds or to surrender any right or power herein conferred upon
the Issuer;
(5) to cure any ambiguity, to correct or supplement any provision
herein which may be defective or inconsistent with any other provision herein,
or to make any other provisions with respect to matters or questions arising
under this Indenture, which shall not be inconsistent with the provisions of
this Indenture, provided that such action shall not adversely affect the
interests of the Holders of the Bonds (any such action shall be deemed not to
adversely affect the interests of the Bondholders if the Issuer delivers to the
Trustee letters from each Rating Agency to the effect that such action will not
result in a downgrading of the Bonds); or
(6) to modify, eliminate or add to the provisions of this Indenture
to such extent as shall be necessary to effect the qualification of this
Indenture under the TIA or under any similar federal statute hereafter enacted,
and to add to this Indenture such other provisions as may be expressly required
by the TIA.
The Trustee is hereby authorized to join in the execution of any
such supplemental indenture and to make any further appropriate agreements and
stipulations that may be therein contained, but the Trustee shall not be
obligated to enter into any such supplemental indenture that affects the
Trustee's own rights, duties, liabilities or immunities under this Indenture or
otherwise except to the extent required by law.
The Trustee may in its discretion determine whether or not the
rights of the Holder of Bonds would be adversely affected by any supplemental
indenture, and any such determination shall be conclusive upon the Holders of
all Bonds, whether theretofore or thereafter authenticated and delivered
hereunder. In making such determination, a supplemental indenture shall be
conclusively deemed by the Trustee not to adversely affect the Bonds if (i) the
Trustee receives a letter or other writing from each Rating Agency rating the
Bonds to the effect that execution of the supplemental indenture will not result
in any change in the current rating assigned by that Rating Agency to the Bonds
and (ii) the supplemental indenture effects no change in principal priority
schedules, interest rates, Redemption Prices, substitution of
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Mortgage Collateral, Payment Dates, Record Dates, Accounting Dates, terms or
optional Redemption, the application of surplus to the payment of the Bonds or
other payment terms. The Trustee shall not be liable for any such determination
made in good faith.
[The Trustee shall provide the Bond Insurer, if any, with a copy of
any supplemental indenture executed pursuant to this Section, by first class
mail mailed to the Bond Insurer within five Business Days after the execution of
such supplemental indenture. Notwithstanding the foregoing, no supplemental
indenture that changes in any way any of the payment terms of the Bonds may be
entered into without the prior written consent of such Bonder Insurer.]
SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF BONDHOLDERS.
With the consent of the Holders of Bonds representing not less than
two-thirds of the aggregate Class Principal Amount of the Controlling Class by
Act of said Holders delivered to the Issuer and the Trustee [and the Bond
Insurer], the Issuer and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to, or changing in
any manner or eliminating any of the provisions of, this Indenture or of
modifying in any manner the rights of the Holders of the Bonds under this
Indenture; provided, however, that no such supplemental indenture shall, without
the consent of the Holder of each Outstanding Bond affected thereby:
(1) change the Stated Maturity of the final installment of the
principal of, or any installment of interest on, any Bond or reduce the
principal amount thereof, the Bond Interest Rate thereon or the Redemption Price
with respect thereto, change the earliest date on which any Bond may be redeemed
at the option of the Issuer, change any place of payment where, or the coin or
currency in which, any Bond or any interest thereon is payable, or impair the
right to institute suit for the enforcement of the payment of any installment of
interest due on any Bond on or after the Stated Maturity thereof or for the
enforcement of the payment of the entire remaining unpaid principal amount of
any Bond on or after the Stated Maturity of the final installment of the
principal thereof (or, in the case of redemption, on or after the applicable
Optional Redemption Date);
(2) reduce the percentage of the aggregate Class Principal Amount of
the Controlling Class, the consent of the Holders of which is required for any
such supplemental indenture, or the consent of the Holders of which is required
for any waiver of compliance with provisions of this Indenture or Defaults
hereunder and their consequences provided for in this Indenture;
(3) modify any of the provisions of this Section, Section 5.14 or
Section 5.18(b) except to increase any percentage specified therein or to
provide that certain other provisions of this Indenture cannot be modified or
waived without the consent of the Holder of each Outstanding Bond affected
thereby;
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(4) modify or alter the provisions of the proviso to the definition
of the term "Outstanding";
(5) permit the creation of any lien ranking prior to or on a parity
with the lien of this Indenture with respect to any part of the Trust Estate
(except for Permitted Encumbrances) or terminate the lien of this Indenture on
any property at any time subject hereto or deprive the Holder of any Bond of the
security afforded by the lien of this Indenture; or
(6) modify any of the provisions of this Indenture in such manner as
to materially and adversely affect rights of the Holders of the Controlling
Class to the benefits of any provisions for the mandatory redemption of Bonds
contained herein.
The Trustee may in its discretion determine whether or not the
rights of the Holder of any Controlling Class would be materially and adversely
affected by any supplemental indenture and any such determination shall be
conclusive upon the Holders of all Bonds authenticated and delivered hereunder.
The Trustee shall not be liable for any such determination made in good faith.
It shall not be necessary for any Act of Bondholders under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
Promptly after the execution by the Issuer and the Trustee of any
supplemental indenture pursuant to this Section, the Trustee shall mail to the
Holders of the Bonds to which such supplemental indenture relates [and to the
Bond Insurer] a notice setting forth in general terms the substance of such
supplemental indenture. Any failure of the Trustee to mail such notice, or any
defect therein, shall not, however, in any way impair or affect the validity of
any such supplemental indenture.
SECTION 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 6.01) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form
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a part of this Indenture for all purposes; and every Holder of Bonds to which
such supplemental indenture relates which have theretofore been or thereafter
are authenticated and delivered hereunder shall be bound thereby.
SECTION 9.05. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the TIA as then in effect so long as this
Indenture shall then be qualified under the TIA.
SECTION 9.06. REFERENCE IN BONDS TO SUPPLEMENTAL INDENTURES.
Bonds authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and if required by the
Trustee shall, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Issuer shall so determine,
new Bonds so modified as to conform, in the opinion of the Trustee and the
Issuer, to any such supplemental indenture may be prepared and executed by the
Issuer and authenticated and delivered by the Trustee in exchange for
Controlling Class.
SECTION 9.07. AMENDMENTS TO DEPOSIT TRUST AGREEMENT OR MASTER SERVICING
AGREEMENT.
The Trustee shall, upon Issuer Request, consent to any proposed
amendment to the Deposit Trust Agreement or Master Servicing Agreement, or an
amendment to or waiver of any provision of any other document relating to the
Deposit Trust Agreement or Master Servicing Agreement, such consent to be given
without the necessity of obtaining the consent of the Holders of any Bonds upon
receipt by the Trustee of:
(i) an Opinion of Counsel to the effect that such amendment or
waiver will not materially and adversely affect the interests of the Holders of
the Bonds and that all conditions precedent to such consent specified in this
Section 9.07 have been satisfied; provided, however, that no such Opinion of
Counsel shall be required if the Person requesting the amendment obtains a
letter from each Rating Agency stating that the amendment would not result in
the downgrading or withdrawal of the respective ratings then assigned to the
Bonds; it being understood and agreed that any such letter in and of itself will
not represent a determination as to the materiality of any such amendment and
will represent a determination only as to the credit issues affecting any such
rating;
(ii) an Officers' Certificate, to which such proposed amendment or
waiver shall be attached, stating that such attached copy is the true copy of
the proposed amendment or waiver and that all conditions precedent to such
consent specified in this Section 9.07 have been satisfied;
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(iii) written confirmation from the Rating Agencies that the
implementation of the proposed amendment or waiver will not adversely affect
their rating of the Bonds; and
(iv) any other document required pursuant to Section 11.01.
Notwithstanding the foregoing, the Trustee may decline to consent to
a proposed waiver or amendment that adversely affects its own rights, duties or
immunities under this Indenture or otherwise.
Nothing in this Section 9.07 shall be construed to require that any
Person obtain the consent of the Trustee to any amendment or waiver or any
provision of any document where the making of such amendment or the giving of
such waiver without obtaining the consent of the Trustee is not prohibited by
this Indenture or by the terms of the document that is the subject of the
proposed amendment or waiver.
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ARTICLE X
REDEMPTION OF BONDS
SECTION 10.01. SPECIAL REDEMPTION; REDEMPTION.
(a) The Bonds shall not be subject to special redemption.
(b) The Bonds shall be subject to redemption by the Class R-LT
Holder, in whole but not in part, at the option of the Class R-LT Holder, on any
Payment Date on or after the Payment Date on which the sum of (i) the Invested
Amount, (ii) the Senior Class Principal Amount, (iii) the Class B-1 Principal
Amount and (iv) the Class B-2 Principal Amount, after giving effect to payments
expected to be made on such Payment Date, is __% or less than the aggregate of
the Stated Principal Balances of the Pledged Mortgages as of the Cut-Off Date,
on the terms and conditions specified in this subsection (b) at the Redemption
Price. If the Class R-LT Holder elects to so redeem the Bonds, it shall, no
later than 30 days prior to the Optional Redemption Date selected for such
redemption, deliver notice of such election to the Trustee, together with the
Redemption Price therefor to be deposited in the Distribution Account, an Issuer
Order directing the Trustee to effect such redemption, any certification and
opinion required pursuant to Section 11.01 and a form of redemption notice. All
Bonds so redeemed shall be due and payable on such Optional Redemption Date upon
the giving of the notice thereof required by Section 10.02. At all times during
the life of the Trust Estate, the Issuer shall hold the Class R-LT Certificates
or the legal right to the redemption rights accorded to the Class R-LT Holder in
this Section 10.01(b).
SECTION 10.02. FORM OF REDEMPTION NOTICE.
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Notice of redemption shall be given by the Trustee in the name of
and at the expense of the Issuer by first class mail, postage prepaid, mailed
not less than five days prior to the applicable Optional Redemption Date (but in
no event prior to the date on which the Redemption Price with respect to the
Bonds to be redeemed pursuant to subsection (b) of Section 10.01 has been
deposited in the Distribution Account) to each Holder of Bonds to be redeemed,
such Holders being determined as of the last day of the month preceding the
month in which such Optional Redemption Date occurs (the "Optional Redemption
Record Date").
All notices of redemption shall state:
(1) the Optional Redemption Date; and
(2) the fact of such payment in full, the place where such Bonds are
to be surrendered for payment of the Redemption Price (which shall be the office
or agency of the Issuer to be maintained as provided in Section 3.02) and that
no interest shall accrue on such Bond for any period after the last day of the
month preceding the month in which the date fixed for redemption occurs. Failure
to give notice of redemption, or any defect therein, to any Holder of any Bond
selected for redemption shall not impair or affect the validity of the
redemption of any other Bond.
SECTION 10.03. BONDS PAYABLE ON OPTIONAL REDEMPTION DATE.
Notice of redemption having been given as provided in Section 10.02,
the Bonds or portions thereof so to be redeemed shall, on the applicable
Optional Redemption Date, become due and payable at the Redemption Price and
(unless the Issuer shall default in the payment of the Redemption Price) no
interest shall accrue on such Redemption Price for any period after the last day
of the month preceding the month in which such Optional Redemption Date occurs.
SECTION 10.04. ADDITIONAL TERMINATION REQUIREMENTS
(a) In the event the Class R-LT Holder elects to redeem the Bonds as
provided in Section 10.01, the Trust Estate shall be terminated in accordance
with the following additional requirements, unless the Trustee has received an
Opinion of Independent Counsel, at the expense of the Class R-LT Holder, to the
effect that the failure of the Trust Estate to comply with the requirements of
this Section 10.04 will not (i) result in the imposition of taxes on "prohibited
transactions" of the Trust Estate as defined in Section 860F of the Code, or
(ii) cause the Trust Estate to fail to qualify as two REMICs at any time that
any Bonds or Class R Certificates are outstanding:
(i) Depositor shall establish a 90-day liquidation period and notify
the Trustee thereof, which shall in turn specify the first day of such
period in a statement attached to the final tax returns of the Trust
Estate pursuant to Treasury Regulation Section 1.860F-1. The Depositor
shall satisfy all requirements of a qualified liquidation under Section
860F of
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the Code and any regulations thereunder, as evidenced by an Independent
Opinion of Counsel obtained at the expense of the Depositor;
(ii) During such 90-day liquidation period, and at or prior to
the Payment Date for the final distribution, the Depositor as agent of the
Trustee shall sell all of the assets of the Trust Estate for cash; and
(iii) At the time of the final payment on the Bonds and Class R
Certificates, the Trustee shall distribute or credit, or cause to be
distributed or credited, to the Class R-LT Holder all cash on hand (other
than cash retained to meet claims), and the Trust Estate shall terminate
at that time.
(b) By their acceptance of the Class R-LT and Class R-UT Certificates, the
Holders thereof hereby authorize the Depositor to specify the 90-day liquidation
period for the Trust Estate, which authorization shall be binding upon all
successor Holders of the Class R-LT and Class R-UT Certificates.
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ARTICLE XI
MISCELLANEOUS
SECTION 11.01. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Issuer to the Trustee to take
any action under any provision of this Indenture, the Issuer shall furnish to
the Trustee an Officers' Certificate stating that all conditions precedent, if
any, provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate, opinion or letter with respect to compliance with
a condition or covenant provided for in this Indenture (including one furnished
pursuant to specific requirements of this Indenture relating to a particular
application or request) shall include:
(1) a statement that each individual signing such certificate,
opinion or letter has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate, opinion or letter are based;
(3) a statement that, in the opinion of each such individual, he or
she has made such examination or investigation as is necessary to enable such
individual to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 11.02. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by,
or covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents
Any certificate or opinion of an officer of the Issuer may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate ar opinion or representations
with respect to the matters upon which his other certificate or opinion is based
are erroneous. Any such Issuer certificate or Opinion of Counsel may be based,
insofar as it relates to factual matters, upon a certificate or opinion of, or
representations by, an Authorized Officer or Officers of the Owner Trustee or a
certificate of the officers of the Depositor or the manager of the Issuer,
stating that the information with respect to such factual matters is in the
possession of the Owner Trustee, or the Depositor or the manager of the Issuer,
unless such officer or counsel knows, or in the exercise of reasonable care
should know, that the certificate or opinion or representations with respect to
such matters are erroneous. Any Opinion of Counsel may be based on the written
opinion of other counsel, in which event such Opinion of Counsel shall be
accompanied by a copy of such other counsel's opinion and shall include a
statement to the effect that such counsel believes that such counsel and the
Trustee may reasonably rely upon the opinion of such other counsel.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Wherever in this Indenture, in connection with any application or
certificate or report to the Trustee, it is provided that the Issuer shall
deliver any document as a condition of the granting of such application, or as
evidence of the Issuer's compliance with any term hereof, it is intended that
the truth and accuracy, at the time of the granting of such application or at
the effective date of such certificate or report (as the case may be), of the
facts and opinions stated in such document shall in such case be conditions
precedent to the right of the Issuer to have such application granted or to the
sufficiency of such certificate or report. The foregoing shall not,
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however, be construed to affect the Trustee's right to rely upon the truth and
accuracy of any statement or opinion contained in any such document as provided
in Section 6.01(b)(2).
Whenever in this Indenture it is provided that the absence of the
occurrence and continuation of a Default or Event of Default is a condition
precedent to the taking of any action by the Trustee at the request or direction
of the Issuer, then, notwithstanding that the satisfaction of such condition is
a condition precedent to the Issuer's right to make such request or direction,
the Trustee shall be protected in acting in accordance with such request or
direction if it does not have knowledge of the occurrence and continuation of
such Default or Event of Default as provided in Section 6.01(d).
SECTION 11.03. ACTS OF BONDHOLDERS.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Bondholders may be embodied in any evidence by one or more instruments of
substantially similar tenor signed by such Bondholders in person or by an agent
duly appointed in writing; and, except as herein otherwise expressly provided,
such action shall become effective when such instrument or instruments are
delivered to the Trustee, and, where it is hereby expressly required, to the
Issuer. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the
Bondholders signing such instrument or instruments. Proof of execution of any
such instrument or of a writing appointing any such agent shall be sufficient
for any purpose of this Indenture and (subject to Section 6.01) conclusive in
favor of the Trustee and the Issuer, if made in the manner provided in this
Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of any notary public or other officer authorized
by law to take acknowledgements of deeds, certifying that the individual signing
such instrument or writing acknowledged to him or her the execution thereof.
Whenever such execution is by an officer of a corporation or a member of a
partnership on behalf of such corporation or partnership, such certificate or
affidavit shall also constitute sufficient proof of his or her authority.
(c) The ownership of Bonds shall be proved by the Bond Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Bonds shall bind the Holder of every
Bond issued upon the registration of transfer thereof or in exchange therefor or
in lieu thereof, in respect of anything done, omitted or suffered to be done by
the Trustee or the Issuer in reliance thereon, whether or not any notation of
such action is made upon such Bonds.
SECTION 11.04. NOTICES, ETC. TO TRUSTEE AND ISSUER.
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Any request, demand, authorization, direction, notice, consent,
waiver or Act of Bondholders or other documents provided or permitted by this
Indenture to be made upon, given or furnished to, or filed with:
(1) the Trustee by any Bondholder or by the Issuer shall be
sufficient for every purpose hereunder if made, given, furnished or filed in
writing to or with and received by the Trustee at its Corporate Trust Office;
(2) the Issuer by the Trustee or by any Bondholder shall be
sufficient for every purpose hereunder (except as provided in Sections 5.01(3)
and (4)) if in writing and mailed, first-class, postage prepaid, to the Issuer
addressed to it c/o __________________________________________________________
____________________________, Attention: Corporate Trust Administration, or at
any other address previously furnished in writing to the Trustee by the Issuer;
(3) any Rating Agency by the Trustee, the Issuer or the Master
Servicer shall be sufficient for every purpose hereunder if made, given,
furnished or filed in writing to or with and received by such Rating Agency at
the address specified therefor in the definition corresponding to the name of
such Rating Agency; or
[(4) the Bond Insurer by the Trustee, the Issuer or any Bondholder
shall be sufficient for every purpose hereunder if in writing and mailed,
first-class, postage prepaid to the Bond Insurer at ___________________
____________________.]
SECTION 11.05. NOTICES AND REPORTS TO BONDHOLDERS; WAIVER OF NOTICES.
Where this Indenture provides for notice to Bondholders of any event
or the mailing of any report to Bondholders, such notice or report shall be
sufficiently given (unless otherwise herein expressly provided) if mailed,
first-class, postage prepaid, to each Bondholder affected by such event or to
whom such report is required to be mailed, at the address of such Bondholder as
it appears on the Bond Register, not later than the latest date, and not earlier
than the earliest date, prescribed for the giving of such notice or the mailing
of such report. In any case where a notice or report to Bondholders is mailed in
the manner provided above, neither the failure to mail such notice or report,
nor any defect in any notice or report so mailed, to any particular Bondholder
shall affect the sufficiency of such notice or report with respect to other
Bondholders, and any notice or report which is mailed in the manner herein
provided shall be conclusively presumed to have been duly given or provided.
Where this Indenture provides for notice in any manner, such notice
may be waived in writing by any Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waiver of notice by any Bondholder shall
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be filed with the Trustee, but such filing shall not be a condition precedent to
the validity of any action taken in reliance upon such waiver.
In case, by reason of the suspension of regular mail service as a
result of a strike, work stoppage or similar activity, it shall be impractical
to mail notice of any event to Bondholders when such notice is required to be
given pursuant to any provision of this Indenture, then any manner of giving
such notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Where this Indenture provides for notice to Bondholders of any
event, such notice shall also be sent to ______________________________________
_____________________________, so long as [ ] is a Rating Agency.
SECTION 11.06. RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for any meeting of
Bondholders. Any Agent may make reasonable rules and set reasonable requirements
for its functions.
SECTION 11.07. CONFLICT WITH TRUST INDENTURE ACT.
If this Indenture is qualified under the TIA and any provision
hereof limits, qualifies or conflicts with another provision hereof which is
required to be included in this Indenture by any of the provisions of the TIA,
such required provision shall control.
SECTION 11.08. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents
are for convenience only and shall not affect the construction hereof.
SECTION 11.09. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Issuer shall
bind its successors and assigns, whether so expressed or not.
SECTION 11.10. SEPARABILITY.
In case any provision in this Indenture or in the Bonds shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 11.11. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Bonds, expressed or implied,
shall give to any Person, other than the parties hereto and their successors
hereunder, any separate trustee or co-
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trustee appointed under Section 6.14 and the Bondholders, any benefit or any
legal or equitable right, remedy or claim under this Indenture.
SECTION 11.12. LEGAL HOLIDAYS.
In any case where the date of any Payment Date, Redemption Date or
any other date on which principal of, or interest on, any Bond is proposed to be
paid shall not be a Business Day, then (notwithstanding any other provision of
the Bonds or this Indenture) payment need not be made on such date, but may be
made on the next succeeding Business Day with the same force and effect as if
made on the nominal date of any such Payment Date, Optional Redemption Date or
other date for the payment of principal of, or interest on, any Bond, as the
case may be, and no interest shall accrue for the period from and after any such
nominal date, provided such payment is made in full on such next succeeding
Business Day.
SECTION 11.13. GOVERNING LAW.
This Indenture and each Bond shall be construed in accordance with
and governed by the substantive laws of the State of New York applicable to
agreements made and to be performed in the State of New York and the
obligations, rights and remedies of the parties hereto and the Bondholders shall
be determined in accordance with such laws.
SECTION 11.14. COUNTERPARTS.
This instrument may be executed in any number of counterparts, each
of which so executed shall be deemed to be an original, and all such
counterparts shall together constitute but one and the same instrument.
SECTION 11.15. RECORDING OF INDENTURE.
This Indenture is subject to recording in any appropriate public
recording office, such recording to be effected by the Issuer and at its expense
in compliance with any Opinion of Counsel delivered pursuant to Section 2.12(c)
or Section 3.06.
SECTION 11.16. ISSUER OBLIGATION.
No recourse may be taken, directly or indirectly, against (i) the
Bank, (ii) any incorporator, subscriber to the capital stock, stockholder,
officer or director of the Bank or of any predecessor or successor of the Bank,
(iii) any holder of a beneficial interest in the Issuer (solely in its capacity
as such), (iv) any incorporator, subscriber to the capital stock, stockholder,
partner, beneficiary, agent, officer, director, employee, or successor or assign
of a holder of a beneficial interest in the Issuer, (v) the Depositor or any
Affiliate thereof (other than the Issuer) or (vi) any incorporator, subscriber
to the capital stock, stockholder, officer, director or employee of the Trustee
or any predecessor or successor of the Trustee with respect to the Issuer's
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obligation with respect to the Bonds or the obligation of the Issuer or the
Trustee under this Indenture or any certificate or other writing delivered in
connection herewith or therewith.
SECTION 11.17. INSPECTION.
The Issuer agrees that, on reasonable prior notice, it will permit
any representative of the Trustee, during the Issuer's normal business hours, to
examine all books of account, records, reports and other papers of the Issuer,
to make copies and extracts therefrom, to cause such books to be audited by
Independent Accountants selected by the Trustee, and to discuss its affairs,
finances and accounts with its officers, employees and Independent Accountants
(and by this provision the Issuer hereby authorizes its Accountants to discuss
with such representatives such affairs, finances and accounts), all at such
reasonable times and as often as may be reasonably requested. Any expense
incident to the exercise by the Trustee of any rights under this Section 11.17
shall be borne by the Issuer.
SECTION 11.18. USURY.
The amount of interest payable or paid on any Bond under the terms
of this Indenture shall be limited to an amount which shall not exceed the
maximum nonusurious rate of interest allowed by the applicable laws of the
United States or the State of New York (whichever shall permit the higher rate),
which could lawfully be contracted for, charged or received (the "Highest Lawful
Rate"). In the event any payment of interest on any Bond exceeds the Highest
Lawful Rate, the Issuer stipulates that such excess amount will be deemed to
have been paid as a result of an error on the part of both the Trustee, acting
on behalf of the Holder of such Bond, and the Issuer, and the Holder receiving
such excess payment shall promptly, upon discovery of such error or upon notice
thereof from the Issuer or the Trustee, refund the amount of such excess or, at
the option of the Trustee, apply the excess to the payment of principal of such
Bond, if any, remaining unpaid.
SECTION 11.19. NO PETITION.
The Trustee, by entering into this Indenture, and each Bondholder,
by accepting a Bond, hereby covenant and agree that they will not at any time
institute against the Depositor or the Issuer, or join in any institution
against the Depositor or the Issuer of, any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings, or other proceedings under
any United States federal or state bankruptcy or similar law in connection with
any obligations relating to the Bonds, this Indenture or any of the Operative
Agreements.
SECTION 11.20. AMENDMENT
This Indenture may be amended from time to time by the Depositor,
the Master Servicer and the Trustee, with the consent of the Bond Insurer so
long as such consent is not unreasonably withheld and without the consent of any
of the Bondholders, (i) to cure or correct any ambiguity, mistake or error, (ii)
to correct or supplement any provisions herein which may be inconsistent
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with any other provisions herein or with the Prospectus Supplement or Prospectus
pursuant to which the Class A Bonds were offered, (iii) to obtain a rating by a
nationally recognized rating agency or to maintain or improve the rating of the
Class A Bonds then given by a rating agency (it being understood that, after
obtaining the rating of the Class A Bonds at the Closing Date, none of the
Trustee, the Depositor or the Master Servicer is obligated to obtain, maintain
or improve any rating of any Class of Bonds), or (iv) to make any other
provisions with respect to matters or questions arising under this Indenture
which shall not be materially inconsistent with the provisions of this
Indenture, including without limitation provisions relating to the issuance of
Definitive Bonds to Beneficial Owners if book-entry registration of the Class A
Bonds is no longer permitted; provided that, in the case of clause (iv), such
action shall not, as evidenced by an Opinion of Independent Counsel, adversely
affect in any material respect the interests of any Bondholder or Class R
Holder.
This Indenture may also be amended from time to time by the
Depositor, the Master Servicer and the Trustee, with the consent of the Holders
of Bonds of each Class affected thereby, evidencing, as to each such Class,
beneficial interests aggregating not less than 66% and the consent of the Bond
Insurer, for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of this Indenture or of modifying in any
manner the rights of the Holders of Bonds of such Class; provided, however, that
no such amendment shall (i) reduce in any manner the amount of, or delay the
timing of, payments received on Mortgage Loans which are required to be
distributed on any Bond without the consent of the Holder of such Bond or (ii)
reduce the aforesaid percentage of Bonds of any class the Holders of which are
required to consent to any such amendment, without the consent of the Holders of
all Bonds of such Class then outstanding.
The Depositor, the Master Servicer and the Trustee, may from time to
time amend this Indenture without the consent of any of the Bondholders or the
Bond Insurer to modify, eliminate or add to any of the provisions hereof to the
extent necessary to maintain the qualification of the Trust Estate as two REMICs
or to avoid the imposition of any material tax liability thereon at all times
that any Bond is outstanding.
Promptly after the execution of any such amendment the Trustee shall
furnish written notification of such amendment to each Bondholder, the Bond
Insurer and the Rating Agencies (with a copy of the amendment itself to Standard
& Poor's).
It shall not be necessary for the consent of Bondholders under this
Section 11.20 to approve the particular form of any proposed amendment but it
shall be sufficient if such consent shall approve the substance thereof. The
manner of obtaining such consents and of evidencing the authorization of the
execution thereof by Bondholders shall be subject to such reasonable regulations
as the Trustee may prescribe.
Notwithstanding any provisions of this Indenture, the Trustee shall
not consent to any amendment to this Indenture unless it shall first receive an
Opinion of Counsel to the effect that such amendment will not result in the
imposition of a tax on the Trust Estate or cause the Trust Estate to fail to
qualify as two REMICs at any time that any Bonds are outstanding. In no event
shall any Opinion of Counsel provided pursuant to this Section 11.20 be an
expense of the Trustee.
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ARTICLE XII
THE BOND INSURER
SECTION 12.01. CERTAIN MATTERS REGARDING THE BOND INSURER AND THE BOND INSURANCE
POLICY.
[as set forth in the applicable policy]
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IN WITNESS WHEREOF, each party has caused this Indenture to be
executed by its duly authorized officer or officers as of the day and year first
above written.
SEQUOIA MORTGAGE TRUST 200_-_,
as Issuer
By: ________________________________,
not in its individual capacity but
solely as Owner Trustee
By: ________________________________
Name: ______________________________
Title: _____________________________
as Trustee
By: ________________________________
Authorized Officer
By: ________________________________
Name: ______________________________
Title: _____________________________
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STATE OF DELAWARE )
) ss.:
COUNTY OF NEW CASTLE )
On the ____ day of _____________ in the year one thousand nine
hundred and ninety-_____ before me personally came __________________________,
to me known, who being by me duly sworn did depose and say that she/he resides
in _______________, that she/he is the ______________________ of
__________________________, the corporation described in and which executed the
above instrument and that she/he signed her/his name thereto by authority of the
Board of Directors of said corporation.
[NOTARIAL SEAL]
- ---------------------------------------
Notary Public
S-2
<PAGE> 122
STATE OF _________________ )
) ss.:
COUNTY OF ________________ )
On the ____ day of __________, 200__, before me, a notary public in
and for said State, personally appeared ___________________________, known to me
(or proved to me on the basis of satisfactory evidence) to be a ______
______________ of ____________________________________, the ___________________
corporation that executed the within instrument, and also known to me (or proved
to me on the basis of satisfactory evidence) to be the persons who executed it
on behalf of said _____________________ corporation, and acknowledged to me that
such ___________________ corporation executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
[NOTARIAL SEAL]
- ---------------------------------------
Notary Public
S-3
<PAGE> 123
EXHIBIT I
LETTER AGREEMENT WITH THE DEPOSITORY
I-1
<PAGE> 124
EXHIBIT II
FORM OF SENIOR BOND
The form of Senior Bond is as follows:
SOLELY FOR US FEDERAL INCOME TAX PURPOSES, THIS BOND IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE.
PRINCIPAL OF THIS BOND IS PAYABLE IN INSTALLMENTS AS SET FORTH
HEREIN. ACCORDINGLY, THE CLASS PRINCIPAL AMOUNT OF THIS BOND AT ANY TIME MAY BE
LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. THE CLASS PRINCIPAL AMOUNT OF
THIS BOND MAY BE ASCERTAINED ONLY BY OBTAINING A CONFIRMATION THEREOF FROM THE
TRUSTEE UNDER THE INDENTURE REFERRED TO BELOW.
UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND SO ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE, OR USE HEREOF, FOR VALUE OR OTHERWISE, BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
<PAGE> 125
SEQUOIA MORTGAGE TRUST 200_-_,
a Delaware Statutory Business Trust
Collateralized Mortgage Bonds
CLASS A-1
DUE: __________ ___, _____
ACCRUAL DATE: __________ ___, _____
ISSUE DATE: __________ ___, _____
[ ] INTEREST RATE
Initial Class Principal
Amount of this Bond:
$____________________________ CUSIP NO.___
CERTIFICATE NUMBER 1
Sequoia Mortgage Trust 200 _-_ (the "Issuer"), a statutory business
trust formed under the Deposit Trust Agreement dated as of _____________ ___,
200__ and having _________________________, a Delaware bank and trust company,
as Owner Trustee, for value received, hereby promises to pay to CEDE & CO. or
registered assigns, the principal sum of [AMOUNT IN WORDS] ($_______) in monthly
installments on the ____________ day of each month, commencing on ________ _
___, _____ (each, a "Payment Date"), and ending on or before __________ ___,
_____, (the "Stated Maturity" of such final installment of principal), and to
pay interest (computed on the basis of a 360-day year of twelve 30-day months)
on the Class Principal Amount (as defined in the Indenture hereinafter referred
to) of this Bond from time to time from _ ________ ___, _____ (the "Accrual
Date"), or such later date to which interest has been paid, through the last day
of the month preceding the month in which the principal amount of this Bond is
paid in full, at a [variable/fixed] rate determined as described below, such
interest being payable monthly on each Payment Date. If any Payment Date shall
not be a "Business Day" (as defined in the Indenture), payment of the amount due
will be made on the next succeeding Business Day.
Installments of principal of this Bond are due and payable as
described in the Indenture.
Interest payable on this Bond on a Payment Date will be equal to the
amount of interest that has accrued on the Class Principal Amount of this Bond
during the one-month period ending on the last day of the month preceding the
month in which each such Payment Date occurs (each, an "Interest Accrual
Period").
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<PAGE> 126
The principal of, and interest on, this Bond are payable in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts. All payments made by the
Issuer with respect to this Bond shall be applied as set forth in the Indenture.
Any installment of principal or interest which is not paid when and as due shall
bear interest as described in the Indenture.
Unless the certificate of authentication hereon has been executed by
the Trustee by manual signature, this Bond shall not be entitled to any benefit
under the Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, Sequoia Mortgage Trust 200_-_ has caused this
instrument to be duly executed by its duly authorized officer.
Dated:_______________ SEQUOIA MORTGAGE TRUST 200_-_
By: ____________________________
not in its individual capacity
but solely as Owner Trustee
By: ____________________________
Title: _________________________
CERTIFICATE OF AUTHENTICATION
This is one of the Bonds referred to in the within-mentioned Indenture.
_______________________________,
as Trustee
By: ___________________________,
Authorized Signatory
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<PAGE> 127
This Bond is one of a duly authorized issue of Bonds of the Issuer,
designated as its Collateralized Mortgage Bonds, Series 200-_ (herein called the
"Bonds"). The Bonds are issuable in one or more classes; the Bonds of particular
Classes being herein called the Class A-1, Class B-1, and Class B-2 Bonds, and
the Class R-LT and Class R-UT Certificates, all issued and to be issued under
the Issuer's Indenture dated as of ____________ ___, 200__ between the Issuer
and _______________________________ (the "Trustee", which term includes any
successor Trustee under the Indenture), which authorized the Bonds, and
reference is hereby made thereto for a statement of the respective rights
thereunder of the Issuer, the Trustee and the Holders of the Bonds of each
particular Class thereof and the terms upon which the Bonds of each Class are,
and are to be, authenticated and delivered.
The Class A-1 Bonds constitute "Senior Bonds" and the Class B-1
Bonds and the Class B-2 Bonds constitute "Subordinated Bonds".
The Class R-LT and R-UT Certificates represent the residual interest
in the Lower-Tier REMIC and Upper-Tier REMIC, respectively.
All terms used in this Bond which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
The Bond Interest Rate for the Senior Bonds (the "Senior Bond
Interest Rate") and any Interest Accrual Period will equal _______________.
As provided in the Indenture, the Bonds are issuable in Classes
which may vary as is provided or permitted in the Indenture. Bonds of each Class
are equally and ratably secured by the collateral pledged as security therefor
to the extent provided by the Indenture.
For each Principal Payment Date, the aggregate amount of each
installment of principal due and payable on the Senior Bonds will be equal to
the Senior Principal Payment Amount for such Payment Date. The Senior Principal
Payment Amount for any Payment Date is equal to the Senior Percentage of the sum
of (a) the principal portion of the Scheduled Payment due on each Pledged
Mortgage [on the related Due Date], (b) the principal portion of the purchase
price of each Pledged Mortgage that was purchased by Redwood Trust or another
person pursuant to the Mortgage Loan Purchase Agreement [or any optional
purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such
Payment Date, (c) the Substitution Adjustment Amount in connection with any
Deleted Pledged Mortgage received with respect to such Payment Date, (d) any
Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal
of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received
during the [calendar month] preceding the month of such Payment Date, (e) with
respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage
during the [calendar month] preceding the month of such Payment Date, the Stated
Principal Balance of such Pledged Mortgage, and (f) all partial and full
principal prepayments by borrowers received during the related Prepayment
Period.
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<PAGE> 128
Payments of principal or interest, if any, on the Bonds will be made
on each Payment Date, commencing on ____________ ___, 200__, in the manner and
in accordance with the priorities for the Bonds provided in the Indenture.
The entire unpaid principal amount of each Class of Bonds shall be
due and payable, if not then previously paid, on the Stated Maturity of the
final installment of principal of such Class.
All payments of principal of, and interest on, the Bonds shall be
made only from the Trust Estate Granted as security for the Bonds and any other
assets of the Issuer that have not been Granted as security for any other bonds
or obligations of the Issuer, and each Holder hereof, by its acceptance of this
Bond, agrees that it will have recourse solely against such Trust Estate and
such other assets of the Issuer and that neither _____________________ ___ in
its individual capacity, any holder of a beneficial interest in the Issuer nor
any of their respective shareholders, partners, beneficiaries, agents, officers,
directors, employees, successors or assigns shall be personally liable for any
amounts payable, or performance due, under this Bond or the Indenture.
Payment of the then remaining unpaid principal amount of this Bond
on the Stated Maturity of its final installment of principal or on such earlier
date as the Issuer shall be required to pay the then remaining unpaid principal
amount of this Bond or payment of the Redemption Price payable on any date as of
which this Bond has been called for redemption in full, shall be made upon
presentation of this Bond to the office or agency of the Issuer maintained for
such purpose. Payments of interest on this Bond due and payable on each Payment
Date or on any Optional Redemption Date, to the extent this Bond is not being
paid in full, together with any installment of principal of this Bond due and
payable on each Payment Date or the Optional Redemption Date, to the extent not
in full payment of this Bond, shall be made by check mailed to the Person whose
name appears as the registered Holder of this Bond (or one or more Predecessor
Bonds) on the Bond Register as of the last day of the month preceding the month
in which such Payment Date occurs (each a "Record Date").
Checks for amounts which include installments of principal due on
this Bond shall be mailed to the Person entitled thereto at the address of such
Person as it appears on the Bond Register as of the applicable Record Date
without requiring that this Bond be submitted for notation of payment and checks
returned undelivered will be held for payment to the Person entitled thereto,
subject to the terms of the Indenture, at the office or agency in the United
States of America designated by the Issuer for such purpose pursuant to the
Indenture. Any reduction in the principal amount of this Bond (or any one or
more Predecessor Bonds) effected by any payments made on any Payment Date shall
be binding upon all Holders of this Bond and of any Bond issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not noted hereon.
If funds are expected to be available, as provided in the Indenture,
for payment in full of the then remaining unpaid principal amount of this Bond
on a Payment Date or Optional
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Redemption Date which is prior to the Stated Maturity of the final installment
of principal hereof, then the Trustee, on behalf of the Issuer, will notify the
Person who was the registered Holder hereof on the last day of the month prior
to the month in which such Payment Date or Optional Redemption Date occurs, and
the amount then due and payable shall, if sufficient funds therefor are
available, be payable only upon presentation of this Bond to the office or
agency of the Issuer maintained for such purpose.
The failure of the Issuer to pay when and as due any installment of
principal of (regardless of the lapse of any grace period) any Senior Bond shall
not constitute an Event of Default under the Indenture unless the Senior Class
Principal Amount exceeds the aggregate Stated Principal Balances of the Pledged
Mortgages after application of all available amounts on deposit in the
Distribution Account on a Payment Date.
If an Event of Default as defined in the Indenture shall occur and
be continuing with respect to the Bonds, the Bonds may become or be declared due
and payable in the manner and with the effect provided in the Indenture. If any
such acceleration of maturity occurs prior to the Stated Maturity of the final
installment of principal of this Bond, the amount payable to the Holder of this
Bond will be equal to the Class Principal Amount of this Bond on the date this
Bond becomes so due and payable, together with accrued interest. Following the
acceleration of the maturity of the Bonds, all amounts collected as proceeds of
the collateral securing the Bonds or otherwise shall be applied as described in
the Indenture. Following such acceleration, interest on any overdue installments
of interest on all Bonds shall be payable at the rate set forth in the
Indenture.
The Bonds are not prepayable or redeemable at the option or
direction of the Issuer except that the Bonds are subject to redemption in
whole, but not in part, at the option of the Issuer on any Payment Date on or
after the Payment Date on which the sum of (i) the Invested Amount, (ii) the
Senior Class Principal Amount, (iii) the Class B- 1 Principal Amount and (iv)
the Class B-2 Principal Amount, after giving effect to payments expected to be
made on such Payment Date, is __% or less of the aggregate of the Stated
Principal Balances of the Pledged Mortgages as of the Cut- Off Date. Any such
redemption at the option of the Issuer shall be at a price equal to 100% of the
unpaid principal amount of the Bonds (including, in the case of the Subordinated
Bonds, any unpaid Class B-1 Principal Carryover Shortfall and/or Class B-2
Principal Carryover Shortfall) so redeemed plus accrued interest through the
last day of the month preceding the month in which such optional redemption
occurs.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Bond may be registered on the Bond
Register of the Issuer, upon surrender of this Bond for registration of transfer
at the office or agency designated by the Issuer pursuant to the Indenture, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Trustee duly executed by the Holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Bonds of the same
Class, of authorized denominations and in the same aggregate initial principal
amount, will be issued to the designated transferee or transferees.
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<PAGE> 130
Prior to the due presentment for registration of transfer of this
Bond, the Issuer, the Trustee, and any agent of the Issuer shall treat the
Person in whose name this Bond is registered (i) on any Record Date, for
purposes of making payments, and (ii) on any other date for any other purposes,
as the owner hereof, whether or not this Bond be overdue, and neither the
Issuer, the Trustee nor any such agent shall be affected by notice to the
contrary.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Issuer and the rights of the Holders of the Bonds under the Indenture at any
time by the Issuer with the consent of the Holders of Bonds representing
two-thirds of the aggregate Class Principal Amount of the Controlling Class. The
Indenture also contains provisions permitting the Holders of Bonds representing
specified percentages of the aggregate Class Principal Amount of the Controlling
Class on behalf of the Holders of all the Bonds of such Class, to waive
compliance by the Issuer with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder, at the time of the giving thereof, of this Bond (or any
one or more Predecessor Bonds) shall be conclusive and binding upon such Holder
and upon all future holders of this Bond and of any Bond issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof whether
or not notation of such consent or waiver is made upon this Bond. The Indenture
also permits the Trustee to amend or waive certain terms and conditions set
forth in the Indenture without the consent of the Holders of the Bonds of any
Series issued thereunder.
The Senior Bonds are "Book Entry Bonds" which will be available to
investors only through the book entry facilities of The Depository Trust
Company, and bond certificates for all Classes of Bonds will be available only
under certain limited circumstances as described in the Indenture.
AS PROVIDED IN THE INDENTURE, THIS BOND AND THE INDENTURE SHALL BE
CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED THEREIN.
No reference herein to the Indenture and no provision of this Bond
or of the Indenture shall alter or impair the obligation of the Issuer, which is
absolute and unconditional to the extent permitted by applicable law, to pay the
principal of, and interest on, this Bond at the times, place and rate, and in
the coin or currency herein prescribed.
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EXHIBIT III
FORM OF CLASS B-1 BOND
The form of a Class B-1 Bond is as follows:
SOLELY FOR US FEDERAL INCOME TAX PURPOSES, THIS BOND IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE.
PRINCIPAL OF THIS BOND IS PAYABLE IN INSTALLMENTS AS SET FORTH
HEREIN. ACCORDINGLY, THE CLASS PRINCIPAL AMOUNT OF THIS BOND AT ANY TIME MAY BE
LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. THE CLASS PRINCIPAL AMOUNT OF
THIS BOND MAY BE ASCERTAINED ONLY BY OBTAINING A CONFIRMATION THEREOF FROM THE
TRUSTEE UNDER THE INDENTURE REFERRED TO BELOW.
UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
THIS BOND IS SUBORDINATED IN RIGHT OF PAYMENT TO THE SENIOR BONDS AS
DESCRIBED IN THE INDENTURE REFERRED TO HEREIN.
THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSE OF APPLYING
THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO THIS BOND.
THE ISSUE DATE OF THIS BOND IS __________ ___, 200__. THE PER ANNUM RATE OF
INTEREST ON THIS BOND IS ___% ASSUMING THAT PRINCIPAL PAYMENTS ARE MADE ON THE
MORTGAGE COLLATERAL UNDERLYING THE BONDS AT _______% OF THE STANDARD PREPAYMENT
ASSUMPTION (AS DEFINED IN THE PROSPECTUS SUPPLEMENT) THIS BOND HAS BEEN ISSUED
WITH $ OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT, THE YIELD TO MATURITY IS
___% AND THE AMOUNT OF OID ATTRIBUTABLE TO THE INITIAL SHORT ACCRUAL PERIOD IS
$_______
<PAGE> 132
OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT, CALCULATED ASSUMING THE YIELD IS
ACCRUED DAILY DURING INITIAL SHORT PERIOD. NO REPRESENTATION IS MADE AS TO THE
RATE AT WHICH PRINCIPAL PAYMENTS WILL BE MADE ON THE MORTGAGE COLLATERAL.
SEQUOIA MORTGAGE TRUST 200_-_,
a Delaware Statutory Business Trust
Collateralized Mortgage Bonds
CLASS B-1
DUE: _____________ ___, _____
ACCRUAL DATE: _____________ ___, _____
ISSUE DATE: _____________ ___, _____
___________ INTEREST RATE
Initial Class Principal CUSIP NO. ______
Amount of this Bond:
$____________________ CERTIFICATE NUMBER 1
Sequoia Mortgage Trust 200_-_ (the "Issuer"), a statutory business
trust formed under the Deposit Trust Agreement dated as of __________ ___,
_____, and having ________________________, a Delaware bank and trust company,
as Owner Trustee for value received, hereby promises to pay to CEDE & CO. or
registered assigns, the principal sum of [AMOUNT IN WORDS] ($___________) in
monthly installments on the ______________ day of each month, commencing on
_________ ___, _____ (each, a "Payment Date"), and ending on or before
__________ ___, _____ (the "Stated Maturity" of such final installment of
principal), and to pay interest (computed on the basis of a 360-day year of
twelve 30-day months) on the Class Principal Amount (as defined in the
Indenture) of this Bond from time to time from __________ ___, _____ (the
"Accrual Date"), or such later date to which interest has been paid, through the
last day of the month preceding the month in which the principal amount of this
Bond is paid in full, at a [variable/fixed] rate determined as described below,
such interest being payable monthly on each Payment Date. If any Payment Date
shall not be a "Business Day" (as defined in the Indenture), payment of the
amount due will be made on the next succeeding Business Day.
Installments of principal of this Bond are due and payable as
described in the Indenture.
Interest payable on this Bond on a Payment Date will be equal to the
amount of interest that has accrued on the Class Principal Balance of this Bond
during the one-month
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<PAGE> 133
period ending on the last day of the month preceding the month in which each
such Payment Date occurs (each, an "Interest Accrual Period").
The principal of, and interest on, this Bond are payable in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts. All payments made by the
Issuer with respect to this Bond shall be applied as set forth in the Indenture.
Any installment of principal or interest which is not paid when and as due shall
bear interest as described in the Indenture.
Unless the certificate of authentication hereon has been executed by
the Trustee by manual signature, this Bond shall not be entitled to any benefit
under the Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, Sequoia Mortgage Trust 200_-_ has caused this
instrument to be duly executed by its duly authorized officer.
Dated:_______________ SEQUOIA MORTGAGE TRUST 200_-_
By: ____________________________
not in its individual capacity
but solely as Owner Trustee
By: ____________________________
Title: _________________________
CERTIFICATE OF AUTHENTICATION
This is one of the Bonds referred to in the within-mentioned Indenture.
______________________________,
as Trustee
By: ___________________________
Authorized Signatory
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<PAGE> 134
This Bond is one of a duly authorized issue of Bonds of the Issuer,
designated as its Collateralized Mortgage Bonds, Series 200_-_ (herein called
the "Bonds"). The Bonds are issuable in one or more classes; the Bonds of
particular Classes being herein called the Class A-1, Class B-1 and Class B-2
Bonds, and Class R-LT and Class R-UT Certificates, all issued and to be issued
under the Issuer's Indenture dated as of ____________ ___, 200__ between the
Issuer and ________________________________ (the "Trustee", which term includes
any successor Trustee under the Indenture), which authorized the Bonds, and
reference is hereby made thereto for a statement of the respective rights
thereunder of the Issuer, the Trustee and the Holders of the Bonds of each
particular Class thereof and the terms upon which the Bonds of each Class are,
and are to be, authenticated and delivered.
The Class A-1 Bonds constitute "Senior Bonds" and the Class B-1
Bonds and Class B-2 Bonds constitute "Subordinated Bonds".
The Class R-LT and R-UT Certificates represent the residual interest
in the Lower-Tier REMIC and Upper-Tier REMIC, respectively.
All terms used in this Bond which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
The Bond Interest Rate for the Class B-1 Bonds (the "Class B-1 Bond
Interest Rate") and any Interest Accrual Period will equal ________________.
As provided in the Indenture, the Bonds are issuable in Classes
which may vary as provided or permitted in the Indenture. Bonds of each Class
are equally and ratably secured by the collateral pledged as security therefor
to the extent provided by the Indenture.
For each Payment Date, the aggregate amount of each installment of
principal due and payable on the Class B-1 Bonds will be equal to the Class B-1
Principal Payment Amount for such Payment Date. The Class B-1 Principal Payment
Amount for any Payment Date is equal to the sum of (i) the Class B-1 Percentage
of the sum of (a) the principal portion of the Scheduled Payment due on each
Pledged Mortgage [on the related Due Date], (b) the principal portion of the
purchase price of each Pledged Mortgage that was purchased by Redwood Trust or
another person pursuant to the Mortgage Loan Purchase Agreement [or by the
Master Servicer in connection with any optional purchase by the Master Servicer
of a defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution
Adjustment Amount in connection with any Deleted Pledged Mortgage received with
respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds
allocable to recoveries of principal of Pledged Mortgages that are not yet
Liquidated Pledged Mortgages received during the [calendar month] preceding the
month of such Payment Date, (e) with respect to each Pledged Mortgage that
became a Liquidated Pledged Mortgage during the [calendar month] preceding the
month of such Payment Date, the Stated Principal Balance of such Pledged
Mortgage and (f) all partial and full principal prepayments by borrowers
received during the related Prepayment Period and (ii) any Class B-1 Principal
Carryover Shortfall.
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Payments of principal or interest, if any, on the Bonds will be made
on each Payment Date, commencing on __________ ___, 200__, in the manner and in
accordance with the priorities for the Bonds provided in the Indenture.
The entire unpaid principal amount of each Class of Bonds shall be
due and payable, if not then previously paid, on the Stated Maturity of the
final installment of principal of such Class.
All payments of principal of, and interest on, the Bonds shall be
made only from the Trust Estate Granted as security for the Bonds and any other
assets of the Issuer that have not been Granted as security for any other bonds
or obligations of the Issuer, and each Holder hereof, by its acceptance of this
Bond, agrees that it will have recourse solely against such Trust Estate and
such other assets of the Issuer and that neither Wilmington Trust Company in its
individual capacity, any holder of a beneficial interest in the Issuer nor any
of their respective shareholders, partners, beneficiaries, agents, officers,
directors, employees, successors or assigns shall be personally liable for any
amounts payable, or performance due, under this Bond or the Indenture.
Payment of the then remaining unpaid principal amount of this Bond
on the Stated Maturity of its final installment of principal or on such earlier
date as the Issuer shall be required to pay the then remaining unpaid principal
amount of this Bond or payment of the Redemption Price payable on any date as of
which this Bond has been called for redemption in full, shall be made upon
presentation of this Bond to the office or agency of the Issuer maintained for
such purpose. Payments of interest on this Bond due and payable on each Payment
Date or on any Optional Redemption Date, to the extent this Bond is not being
paid in full, together with any installment of principal of this Bond due and
payable on each Payment Date or the Optional Redemption Date, to the extent not
in full payment of this Bond, shall be made by check mailed to the Person whose
name appears as the registered Holder of this Bond (or one or more Predecessor
Bonds) on the Bond Register as of the last day of the month preceding the month
in which such Payment Date occurs (each a "Record Date").
Checks for amounts which include installments of principal due on
this Bond shall be mailed to the Person entitled thereto at the address of such
Person as it appears on the Bond Register as of the applicable Record Date
without requiring that this Bond be submitted for notation of payment and checks
returned undelivered will be held for payment to the Person entitled thereto,
subject to the terms of the Indenture, at the office or agency in the United
States of America designated by the Issuer for such purpose pursuant to the
Indenture. Any reduction in the principal amount of this Bond (or any one or
more Predecessor Bonds) effected by any payments made on any Payment Date shall
be binding upon all Holders of this Bond and of any Bond issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not noted hereon.
If funds are expected to be available, as provided in the Indenture,
for payment in full of the then remaining unpaid principal amount of this Bond
on a Payment Date or Optional
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Redemption Date which is prior to the Stated Maturity of the final installment
of principal hereof, then the Trustee, on behalf of the Issuer, will notify the
Person who was the registered Holder hereof on the last day of the month prior
to the month in which such Payment Date or optional Redemption Date occurs, and
the amount then due and payable shall, if sufficient funds therefor are
available, be payable only upon presentation of this Bond to the office or
agency of the Issuer maintained for such purpose.
Prior to the payment in full of the Senior Bonds, the failure of the
Issuer to pay when and as due any installment of principal of or interest
(regardless of the lapse of any grace period) on any Subordinated Bond shall not
constitute an Event of Default under the Indenture. In addition, notwithstanding
any applicable provision of the Indenture, upon payment in full of the Senior
Bonds, the prior occurrence of any such shortfalls attributable to the
Subordinated Bonds, which shortfalls have previously been paid in full, will not
constitute an Event of Default under the Indenture in respect of the
Subordinated Bonds.
If an Event of Default as defined in the Indenture shall occur and
be continuing with respect to the Bonds, the Bonds may become or be declared due
and payable in the manner and with the effect provided in the Indenture. If any
such acceleration of maturity occurs prior to the Stated Maturity of the final
installment of principal of this Bond, the amount payable to the Holder of this
Bond will be equal to the Class Principal Amount of this Bond on the date this
Bond becomes so due and payable, together with accrued interest. Following the
acceleration of the maturity of the Bonds, all amounts collected as proceeds of
the collateral securing the Bonds or otherwise shall be applied as described in
the Indenture. Following such acceleration, interest on any overdue installments
of interest on all Bonds shall be payable at the rate set forth in the
Indenture.
The Bonds are not prepayable or redeemable at the option or
direction of the Issuer except that the Bonds are subject to redemption in
whole, but not in part, at the option of the Issuer on any Payment Date on or
after the Payment Date on which the sum of (i) the Invested Amount, (ii) the
Senior Class Principal Amount, (iii) the Class B- 1 Principal Amount and (iv)
the Class B-2 Principal Amount, after giving effect to payments expected to be
made on such Payment Date, is __% or less of the aggregate of the Stated
Principal Balances of the Pledged Mortgages as of the Cut- Off Date. Any such
redemption at the option of the Issuer shall be at a price equal to 100% of the
unpaid principal amount of the Bonds (including, in the case of the Subordinated
Bonds, any unpaid Class B-1 Principal Carryover Shortfall and/or Class B-2
Principal Carryover Shortfall) so redeemed plus accrued interest through the
last day of the month preceding the month in which such optional redemption
occurs.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Bond may be registered on the Bond
Register of the Issuer, upon surrender of this Bond for registration of transfer
at the office or agency designated by the Issuer pursuant to the Indenture, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Trustee duly executed by the Holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Bonds of the same
Class, of authorized denominations
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and in the same aggregate initial principal amount, will be issued to the
designated transferee or transferees.
Prior to the due presentment for registration of transfer of this
Bond, the Issuer, the Trustee, and any agent of the Issuer shall treat the
Person in whose name this Bond is registered (i) on any Record Date, for
purposes of making payments, and (ii) on any other date for any other purposes,
as the owner hereof, whether or not this Bond be overdue, and neither the
Issuer, the Trustee nor any such agent shall be affected by notice to the
contrary.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Issuer and the rights of the Holders of the Bonds under the Indenture at any
time by the Issuer with the consent of the Holders of Bonds representing
two-thirds of the aggregate Class Principal Amount of the Controlling Class. The
Indenture also contains provisions permitting the Holders of Bonds representing
specified percentages of the aggregate Class Principal Amount of the Controlling
Class on behalf of the Holders of all the Bonds of such Class, to waive
compliance by the Issuer with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder, at the time of the giving thereof, of this Bond (or any
one or more Predecessor Bonds) shall be conclusive and binding upon such Holder
and upon all future holders of this Bond and of any Bond issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof whether
or not notation of such consent or waiver is made upon this Bond. The Indenture
also permits the Trustee to amend or waive certain terms and conditions set
forth in the Indenture without the consent of the Holders of the Bonds of any
Series issued thereunder.
The Class B-1 Bonds are "Book Entry Bonds" which will be available
to investors only through the book entry facilities of The Depository Trust
Company, and bond certificates for all Classes of Bonds will be available only
under certain limited circumstances as described in the Indenture.
AS PROVIDED IN THE INDENTURE, THIS BOND AND THE INDENTURE SHALL BE
CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED THEREIN.
No reference herein to the Indenture and no provision of this Bond
or of the Indenture shall alter or impair the obligation of the Issuer, which is
absolute and unconditional to the extent permitted by applicable law, to pay the
principal of, and interest on, this Bond at the times, place and rate, and in
the coin or currency herein prescribed.
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EXHIBIT IV
FORM OF CLASS B-2 BOND
The form of a Class B-2 Bond is as follows:
SOLELY FOR US FEDERAL INCOME TAX PURPOSES, THIS BOND IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE.
PRINCIPAL OF THIS BOND IS PAYABLE IN INSTALLMENTS AS SET FORTH
HEREIN. ACCORDINGLY, THE CLASS PRINCIPAL AMOUNT OF THIS BOND AT ANY TIME MAY BE
LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. THE CLASS PRINCIPAL AMOUNT OF
THIS BOND MAY BE ASCERTAINED ONLY BY OBTAINING A CONFIRMATION THEREOF FROM THE
TRUSTEE UNDER THE INDENTURE REFERRED TO BELOW.
[UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
THIS BOND IS SUBORDINATED IN RIGHT OF PAYMENT TO THE CLASS B-1 BONDS
AND THE SENIOR BONDS AS DESCRIBED IN THE INDENTURE REFERRED TO HEREIN.
THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSE OF APPLYING
THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO THIS BOND.
THE ISSUE DATE OF THIS BOND IS _____________, 200__. THE PER ANNUM RATE OF
INTEREST ON THIS BOND IS ___% ASSUMING THAT PRINCIPAL PAYMENTS ARE MADE ON THE
MORTGAGE COLLATERAL UNDERLYING THE BONDS AT _______% OF THE STANDARD PREPAYMENT
ASSUMPTION (AS DEFINED IN THE PROSPECTUS SUPPLEMENT) THIS BOND HAS BEEN ISSUED
WITH $ OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT, THE YIELD TO MATURITY IS
___% AND THE AMOUNT
<PAGE> 139
OF OID ATTRIBUTABLE TO THE INITIAL SHORT ACCRUAL PERIOD IS $_______ OF OID PER
$1,000 OF INITIAL PRINCIPAL AMOUNT, CALCULATED ASSUMING THE YIELD IS ACCRUED
DAILY DURING INITIAL SHORT PERIOD. NO REPRESENTATION IS MADE AS TO THE RATE AT
WHICH PRINCIPAL PAYMENTS WILL BE MADE ON THE MORTGAGE COLLATERAL.
SEQUOIA MORTGAGE TRUST 200_-_,
a Delaware Statutory Business Trust
Collateralized Mortgage Bonds
CLASS B-2
DUE: __________ ___, _____
ACCRUAL DATE: __________ ___, _____
ISSUE DATE: __________ ___, _____
INTEREST RATE _____
Initial Class Principal CUSIP NO. ______
Amount of this Bond:
$____________________ CERTIFICATE NUMBER 1
Sequoia Mortgage Trust 200_-_ (the "Issuer"), a statutory business
trust formed under the Deposit Trust Agreement dated as of __________ ___,
200__, and having ________________________, a Delaware bank and trust company,
as Owner Trustee for value received, hereby promises to pay to CEDE & CO. or
registered assigns, the principal sum of [AMOUNT IN WORDS] ($___________) in
monthly installments on the ____________ day of each month, commencing on
__________ ___, _____ (each, a "Payment Date"), and ending on or before
__________ ___, _____ (the "Stated Maturity" of such final installment of
principal), and to pay interest (computed on the basis of a 360-day year of
twelve 30-day months) on the Class Principal Amount (as defined in the
Indenture) of this Bond from time to time from __________ ___, _____ (the
"Accrual Date"), or such later date to which interest has been paid, through the
last day of the month preceding the month in which the principal amount of this
Bond is paid in full, at a variable rate determined as described below, such
interest being payable monthly on each Payment Date. If any Payment Date shall
not be a "Business Day" (as defined in the Indenture), payment of the amount due
will be made on the next succeeding Business Day.
Installments of principal of this Bond are due and payable as
described in the Indenture.
Interest payable on this Bond on a Payment Date will be equal to the
amount of interest that has accrued on the Class Principal Balance of this Bond
during the one-month
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period ending on the last day of the month preceding the month in which each
such Payment Date occurs (each, an "Interest Accrual Period").
The principal of, and interest on, this Bond are payable in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts. All payments made by the
Issuer with respect to this Bond shall be applied as set forth in the Indenture.
Any installment of principal or interest which is not paid when and as due shall
bear interest as described in the Indenture.
Unless the certificate of authentication hereon has been executed by
the Trustee by manual signature, this Bond shall not be entitled to any benefit
under the Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, Sequoia Mortgage Trust 200_-_ has caused this
instrument to be duly executed by its duly authorized officer.
Dated:_______________ SEQUOIA MORTGAGE TRUST 200_-_
By: ____________________________
not in its individual capacity
but solely as Owner Trustee
By: ____________________________
Title: _________________________
CERTIFICATE OF AUTHENTICATION
This is one of the Bonds referred to in the within-mentioned Indenture.
______________________________,
as Trustee
By: ___________________________
Authorized Signatory
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This Bond is one of a duly authorized issue of Bonds of the Issuer,
designated as its Collateralized Mortgage Bonds, Series 200__-__ (herein called
the "Bonds"). The Bonds are issuable in one or more classes; the Bonds of
particular Classes being herein called the Class A-1, Class B-1 and Class B-2
Bonds, and Class R-LT and Class R-UT Certificates, all issued and to be issued
under the Issuer's Indenture dated as of ____________ ___, _____, between the
Issuer and ____________ _____________________ (the "Trustee", which term
includes any successor Trustee under the Indenture), which authorized the Bonds,
and reference is hereby made thereto for a statement of the respective rights
thereunder of the Issuer, the Trustee and the Holders of the Bonds of each
particular Class thereof and the terms upon which the Bonds of each Class are,
and are to be, authenticated and delivered.
The Class A-1 Bonds constitute "Senior Bonds" and the Class B-1 and
Class B-2 Bonds constitute "Subordinated Bonds".
The Class R-LT and Class R-UT Certificates represent the residual
interest in the Lower-Tier REMIC and Upper-Tier REMIC, respectively.
All terms used in this Bond which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
The Bond Interest Rate for the Class B-2 Bonds (the "Class B-2 Bond
Interest Rate") and any Interest Accrual Period will equal _______________.
As provided in the Indenture, the Bonds are issuable in Classes
which may vary as provided or permitted in the Indenture. Bonds of each Class
are equally and ratably secured by the collateral pledged as security therefor
to the extent provided by the Indenture.
For each Payment Date, the aggregate amount of each installment of
principal due and payable on the Class B-2 Bonds will be equal to the Class B-2
Principal Payment Amount for such Payment Date. The Class B-2 Principal Payment
Amount for any Payment Date is equal to the sum of (i) the Class B-2 Percentage
of the sum of (a) the principal portion of the Scheduled Payment due on each
Pledged Mortgage [on the related Due Date], (b) the principal portion of the
purchase price of each Pledged Mortgage that was purchased by Redwood Trust or
another person pursuant to the Mortgage Loan Purchase Agreement [or by the
Master Servicer in connection with any optional purchase by the Master Servicer
of a defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution
Adjustment Amount in connection with any Deleted Pledged Mortgage received with
respect to such Payment Date, (d) any Insurance Proceeds or Liquidation Proceeds
allocable to recoveries of principal of Pledged Mortgages that are not yet
Liquidated Pledged Mortgages received during the [calendar month] preceding the
month of such Payment Date, (e) with respect to each Pledged Mortgage that
became a Liquidated Pledged Mortgage during the [calendar month] preceding the
month of such Payment Date, the Stated Principal Balance of such Pledged
Mortgage and (f) all partial and full principal prepayments by borrowers
received during the related Prepayment Period and (ii) any Class B-2 Principal
Carryover Shortfall.
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Payments of principal or interest, if any, on the Bonds will be made
on each Payment Date, commencing on _____________ __, 200_, in the manner and in
accordance with the priorities for the Bonds provided in the Indenture.
The entire unpaid principal amount of each Class of Bonds shall be
due and payable, if not then previously paid, on the Stated Maturity of the
final installment of principal of such Class.
All payments of principal of, and interest on, the Bonds shall be
made only from the Trust Estate Granted as security for the Bonds and any other
assets of the Issuer that have not been Granted as security for any other bonds
or obligations of the Issuer, and each Holder hereof, by its acceptance of this
Bond, agrees that it will have recourse solely against such Trust Estate and
such other assets of the Issuer and that neither Wilmington Trust Company in its
individual capacity, any holder of a beneficial interest in the Issuer nor any
of their respective shareholders, partners, beneficiaries, agents, officers,
directors, employees, successors or assigns shall be personally liable for any
amounts payable, or performance due, under this Bond or the Indenture.
Payment of the then remaining unpaid principal amount of this Bond
on the Stated Maturity of its final installment of principal or on such earlier
date as the Issuer shall be required to pay the then remaining unpaid principal
amount of this Bond or payment of the Redemption Price payable on any date as of
which this Bond has been called for redemption in full, shall be made upon
presentation of this Bond to the office or agency of the Issuer maintained for
such purpose. Payments of interest on this Bond due and payable on each Payment
Date or on any Optional Redemption Date, to the extent this Bond is not being
paid in full, together with any installment of principal of this Bond due and
payable on each Payment Date or the Optional Redemption Date, to the extent not
in full payment of this Bond, shall be made by check mailed to the Person whose
name appears as the registered Holder of this Bond (or one or more Predecessor
Bonds) on the Bond Register as of the last day of the month preceding the month
in which such Payment Date occurs (each a "Record Date").
Checks for amounts which include installments of principal due on
this Bond shall be mailed to the Person entitled thereto at the address of such
Person as it appears on the Bond Register as of the applicable Record Date
without requiring that this Bond be submitted for notation of payment and checks
returned undelivered will be held for payment to the Person entitled thereto,
subject to the terms of the Indenture, at the office or agency in the United
States of America designated by the Issuer for such purpose pursuant to the
Indenture. Any reduction in the principal amount of this Bond (or any one or
more Predecessor Bonds) effected by any payments made on any Payment Date shall
be binding upon all Holders of this Bond and of any Bond issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not noted hereon.
If funds are expected to be available, as provided in the Indenture,
for payment in full of the then remaining unpaid principal amount of this Bond
on a Payment Date or Optional
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Redemption Date which is prior to the Stated Maturity of the final installment
of principal hereof, then the Trustee, on behalf of the Issuer, will notify the
Person who was the registered Holder hereof on the last day of the month prior
to the month in which such Payment Date or optional Redemption Date occurs, and
the amount then due and payable shall, if sufficient funds therefor are
available, be payable only upon presentation of this Bond to the office or
agency of the Issuer maintained for such purpose.
Prior to the payment in full of the Senior Bonds, the failure of the
Issuer to pay when and as due any installment of principal of or interest
(regardless of the lapse of any grace period) on any Subordinated Bond shall not
constitute an Event of Default under the Indenture. In addition, notwithstanding
any applicable provision of the Indenture, upon payment in full of the Senior
Bonds, the prior occurrence of any such shortfalls attributable to the
Subordinated Bonds, which shortfalls have previously been paid in full, will not
constitute an Event of Default under the Indenture in respect of the
Subordinated Bonds.
If an Event of Default as defined in the Indenture shall occur and
be continuing with respect to the Bonds, the Bonds may become or be declared due
and payable in the manner and with the effect provided in the Indenture. If any
such acceleration of maturity occurs prior to the Stated Maturity of the final
installment of principal of this Bond, the amount payable to the Holder of this
Bond will be equal to the Class Principal Amount of this Bond on the date this
Bond becomes so due and payable, together with accrued interest. Following the
acceleration of the maturity of the Bonds, all amounts collected as proceeds of
the collateral securing the Bonds or otherwise shall be applied as described in
the Indenture. Following such acceleration, interest on any overdue installments
of interest on all Bonds shall be payable at the rate set forth in the
Indenture.
The Bonds are not prepayable or redeemable at the option or
direction of the Issuer except that the Bonds are subject to redemption in
whole, but not in part, at the option of the Issuer on any Payment Date on or
after the Payment Date on which the sum of (i) the Invested Amount, (ii) the
Senior Class Principal Amount and (iii) the Subordinated Class Principal Amount,
after giving effect to payments expected to be made on such Payment Date, is __%
or less of the aggregate of the Stated Principal Balances of the Pledged
Mortgages as of the Cut-Off Date. Any such redemption at the option of the
Issuer shall be at a price equal to 100% of the unpaid principal amount of the
Bonds (including, in the case of the Subordinated Bonds, any unpaid Class B-1
Principal Carryover Shortfall and/or Class B-2 Principal Carryover Shortfall) so
redeemed plus accrued interest through the last day of the month preceding the
month in which such optional redemption occurs.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Bond may be registered on the Bond
Register of the Issuer, upon surrender of this Bond for registration of transfer
at the office or agency designated by the Issuer pursuant to the Indenture, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Trustee duly executed by the Holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Bonds of the same
Class, of authorized denominations
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<PAGE> 144
and in the same aggregate initial principal amount, will be issued to the
designated transferee or transferees.
Prior to the due presentment for registration of transfer of this
Bond, the Issuer, the Trustee, and any agent of the Issuer shall treat the
Person in whose name this Bond is registered (i) on any Record Date, for
purposes of making payments, and (ii) on any other date for any other purposes,
as the owner hereof, whether or not this Bond be overdue, and neither the
Issuer, the Trustee nor any such agent shall be affected by notice to the
contrary.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Issuer and the rights of the Holders of the Bonds under the Indenture at any
time by the Issuer with the consent of the Holders of Bonds representing
two-thirds of the aggregate Class Principal Amount of the Controlling Class. The
Indenture also contains provisions permitting the Holders of Bonds representing
specified percentages of the aggregate Class Principal Amount of the Controlling
Class on behalf of the Holders of all the Bonds such Class, to waive compliance
by the Issuer with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder, at the time of the giving thereof, of this Bond (or any one or more
Predecessor Bonds) shall be conclusive and binding upon such Holder and upon all
future holders of this Bond and of any Bond issued upon the registration of
transfer hereof or in exchange herefor or in lieu hereof whether or not notation
of such consent or waiver is made upon this Bond. The Indenture also permits the
Trustee to amend or waive certain terms and conditions set forth in the
Indenture without the consent of the Holders of the Bonds of any Series issued
thereunder.
[The Subordinated Bonds are "Book Entry Bonds" which will be
available to investors only through the book entry facilities of The Depository
Trust Company, and bond certificates for all Classes of Bonds will be available
only under certain limited circumstances as described in the Indenture.]
AS PROVIDED IN THE INDENTURE, THIS BOND AND THE INDENTURE SHALL BE
CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED THEREIN.
No reference herein to the Indenture and no provision of this Bond
or of the Indenture shall alter or impair the obligation of the Issuer, which is
absolute and unconditional to the extent permitted by applicable law, to pay the
principal of, and interest on, this Bond at the times, place and rate, and in
the coin or currency herein prescribed.
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EXHIBIT V
FORM OF CLASS R-LT CERTIFICATE
THIS CLASS R-LT CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT
BE RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT OR
LAWS OR IS SOLD OR TRANSFERRED IN TRANSACTIONS WHICH ARE EXEMPT FROM
REGISTRATION UNDER SUCH ACT OR UNDER APPLICABLE STATE LAW AND IS
TRANSFERRED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 2.07 OF THE
INDENTURE REFERRED TO HEREIN.
THIS CLASS R-LT CERTIFICATE IS SUBORDINATE IN RIGHT OF PAYMENT TO THE
CLASS A AND CLASS B BONDS AS DESCRIBED IN THE INDENTURE REFERRED TO
HEREIN.
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
"RESIDUAL INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" AS
THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE
INTERNAL REVENUE CODE.
NEITHER THIS CERTIFICATE NOR ANY BENEFICIAL INTEREST HEREIN MAY BE,
DIRECTLY OR INDIRECTLY, TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR
OTHERWISE ASSIGNED WITHOUT THE DELIVERY TO THE TRUSTEE OF AN EXECUTED
TRANSFER AFFIDAVIT, AND ANY TRANSFER IN VIOLATION OF THIS RESTRICTION
SHALL BE ABSOLUTELY NULL AND VOID AND SHALL VEST NO RIGHTS IN ANY
PURPORTED TRANSFEREE, AND SHALL SUBJECT THE HOLDER HEREOF TO LIABILITY FOR
ANY TAX IMPOSED (AND RELATED EXPENSES, IF ANY) WITH RESPECT TO SUCH
ATTEMPTED TRANSFER.
CLASS R-LT PERCENTAGE
RESIDUAL INTEREST INTEREST: 100%
NUMBER: __________
DATE OF INDENTURE:
[_________, 20__]
<PAGE> 146
CUT-OFF DATE:
[________, 20__]
FIRST DISTRIBUTION DATE:
[________, 20__]
SEQUOIA MORTGAGE TRUST [20__]
COLLATERALIZED MORTGAGE BONDS
evidencing a percentage interest in any distribution allocable to the
Class R-LT Certificates with respect to a pool of adjustable rate
conventional one- to four-family mortgage loans formed and sold by
SEQUOIA MORTGAGE FUNDING, INC.
THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN SEQUOIA
MORTGAGE FUNDING, INC., THE MASTER SERVICER OR THE TRUSTEE REFERRED TO BELOW OR
ANY OF THEIR AFFILIATES. NEITHER THIS CERTIFICATE NOR THE UNDERLYING MORTGAGE
LOANS ARE GUARANTEED OR INSURED BY SEQUOIA MORTGAGE FUNDING, INC. OR BY ANY OF
ITS AFFILIATES OR BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
This certifies that ___________________ is the registered owner of a beneficial
interest in certain distributions with respect to a pool (the "Mortgage Pool")
conventional one- to four-family mortgage loans (the "Mortgage Pool") formed and
sold by Sequoia Mortgage Funding, Inc. (hereinafter called the "Depositor",
which term includes any successor entity under the Indenture referred to below),
and certain other property held in trust for the benefit of Bondholders
(collectively, the "Trust Estate"). The Mortgage Loans are serviced by
__________________ (the "Master Servicer"). The Trust Estate was created
pursuant to an Indenture dated as specified above (the "Indenture") among
Sequoia Mortgage Trust [20__] (the "Issuer"), and _____________ (the "Trustee"),
a summary of certain of the pertinent provisions of which is set forth
hereafter. To the extent not defined herein, the capitalized terms used herein
have the meanings signed in the Indenture.
This Certificate is one of a duly authorized issue of Certificates, designated
as Sequoia Mortgage Trust [20__] Collateralized Mortgage Bonds, Class R-LT (the
"Class R-LT Certificate") and is issued under and is subject to the terms,
provisions and conditions of the Indenture, to which Indenture the Holder of
this Certificate by virtue of the acceptance hereof assents and by which such
Holder is bound. Also issued under the Indenture are Bonds designated as Sequoia
Mortgage Trust [20__] Collateralized Mortgage Bonds, Class B (the "Class B
Bonds"), and one residual interest Certificate designated collectively as
Sequoia Mortgage Trust [20__] Collateralized Mortgage Bonds, Class R-UT (the
"Class R-UT Certificate" and together with the Class R-LT Certificate, the
"Class R Certificates"). The Class A Bonds are senior to the Class B
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Bonds and Class R Certificates in right of payment to the extent described in
the Indenture. The Class A Bonds and the Class B Bonds are collectively referred
to as the "Bonds". Any payments made under this Certificate will be made in
accordance with the terms of the Indenture.
The Indenture may be amended from time to time by the Depositor, the Master
Servicer and the Trustee, with the consent of the Bond Insurer and without the
consent of any of the Bondholders, (i) to cure or correct any ambiguity, mistake
or error, (ii) to correct or supplement any provisions therein which may be
inconsistent with any other provisions therein or with the Prospectus Supplement
or Prospectus pursuant to which the Class A Bonds were offered, (iii) to ensure
continuing treatment of the Trust Estate as two REMICs or to avoid the
imposition of certain tax liabilities, (iv) to obtain a rating by a nationally
recognized rating agency or to maintain or improve the ratings of the Class A
Bonds then given by a rating agency (it being understood that, after obtaining
the ratings of the Class A Bonds at the Closing Date, none of the Trustee, the
Depositor or the Master Servicer is obligated to obtain, maintain or improve any
rating of any Class of Bonds), and (v) to make any other provisions with respect
to matters or questions arising under the Indenture which are not materially
inconsistent with the provisions of the Indenture, including without limitation
provisions relating to the issuance of Definitive Bonds to Beneficial Owners if
book-entry registration of the Class A Bonds is no longer permitted; provided
that, in the case of clause (v), such action does not, as evidenced by an
Opinion of Counsel, adversely affect in any material respect the interest of any
Bondholder.
The Indenture may also be amended from time to time by the Depositor, the Master
Servicer and the Trustee, with the consent of the Holders of Bonds of each Class
affected thereby evidencing, as to each such Class, beneficial interests
aggregating not less than 66% and the consent of the Bond Insurer, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Indenture or of modifying in any manner the rights of
the Holders of Bonds of such Class; provided, however, that no such amendment
may (i) reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans which are required to be distributed on any Bond
without the consent of the Holder of such Bond or (ii) reduce the aforesaid
percentage of Bonds of any Class the Holders of which are required to consent to
any such amendment, without the consent of the Holders of all Bonds of such
Class then outstanding.
The Depositor intends to cause an election to be made to treat the Trust as two
real estate mortgage investment conduits (the "Lower-Tier REMIC" and the
"Upper-Tier REMIC"). The Class A Bonds and the Class B Bonds will constitute
"regular interests" in the Upper-Tier REMIC. The Class R-UT Certificate will
constitute the "residual interest" in the Upper-Tier REMIC and the Class R-LT
Certificate will constitute the "residual interest" in the Lower-Tier REMIC.
No transfer of a Class R Certificate will be made unless such transfer is exempt
from the registration requirements of the Securities Act of 1933, as amended,
and any applicable state securities laws or is made pursuant to an effective
registration statement under said Act or laws. The Depositor may direct the
Trustee to require an opinion of counsel acceptable to and in form and substance
satisfactory to the Depositor that such transfer is exempt (describing the
applicable
3
<PAGE> 148
exemption and the basis therefor) from the registration requirements of the
Securities Act of 1933, as amended, and from any applicable securities statute
of any state, and the transferee shall execute an investment letter in the form
described by the Indenture. Unless the Opinion of Counsel required by Section
2.07(h) has been delivered to the Trustee in connection with this Certificate,
the holder of this Certificate represents, by virtue of its acceptance hereof,
that it is not an employee benefit plan or other retirement plan or arrangement
subject to Section 406 of ERISA or Section 4975 of the Code or a person acting
on behalf of such a plan or arrangement or using the funds of such a plan or
arrangement to acquire this Certificate.
The respective obligations and responsibilities of the Depositor, the Master
Servicer and the Trustee under the Indenture will terminate upon: (i) the later
of the final payment or other liquidation (or any advance with respect thereto)
of the last Mortgage Loan or the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure of any Mortgage Loan and the
remittance of all funds due thereunder; or (ii) at the option of the Class R-LT
Holder on any Payment Date which occurs in the month following a Due Date on
which the aggregate unpaid Principal Balance of all outstanding Mortgage Loans
is less than [__]% of the Cut-off Date Pool Balance in accordance with the
provisions set forth in the Indenture; or (iii) at the option of the Bond
Insurer on any Payment Date which occurs in the month following a Due Date on
which the aggregate unpaid Principal Balance of all outstanding Mortgage Loans
is less than [__%] of the Cut-off Date Pool Balance in accordance with the
provisions set forth in the Indenture; provided, however, that in no event shall
the trust created hereby continue beyond the expiration of 21 years from the
death of the last survivor of the descendants of Joseph P. Kennedy, the late
ambassador of the United States to the Court of St. James's, living on the date
hereof.
Most of the Mortgage Loans are convertible to fixed rates or new Indices in
accordance with their terms.
Unless the certificate of authentication hereon has been executed by the
Trustee, by manual signature, this Certificate shall not be entitled to any
benefit under the Indenture or be valid for any purpose.
4
<PAGE> 149
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly executed.
Dated: [_______ __, 20__]
--------------------------------------
as Trustee
By:
-----------------------------------
Authorized Signatory
FORM OF CERTIFICATE OF AUTHENTICATION
THIS IS THE CLASS R
CERTIFICATE REFERRED TO
IN THE WITHIN-MENTIONED INDENTURE
- -------------------------------,
as Trustee
By:
------------------------------------
Authorized Signatory
5
<PAGE> 150
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto
(PLEASE INSERT SOCIAL SECURITY* OR TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE)
- --------------------------
- --------------------------
- --------------------------------------------------------------------------------
(Please Print or Typewrite Name and Address of Assignee)
- --------------------------------------------------------------------------------
the within Certificate, and all rights thereunder, and hereby does irrevocably
constitute and appoint
- --------------------------------------------------------------------------------
Attorney to transfer the within Certificate on the books kept for the
registration thereof, with full power of substitution in the premises.
Dated:
(Signature guaranty)
--------------------------------------------
NOTICE: The signature to this
assignment must correspond with
the name as it appears upon the
face of the within Certificate
in every particular, without
alteration or enlargement or
any change whatever.
(*This information, which is voluntary, is being requested to ensure that the
assignee will not be subject to backup withholding under Section 3406 of the
Code.)
6
<PAGE> 151
EXHIBIT VI
FORM OF CLASS R-UT CERTIFICATE
THIS CLASS R-UT CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT
BE RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT OR
LAWS OR IS SOLD OR TRANSFERRED IN TRANSACTIONS WHICH ARE EXEMPT FROM
REGISTRATION UNDER SUCH ACT OR UNDER APPLICABLE STATE LAW AND IS
TRANSFERRED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 2.07 OF THE
INDENTURE REFERRED TO HEREIN.
THIS CLASS R-UT CERTIFICATE IS SUBORDINATE IN RIGHT OF PAYMENT TO THE
CLASS A AND CLASS B BONDS AS DESCRIBED IN THE INDENTURE REFERRED TO
HEREIN.
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
"RESIDUAL INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" AS
THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE
INTERNAL REVENUE CODE.
NEITHER THIS CERTIFICATE NOR ANY BENEFICIAL INTEREST HEREIN MAY BE,
DIRECTLY OR INDIRECTLY, TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR
OTHERWISE ASSIGNED WITHOUT THE DELIVERY TO THE TRUSTEE OF AN EXECUTED
TRANSFER AFFIDAVIT, AND ANY TRANSFER IN VIOLATION OF THIS RESTRICTION
SHALL BE ABSOLUTELY NULL AND VOID AND SHALL VEST NO RIGHTS IN ANY
PURPORTED TRANSFEREE, AND SHALL SUBJECT THE HOLDER HEREOF TO LIABILITY FOR
ANY TAX IMPOSED (AND RELATED EXPENSES, IF ANY) WITH RESPECT TO SUCH
ATTEMPTED TRANSFER.
CLASS R-UT PERCENTAGE
RESIDUAL INTEREST INTEREST: 100%
NUMBER:___________
DATE OF INDENTURE:
[________, 20__]
<PAGE> 152
CUT-OFF DATE:
[_______, 20__]
FIRST DISTRIBUTION DATE:
[________, 20__]
SEQUOIA MORTGAGE TRUST 20__
COLLATERALIZED MORTGAGE BONDS
evidencing a percentage interest in any distribution allocable to the
Class R-UT Certificate with respect to a pool of adjustable rate
conventional one- to four-family mortgage loans formed and sold by
SEQUOIA MORTGAGE FUNDING, INC.
THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN SEQUOIA
MORTGAGE FUNDING, INC., THE MASTER SERVICER OR THE TRUSTEE REFERRED TO BELOW OR
ANY OF THEIR AFFILIATES. NEITHER THIS CERTIFICATE NOR THE UNDERLYING MORTGAGE
LOANS ARE GUARANTEED OR INSURED BY SEQUOIA MORTGAGE FUNDING, INC. OR BY ANY OF
ITS AFFILIATES OR BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
This certifies that ___________________ is the registered owner of a beneficial
interest in certain distributions with respect to a pool (the "Mortgage Pool")
conventional one- to four-family mortgage loans (the "Mortgage Pool") formed and
sold by Sequoia Mortgage Funding, Inc. (hereinafter called the "Depositor",
which term includes any successor entity under the Indenture referred to below),
and certain other property held in trust for the benefit of Bondholders
(collectively, the "Trust Estate"). The Mortgage Loans are serviced by
____________ (the "Master Servicer"). The Trust Estate was created pursuant to
an Indenture dated as specified above (the "Indenture") among Sequoia Mortgage
Funding 20__ (the "Issuer") and _____________ (the "Trustee"), a summary of
certain of the pertinent provisions of which is set forth hereafter. To the
extent not defined herein, the capitalized terms used herein have the meanings
signed in the Indenture.
This Certificate is one of a duly authorized issue of Bonds and Class R
Certificates, designated as Sequoia Mortgage Trust 20__ Collateralized Mortgage
Bonds, Class R (the "Class R Certificate") and is issued under and is subject to
the terms, provisions and conditions of the Indenture, to which Indenture the
Holder of this Certificate by virtue of the acceptance hereof assents and by
which such Holder is bound. Also issued under the Indenture are Bonds designated
as Sequoia Mortgage Trust 20__ Collateralized Mortgage Bonds, Class B (the
"Class B Bonds"), and one residual interest Certificate designated collectively
as Sequoia Mortgage Trust 20__ Collateralized Mortgage Bonds, Class R-LT (the
"Class R-LT Certificate" and together with the Class R-UT Certificate, the
"Class R Certificates"). The Class A Bonds are senior to the Class B Bonds and
Class R Certificates in right of payment to the extent described in the
Indenture. The Class A Bonds, the Class B Bonds are collectively referred to as
the
2
<PAGE> 153
"Bonds". Any payments made under this Certificate will be made in accordance
with the terms of the Indenture.
The Indenture may be amended from time to time by the Depositor, the Master
Servicer and the Trustee, with the consent of the Bond Insurer and without the
consent of any of the Bondholders, (i) to cure or correct any ambiguity, mistake
or error, (ii) to correct or supplement any provisions therein which may be
inconsistent with any other provisions therein or with the Prospectus Supplement
or Prospectus pursuant to which the Class A Bonds were offered, (iii) to ensure
continuing treatment of the Trust Estate as two REMICs or to avoid the
imposition of certain tax liabilities, (iv) to obtain a rating by a nationally
recognized rating agency or to maintain or improve the ratings of the Class A
Bonds then given by a rating agency (it being understood that, after obtaining
the ratings of the Class A Bonds at the Closing Date, none of the Trustee, the
Depositor or the Master Servicer is obligated to obtain, maintain or improve any
rating of any Class of Bonds), and (v) to make any other provisions with respect
to matters or questions arising under the Indenture which are not materially
inconsistent with the provisions of the Indenture, including without limitation
provisions relating to the issuance of Definitive Bonds to Beneficial Owners if
book-entry registration of the Class A Bonds is no longer permitted; provided
that, in the case of clause (v), such action does not, as evidenced by an
Opinion of Counsel, adversely affect in any material respect the interest of any
Bondholder.
The Indenture may also be amended from time to time by the Depositor, the Master
Servicer and the Trustee, with the consent of the Holders of Bonds of each Class
affected thereby evidencing, as to each such Class, beneficial interests
aggregating not less than 66% and the consent of the Bond Insurer, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Indenture or of modifying in any manner the rights of
the Holders of Bonds of such Class; provided, however, that no such amendment
may (i) reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans which are required to be distributed on any Bond
without the consent of the Holder of such Bond or (ii) reduce the aforesaid
percentage of Bonds of any Class the Holders of which are required to consent to
any such amendment, without the consent of the Holders of all Bonds of such
Class then outstanding.
The Depositor intends to cause an election to be made to treat the Trust Estate
as two real estate mortgage investment conduits (the "Lower-Tier REMIC" and the
"Upper-Tier REMIC"). The Class A Bonds and the Class B Bonds will constitute
"regular interests" in the Upper-Tier REMIC. The Class R-UT Certificate will
constitute the "residual interest" in the Upper-Tier REMIC and the Class R-LT
Certificate will constitute the "residual interest" in the Lower-Tier REMIC.
No transfer of a Class R Certificate will be made unless such transfer is exempt
from the registration requirements of the Securities Act of 1933, as amended,
and any applicable state securities laws or is made pursuant to an effective
registration statement under said Act or laws. The Depositor may direct the
Trustee to require an opinion of counsel acceptable to and in form and substance
satisfactory to the Depositor that such transfer is exempt (describing the
applicable
3
<PAGE> 154
exemption and the basis therefor) from the registration requirements of the
Securities Act of 1933, as amended, and from any applicable securities statute
of any state, and the transferee shall execute an investment letter in the form
described by the Indenture. Unless the Opinion of Counsel required by Section
2.07 has been delivered to the Trustee in connection with this Certificate, the
holder of this Certificate represents, by virtue of its acceptance hereof, that
it is not an employee benefit plan or other retirement plan or arrangement
subject to Section 406 of ERISA or Section 4975 of the Code or a person acting
on behalf of such a plan or arrangement or using the funds of such a plan or
arrangement to acquire this Certificate.
The respective obligations and responsibilities of the Depositor, the Master
Servicer and the Trustee under the Indenture will terminate upon: (i) the later
of the final payment or other liquidation (or any advance with respect thereto)
of the last Mortgage Loan or the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure of any Mortgage Loan and the
remittance of all funds due thereunder; or (ii) at the option of the Class R-LT
Holder on any Payment Date which occurs in the month following a Due Date on
which the aggregate unpaid Principal Balance of all outstanding Mortgage Loans
is less than [__%] of the Cut-off Date Pool Balance in accordance with the
provisions set forth in the Indenture; or (iii) at the option of the Bond
Insurer on any Payment Date which occurs in the month following a Due Date on
which the aggregate unpaid Principal Balance of all outstanding Mortgage Loans
is less than [__%] of the Cut-off Date Pool Balance in accordance with the
provisions set forth in the Indenture; provided, however, that in no event shall
the trust created hereby continue beyond the expiration of 21 years from the
death of the last survivor of the descendants of Joseph P. Kennedy, the late
ambassador of the United States to the Court of St. James's, living on the date
hereof.
Most of the Mortgage Loans are convertible to fixed rates or new Indices in
accordance with their terms.
Unless the certificate of authentication hereon has been executed by the
Trustee, by manual signature, this Certificate shall not be entitled to any
benefit under the Indenture or be valid for any purpose.
4
<PAGE> 155
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly executed.
Dated: [___________, 20__]
--------------------------------------
as Trustee
By:
-----------------------------------
Authorized Signatory
FORM OF CERTIFICATE OF AUTHENTICATION
THIS IS THE CLASS R-UT
CERTIFICATE REFERRED TO
IN THE WITHIN-MENTIONED INDENTURE
- ---------------------------------
as Trustee
By:
------------------------------
Authorized Signatory
5
<PAGE> 156
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto
(PLEASE INSERT SOCIAL SECURITY* OR TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE)
- -------------------------------
- -------------------------------
- --------------------------------------------------------------------------------
(Please Print or Typewrite Name and Address of Assignee)
- --------------------------------------------------------------------------------
the within Certificate, and all rights thereunder, and hereby does irrevocably
constitute and appoint
- --------------------------------------------------------------------------------
Attorney to transfer the within Certificate on the books kept for the
registration thereof, with full power of substitution in the premises.
Dated:
(Signature guaranty)
--------------------------------------------
NOTICE: The signature to this
assignment must correspond with
the name as it appears upon the
face of the within Certificate
in every particular, without
alteration or enlargement or
any change whatever.
(*This information, which is voluntary, is being requested to ensure that the
assignee will not be subject to backup withholding under Section 3406 of the
Code.)
6
<PAGE> 157
EXHIBIT VII
FORM OF BOND INSURANCE POLICY
<PAGE> 158
EXHIBIT VIII
FORM OF INVESTMENT LETTER FOR HOLDER OF THE
CLASS B BOND, CLASS R-LT AND CLASS R-UT CERTIFICATES
1. The Purchaser is acquiring the Class B Bond (the "Bond"), Class R-LT or Class
R-UT Certificate (the "Certificate") as principal for its own account for the
purpose of investment [neither the Depositor nor any of its Affiliates need
represent that it is acquiring for purposes of investment] and not with a view
to or for sale in connection with any distribution thereof, subject nevertheless
to any requirement of law that the disposition of the Purchaser's property shall
at all times be and remain within its control.
2. The Purchaser has knowledge and experience in financial and business matters
and is capable of evaluating the merits and risks of its investment in the
residual interest and is able to bear the economic risk of such investment. The
Purchaser is an "accredited investor" within the meaning of Rule 501(a) under
the rules and regulations of the Securities and Exchange Commission under the
Securities Act of 1933, as amended [Affiliates of the Depositor need not make
this representation]. The Purchaser has been given such information concerning
the Bond and/or Certificate, the underlying Mortgage Loans and the Master
Servicer as it has requested.
3. The Purchaser will comply with all applicable federal and state securities
laws in connection with any subsequent resale by the Purchaser of the Bond
and/or Certificate.
4. The Purchaser understands that the Bond and/or Certificate has not been and
will not be registered under the Securities Act of 1933, as amended, or any
state securities laws and may be resold (which resale is not currently
contemplated) only if an exemption from registration is available, that neither
the Depositor, the Master Servicer nor the Trustee is required to register the
Bond or the Certificate and that any transfer must comply with Section 2.07 of
the Indenture. In connection with any resale of the Bond and/or Certificate, the
Purchaser shall not make any general solicitation or advertisement.
5. The Purchaser agrees that it will obtain from any purchaser of the Bond
and/or Certificate from it the same representations, warranties and agreements
contained in the foregoing paragraphs 1 through 4 and in this paragraph 5.
<PAGE> 159
6. The Purchaser hereby directs the Trustee to register the Bond and/or
Certificate acquired by the Purchaser in the name of its nominee as follows:
____________.
Very truly yours,
-----------------------------------------
NAME OF PURCHASER
By:
-------------------------------------
Name:
---------------------------------
Title:
---------------------------------
7
<PAGE> 160
EXHIBIT IX
FORM OF TRANSFER AFFIDAVIT FOR CLASS R-LT OR CLASS R-UT CERTIFICATE
STATE OF )
: ss.:
COUNTY OF )
The undersigned, being first duly sworn, deposes and says as follows:
1. The undersigned is an officer of _____________________ (the "Transferee"), a
corporation duly organized and existing under the laws of the State of Delaware
and on behalf of which the undersigned makes this affidavit.
2. The Transferee is acquiring a beneficial ownership interest in Sequoia
Mortgage Trust 200__, Collateralized Mortgage Bonds, Class [R-LT] [R-UT] (the
"Class [R-LT] [R-UT] Certificates"), issued pursuant to the Indenture, dated as
of ____________ 1, 200_ (the "Indenture"), by and among Sequoia Mortgage Trust
20__, as Issuer (the "Issuer") and ______________, as Trustee (the "Trustee").
Capitalized terms used, but not defined herein, shall have the meanings ascribed
to such terms in the Indenture. The Transferee has authorized the undersigned to
make this affidavit on behalf of the Transferee.
3. The Transferee is not, as of the date hereof, and will not be, as of the date
of the Transfer, a Disqualified Organization. The Transferee is acquiring the
Class [R-LT] [R-UT] Certificate either (i) for its own account or (ii) as
nominee, trustee or agent for another Person and has attached hereto an
affidavit from such Person in substantially the form as this affidavit attached
hereto. The Transferee has no knowledge that any such affidavit is false.
4. The Transferee has been advised of, and understands that: (i) a tax shall be
imposed on any Transfer to Persons that are Disqualified Organizations; (ii)
such tax is imposed on the transferor, or, if such Transfer is through an agent
(which includes a broker, nominee or middleman) for Persons that are
Disqualified Organizations, on the agent; and (iii) the Person otherwise liable
for the tax shall be relieved of liability for the tax if the subsequent
transferee furnished to such Person an affidavit that such subsequent transferee
is not a Disqualified Organization and, at the time of the Transfer, such Person
does not have actual knowledge that the affidavit is false.
<PAGE> 161
5. The Transferee has been advised and understands that a tax shall be imposed
on a "pass-through entity" holding Class [R-LT] [R-UT] Certificates if at any
time during the taxable year of the pass-through entity a Person that is a
Disqualified Organization is the record holder of an interest in such entity.
The Transferee understands that no tax will be imposed for any period for which
the record holder furnishes to the pass-through entity an affidavit stating that
the record holder is not a Disqualified Organization and the pass-through entity
does not have actual knowledge that such affidavit is false. (For this purpose,
a "pass-through entity" includes a regulated investment company, a real estate
investment trust or common trust fund, a partnership, trust or estate, and
certain cooperatives and, except as may be provided in Treasury Regulations,
persons holding interests in pass-through entities as nominees for other
Persons.)
6. The Transferee has reviewed the provisions of Section 2.07 of the Indenture,
which is incorporated herein by reference, and understands the legal
consequences of the acquisition of the Class [R-LT] [R-UT] Certificates
including, without limitations, the restrictions on subsequent Transfers and the
provisions regarding voiding the Transfer and mandatory sales. The Transferee
expressly agrees to be bound by and to abide by the provisions of Section 2.07
of the Indenture. The Transferee understands and agrees that any breach of any
of the representations included herein shall render the Transfer to the
Transferee contemplated hereby null and void.
7. The Transferee does not have the intention to impede the assessment or
collection of any income tax legally required to be paid with respect to the
Class [R-LT] [R-UT] Certificates and the Transferee hereby acknowledges that the
Class [R-LT] [R-UT] Certificates may generate tax liabilities in excess of the
cash flow associated with the Class [R-LT] [R-UT] Certificates and intends to
pay such taxes associated with the Class [R-LT] [R-UT] Certificates when they
become due.
8. The Transferee hereby represents to and for the benefit of the transferor
that the Transferee intends and reasonably expects to have the ability to pay
any taxes associated with the holding of the Class [R-LT] [R-UT] Certificates as
they become due, fully realizing that it may incur tax liabilities in excess of
any cash flows generated by the Class [R-LT] [R-UT] Certificates. The Transferee
has provided financial statements or other financial information requested by
the transferor in connection with the transfer of the Class [R-LT] [R-UT]
Certificates to permit the transferor to assess the financial capability of the
Transferee to pay any such taxes.
9. The Transferee agrees to require a Transfer Affidavit from any Person to whom
the Transferee attempts to make a Transfer and in connection with any Transfer
by a Person for whom the Transferee is acting as nominee, trustee or agent, and
the Transferee will not make a Transfer or cause any Transfer to any Person that
the Transferee knows is a Disqualified Organization.
10. That the Purchaser (i) is not a Non-U.S. Person or (ii) is a Non-U.S. Person
that holds the Class [R-LT] [R-UT] Certificate in connection with the conduct of
a trade or business in the United States and has furnished the transferor and
the Trustee with an effective Internal Revenue Service Form 4224 or successor
form at the time and in the manner required by the Code or (iii)
2
<PAGE> 162
is a Non-U.S. Person that has delivered to both the transferor and the Trustee
an opinion of a nationally recognized tax counsel to the effect that the
transfer of the Class [R-LT] [R-UT] Certificates to it is in accordance with the
requirements of the Code and the regulation promulgated thereunder and that such
transfer of the Class [R-LT] [R-UT] Certificates will not be disregarded for
federal income tax purposes.
11. The following information as to the Transferee is true and correct:
Address: ______________________________________________________
_______________________________________________________________
_______________________________________________________________
Contact for Tax Matters: ______________________________________
Phone Number: _________________________________________________
Form of Organization of Transferee: ___________________________
Transferee's Federal Tax Identification Number: _______________
Percentage of Residual Interest Acquired: __%
Price Paid for Residual Interest: _____________________________
Date of Acquisition: __________________________________________
If security is being registered in the name of a nominee, please
state such name:
________________________________________________________________
3
<PAGE> 163
IN WITNESS WHEREOF, the Transferee has caused this instrument to be executed on
its behalf, pursuant to authority of its _________________, by its duly
authorized officer this _____ day of _____________.
[NAME OF TRANSFEREE]
By:
-------------------------------------
Name:
---------------------------------
Title:
---------------------------------
4
<PAGE> 164
STATE OF )
) ss.:
COUNTY OF )
Personally appeared before me the above-named __________, known or proved to me
to be the same person who executed the foregoing instrument and to be the of
_______________________________, and acknowledged that he executed the same as
his free act and deed and the free act and deed of the Transferee.
Subscribed and sworn before me this _______ of ___________.
--------------------------------------
NOTARY PUBLIC
My commission expires the ___ day of
________________, 200__.
<PAGE> 165
EXHIBIT X
ERISA REPRESENTATION LETTER
(FOR TRANSFERS OF CLASS B BOND, CLASS R-LT AND CLASS R-UT CERTIFICATES)
The Purchaser is not an employee benefit plan or other retirement plan or
arrangement (a "Plan") subject to Section 406 of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code") or a person acting on behalf of
such a Plan or arrangement or using the assets of such a Plan or arrangement to
acquire a Class B Bond or Class [R-LT] [R-UT] Certificate.
<PAGE> 1
EXHIBIT 5.1
[Letterhead of Tobin & Tobin]
May 9, 2000
Sequoia Mortgage Funding Corporation
591 Redwood Highway
Suite 3120
Mill Valley, CA 94941
Re: Sequoia Mortgage Funding Corporation
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special counsel to Sequoia Mortgage Funding
Corporation, a Delaware corporation (the "Registrant"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act"), of
Collateralized Mortgage Bonds (the "Bonds"), and the related preparation and
filing of a Registration Statement on Form S-3 (the "Registration Statement")
and a related Post-Effective Amendment No. 1 (the "Post-Effective Amendment No.
1"), (the Registration Statement and the Post-Effective Amendment No. 1,
collectively, the "Registration Statement"). The Bonds are issuable in series
under separate indentures (each such agreement, an "Indenture"), between an
issuer and an indenture trustee, each to be identified in the prospectus
supplement for such series of Bonds. Each Indenture will be substantially in one
of the forms filed as an exhibit to the Registration Statement.
We have examined and relied upon copies of the Company's Bylaws, the
Registration Statement, the form of Indenture and the forms of Bonds included as
exhibits thereto and such other records, documents and statutes as we have
deemed necessary for purposes of this opinion.
<PAGE> 2
Sequoia Mortgage Funding Corporation
May 9, 2000
Page 2
In our examination we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the conformity
to original documents of all documents submitted to us as certified or
photostatic copies and the authenticity of the originals of such documents. As
to any facts material to the opinions expressed herein that were not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and others.
In rendering this opinion letter, we express no opinion as to the laws
of any jurisdiction other than the laws of the State of New York, the
corporation laws of the State of Delaware and the federal laws of the United
States of America.
Based upon the foregoing, we are of the opinion that:
1. When an Indenture for a series of Bonds has been duly authorized by
all necessary action and duly executed and delivered by the parties thereto,
such Indenture will be a legal and valid obligation of the applicable issuer.
2. When an Indenture for a series of Bonds has been duly authorized by
all necessary action and duly executed and delivered by the parties thereto, and
when the Bonds of such series have been duly executed and authenticated in
accordance with the provisions of that Indenture, and issued and sold as
contemplated in the Registration Statement and the prospectus and prospectus
supplement delivered in connection therewith, such Bonds will be legally and
validly issued and outstanding, fully paid and non-assessable, and will be
binding obligations of the applicable issuer, and the holders of such Bonds will
be entitled to the benefits of that Indenture.
<PAGE> 3
Sequoia Mortgage Funding Corporation
May 9, 2000
Page 3
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in the base prospectus and prospectus supplement forming a part
of the Registration Statement, without admitting that we are "experts" within
the meaning of the Act or the Rules and Regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this exhibit.
Very truly yours,
/s/ Tobin & Tobin
<PAGE> 1
EXHIBIT 8.1
[Letterhead of Giancarlo & Gnazzo]
May 9, 2000
Sequoia Mortgage Funding Corporation
591 Redwood Highway
Suite 3100
Mill Valley, CA 94941
Re: Sequoia Mortgage Funding Corporation Shelf Registration
Ladies and Gentlemen:
We have acted as your special tax counsel and have assisted in the
preparation of the tax summary for the Shelf Registration Statement on Form S-3,
dated April --, 1997 (the "Original Registration Statement") and a related
Post-Effective Amendment No. 1 (the "Post-Effective Amendment No. 1" and,
together with the Original Registration Statement, the "Registration Statement")
which has been filed by Sequoia Mortgage Funding Corporation (the "Company")
with the Securities and Exchange Commission the (the "SEC") in connection with
the registration of certain Collateralized Mortgage Bonds (issuable in series)
(the "Bonds"). Each series of Bonds will be issued by a trust (the "Issuer")
formed by the Company pursuant to a deposit trust agreement (each, a "Deposit
Trust Agreement") and pursuant to a separate indenture entered into by the
Issuer and an indenture trustee. Each indenture, and the Bonds issued
thereunder, will be substantially in the form of one of the forms filed as an
exhibit to the Registration Statement (such indentures, the "Form Indentures").
You have requested our opinion regarding certain descriptions of federal income
tax consequences contained in the forms of prospectus and prospectus supplement
to be used in connection with offers and sales of the Bonds (the "Form
Prospectus" and "Form Prospectus Supplement", respectively).
In formulating our opinions, we have reviewed (i) the Registration
Statement and the related Form Prospectus and Form Prospectus Supplement filed
with the SEC on the date hereof , (ii) the forms of the Deposit Trust Agreement
and the Bonds, (iii) the Form Indenture and such other transaction documents as
we have considered necessary, and (iv) the Articles of Incorporation and other
organizational documents of the Company, as amended and supplemented to date,
and such resolutions, certificates, records, and other documents provided by the
Company as we have deemed necessary or appropriate as a basis for the opinions
set forth below.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or other copies, and the
authenticity of the originals of such copies.
In rendering our opinions, we have assumed that the transactions
described in or contemplated by the foregoing documents have been or will be
consummated in accordance with such operative documents, and that
<PAGE> 2
Sequoia Funding Corporation
May 9, 2000
Page 2
such documents accurately reflect the material facts of such transactions. Our
opinion is also based on the Internal Revenue Code of 1986, as amended,
administrative rulings, judicial decisions, Treasury regulations and other
applicable authorities. The statutory provisions, regulations, and
interpretations on which our opinion is based are subject to change, possibly
retroactively. In addition, there can be no complete assurance that the Internal
Revenue Service will not take positions contrary to those stated in our opinion.
Although the discussion in the Form Prospectus and Form Prospectus
Supplement under the heading "Federal Income Tax Consequences" does not purport
to discuss all possible United States federal income tax consequences of the
purchase, ownership and disposition of the Bonds, in our opinion, such
discussion constitutes in all material respects, a fair and accurate summary of
the United States federal income tax consequences under existing law of the
purchase, ownership and disposition of Bonds substantially in the form of those
bonds contemplated under a Form Indenture. We note that the Form Prospectus
Supplement relates to a specific transaction and that the above referenced
description of "Federal Income Tax Consequences" may, under certain
circumstances, require modification when additional transactions are done.
Other than as expressly stated above, we express no opinion on any issue
relating to the Company, or any series of Bonds, under any law other than the
federal income tax laws.
We are furnishing this opinion to you solely in connection with the
filing of the Registration Statement and it is not to be relied upon, used,
circulated, quoted or otherwise referred to for any other purpose without our
express written permission.
We consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to Giancarlo & Gnazzo, A
Professional Corporation under the caption "Federal Income Tax Considerations"
in the Form Prospectus and Form Prospectus Supplement included in the
Registration Statement.
Very truly yours,
