Prospectus Supplement dated December 12, 2000 (To Prospectus dated December 12,
2000)
$980,000,000 (APPROXIMATE)
LONG BEACH MORTGAGE LOAN TRUST 2000-1
ASSET-BACKED CERTIFICATES, SERIES 2000-1
LONG BEACH SECURITIES CORP.
DEPOSITOR
SELLER AND MASTER SERVICER
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CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S- 10 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 4 IN THE PROSPECTUS. The certificates represent
obligations of the trust only and do not represent an interest in or obligation
of Long Beach Securities Corp., Long Beach Mortgage Company or any of their
affiliates. This prospectus supplement may be used to offer and sell the
certificates only if accompanied by the prospectus.
--------------------------------------------------------------------------------
Only the eight classes of certificates identified below are being offered by
this prospectus supplement and the accompanying prospectus.
THE OFFERED CERTIFICATES
o Represent ownership interests in a trust consisting primarily of a pool of
first lien adjustable-rate and fixed-rate residential mortgage loans. The
mortgage loans will be segregated into two groups, one consisting of
fixed-rate mortgage loans and one consisting of adjustable-rate mortgage
loans.
o The Class AF-1 Certificates, the Class AF-2 Certificates, the Class AF-3
Certificates and the Class AF-4 Certificates will accrue interest at the
pass-through rate shown in the table below, subject, in the case of the
Class AF-3 Certificates and the Class AF-4 Certificates, to certain
limitations as described in this prospectus supplement.
o The Class AV-1 Certificates, the Class M-1 Certificates, the Class M-2
Certificates and the Class M-3 Certificates will accrue interest at a rate
equal to one-month LIBOR plus a fixed margin, subject to certain
limitations described in this prospectus supplement.
CREDIT ENHANCEMENT
o Subordination as described in this prospectus supplement under "Description
of the Certificates--Credit Enhancement."
o Overcollateralization as described in this prospectus supplement under
"Description of the Certificates--Overcollateralization Provisions."
o Excess Interest as described in this prospectus supplement under
"Description of the Certificates--Overcollateralization Provisions."4
o Crosscollateralization as described in this prospectus supplement under
"Description of the Certificates--Allocation of Available Funds."
o A Primary Mortgage Insurance Policy as described in this prospectus
supplement under "Description of the Certificates--The PMI Policy."
<TABLE>
<CAPTION>
ORIGINAL
CERTIFICATE PASS THROUGH UNDERWRITING PROCEEDS TO THE
CLASS PRINCIPAL BALANCE RATE PRICE TO PUBLIC DISCOUNT DEPOSITOR(1)
----- ----------------- ---- --------------- -------- ------------
<S> <C> <C> <C> <C> <C>
Class AF-1........... $ 16,810,000 7.224% 100.00% 0.100% 99.9989%
Class AF-2........... $ 18,388,000 6.907% 100.00% 0.140% 99.9975%
Class AF-3........... $ 22,472,000 7.434%(2) 100.00% 0.270% 99.9951%
Class AF-4........... $ 7,300,000 7.216%(2) 100.00% 0.345% 99.9925%
Class AV-1........... $ 825,030,000 Variable(3) 100.00% 0.200% 99.9980%
Class M-1............ $ 37,500,000 Variable(3) 100.00% 0.370% 99.9963%
Class M-2............ $ 35,000,000 Variable(3) 100.00% 0.500% 99.9950%
Class M-3............ $ 17,500,000 Variable(3) 100.00% 0.650% 99.9935%
</TABLE>
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(1) Before deducting expenses estimated to be $875,000.
(2) Subject to limitation or increase as described in the prospectus
supplement.
(3) Determined as described in this prospectus supplement.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Delivery of the Class A Certificates, the Class M-1 Certificates, the Class M-2
Certificates and the Class M-3 Certificates will be made in book-entry form
through the facilities of The Depository Trust Company, Clearstream Banking
Luxembourg and the Euroclear System on or about December 15, 2000.
DEUTSCHE BANC ALEX. BROWN
BANC OF AMERICA SECURITIES LLC CHASE SECURITIES INC.
CREDIT SUISSE FIRST BOSTON GREENWICH CAPITAL MARKETS, INC.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
<S> <C>
SUMMARY OF TERMS................................................................................................S-3
RISK FACTORS...................................................................................................S-10
THE MORTGAGE POOL..............................................................................................S-17
LONG BEACH MORTGAGE COMPANY....................................................................................S-38
THE POOLING AGREEMENT..........................................................................................S-46
DESCRIPTION OF THE CERTIFICATES................................................................................S-52
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS..................................................................S-68
USE OF PROCEEDS................................................................................................S-81
FEDERAL INCOME TAX CONSEQUENCES................................................................................S-81
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS......................................................................S-84
LEGAL INVESTMENT CONSIDERATIONS................................................................................S-85
METHOD OF DISTRIBUTION.........................................................................................S-85
LEGAL MATTERS..................................................................................................S-87
RATINGS........................................................................................................S-87
INDEX OF DEFINED TERMS.........................................................................................S-88
ANNEX I.........................................................................................................I-1
</TABLE>
S-2
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SUMMARY OF TERMS
O THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERING OF THE
CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
O THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED
BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND
OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER FINANCIAL
ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED
RESULTS. THOSE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE
WITH GOVERNMENTAL REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE
BEYOND OUR CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY
DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
OFFERED CERTIFICATES
On the Closing Date, Long Beach Mortgage Loan Trust 2000-1 will issue eleven
classes of certificates, eight of which are being offered by this prospectus
supplement and the accompanying prospectus. The assets of the trust that will
support the certificates will consist primarily of a pool of fixed-rate and
adjustable-rate mortgage loans having the characteristics described in this
prospectus supplement. The Class AF-1 Certificates, the Class AF-2 Certificates,
the Class AF- 3 Certificates, the Class AF-4 Certificates, the Class AV-1
Certificates (collectively, the "Class A Certificates"), the Class M-1
Certificates, the Class M- 2 Certificates and the Class M-3 Certificates are the
only classes of offered certificates.
The Class A Certificates, the Class M-1 Certificates, the Class M-2 Certificates
and the Class M-3 Certificates will be book-entry securities clearing through
The Depository Trust Company (in the United States) or Clearstream Banking
Luxembourg and the Euroclear System (in Europe) in minimum denominations of
$50,000.
OTHER CERTIFICATES
The trust will issue three additional classes of certificates. These
certificates will be designated as the Class C Certificates, the Class P
Certificates and the Class R Certificates and are not being offered to the
public by this prospectus supplement and the prospectus.
The Class C Certificates will have an initial certificate principal balance of
approximately $20,000,495, which is approximately equal to the initial
overcollateralization required by the pooling agreement. The Class C
Certificates initially evidence an interest of approximately 2.00% in the trust.
The Class C Certificates will be delivered to a wholly- owned bankruptcy remote
subsidiary of the Seller or its designee as partial consideration for the
Mortgage Loans.
The Class P Certificates will have an original principal balance of $100 and
will not be entitled to distributions in respect of interest. The Class P
Certificates will be entitled to all prepayment premiums or charges received in
respect of the Mortgage Loans. The Class P Certificates will be delivered to a
wholly-owned bankruptcy remote subsidiary of the Seller or its designee as
partial consideration for the Mortgage Loans.
The Class R Certificates will not have an original principal balance and are the
class of certificates representing the residual interests in the trust. The
Class R Certificates will be delivered to a wholly- owned bankruptcy remote
subsidiary of the Seller or its designee as partial consideration for the
Mortgage Loans.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES-- GENERAL," "--BOOK-ENTRY
CERTIFICATES" AND "THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
CLOSING DATE
On or about December 15, 2000.
CUT-OFF DATE
December 1, 2000.
THE DEPOSITOR
Long Beach Securities Corp., a Delaware corporation and a wholly owned
subsidiary of Long Beach
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Mortgage Company. WE REFER YOU TO "THE DEPOSITOR" IN THE PROSPECTUS FOR
ADDITIONAL INFORMATION.
SELLER AND MASTER SERVICER
Long Beach Mortgage Company, a Delaware corporation. WE REFER YOU TO "LONG BEACH
MORTGAGE COMPANY" IN THIS PROSPECTUS SUPPLEMENT.
TRUSTEE
First Union National Bank, a national banking association. WE REFER YOU TO "THE
POOLING AGREEMENT--THE TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
TRUST ADMINISTRATOR
Bankers Trust Company of California, N.A., a national banking association. WE
REFER YOU TO "THE POOLING AGREEMENT--THE TRUST ADMINISTRATOR" IN THIS PROSPECTUS
SUPPLEMENT FOR ADDITIONAL INFORMATION.
PMI INSURER
Mortgage Guaranty Insurance Corporation, a Wisconsin stock insurance
corporation. Some of the Mortgage Loans are covered by primary mortgage
insurance provided by the PMI Insurer, which may provide limited protection to
the trust in the event such Mortgage Loans default. WE REFER YOU TO "DESCRIPTION
OF THE CERTIFICATES--THE PMI POLICY" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
DESIGNATIONS
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o OFFERED CERTIFICATES
Class A Certificates and Mezzanine
Certificates.
o GROUP I CERTIFICATES
Class AF-1 Certificates, Class AF-2 Certificates, Class AF-3 Certificates
and Class AF-4 Certificates. Except under the circumstances described under
"Description of the Certificates--Allocation of Available Funds," the Group
I Certificates receive their distributions from Loan Group I. The Group I
Certificates are sometimes collectively referred to as Certificate Group I.
o GROUP II CERTIFICATES
Class AV-1 Certificates. Except under the circumstances described under
"Description of the Certificates--Allocation of Available Funds", the Group
II Certificates receive their distributions from Loan Group II. The Group
II Certificates are sometimes collectively referred to as Certificate Group
II.
o CLASS A CERTIFICATES
Class AF-1 Certificates, Class AF-2 Certificates, Class AF-3 Certificates,
Class AF-4 Certificates and the Class AV-1 Certificates.
o MEZZANINE CERTIFICATES
Class M-1 Certificates, Class M-2 Certificates and Class M-3 Certificates.
o SUBORDINATE CERTIFICATES
The Mezzanine Certificates and the Class C Certificates.
o RESIDUAL CERTIFICATEs
Class R Certificates.
o LOAN GROUP I
The Mortgage Loans that accrue interest at fixed rates. The Mortgage Loans
in Loan Group I are sometimes referred to as the "Group I Mortgage Loans."
o LOAN GROUP II
The Mortgage Loans that accrue interest at adjustable rates. The Mortgage
Loans in Loan Group II are sometimes referred to as the "Group II Mortgage
Loans."
MORTGAGE LOANS
On the Closing Date the trust will acquire a pool of mortgage loans that will be
divided into two loan groups, Loan Group I and Loan Group II (each, a "Loan
Group"). Loan Group I will consist of fixed- rate mortgage loans (the "Group I
Mortgage Loans") and Loan Group II will consist of adjustable-rate mortgage
loans (the "Group II Mortgage Loans"; together with the Group I Mortgage Loans,
the "Mortgage Loans").
S-4
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All of the Mortgage Loans will be adjustable-rate or fixed-rate, first lien,
fully-amortizing or balloon payment, residential mortgage loans.
The statistical information in this prospectus supplement reflects the
characteristics of the Mortgage Loans as of the Cut-off Date. After the date of
this prospectus supplement and prior to the Closing Date, some mortgage loans
may be added to the mortgage pool and some mortgage loans may be removed from
the mortgage pool, as described under "The Mortgage Pool" in this prospectus
supplement. The statistical information as of the Closing Date for the actual
pool of Mortgage Loans may therefore vary somewhat from the statistical
information for the Mortgage Loans presented in this prospectus supplement.
The Group I Mortgage Loans consist of approximately 764 fixed-rate mortgage
loans with an aggregate outstanding principal balance as of the Cut-off Date of
approximately $72,998,895.
The Group I Mortgage Loans have the following characteristics (1):
Loans with Prepayment Charges: 80.38%
Range of Remaining Term 119 months to
to Stated Maturities: 360 months
Weighted Average Remaining
Term to Stated Maturity: 348 months
Range of Original Principal $15,300 to
Balances: $570,000
Average Original Principal Balance: $95,656
Range of Outstanding Principal $15,297 to
Balances: $569,746
Average Outstanding Principal $95,548
Balance:
Range of Mortgage Rates: 8.200% to
14.975%
Weighted Average Mortgage Rate: 10.962%
Range of Loan-to-Value Ratios: 9.67% to 90.60%
Weighted Average Loan-to-Value 77.14%
Ratio:
Balloon Loans: 0.08%
Geographic Concentrations
in excess of 5%:
California 18.18%
Texas 10.90%
New York 8.05%
Florida 6.63%
Colorado 6.59%
(1) All figures are approximate. Percentages and weighted averages are based on
principal balances as of the Cut-off Date.
The Group II Mortgage Loans consist of approximately 7,416 adjustable-rate
mortgage loans with an aggregate outstanding principal balance as of the Cut-off
Date for those Mortgage Loans of approximately $927,001,700.
The Group II Mortgage Loans have the following characteristics (1):
Loans with Prepayment Charges: 84.67%
Range of Remaining Term 177 months to
to Stated Maturities: 360 months
Weighted Average Remaining
Term to Stated Maturity: 358 months
Range of Original Principal Balances: $15,750 to
$750,000
Average Original Principal Balance: $125,102
Range of Outstanding Principal $15,750 to
Balances: $749,334
Average Outstanding Principal Balance: $125,000
Range of Mortgage Rates: 7.500% to
15.100%
Weighted Average Mortgage Rate: 10.762%
Weighted Average Gross Margin: 6.132%
Weighted Average Maximum Mortgage
Rate: 16.764%
Weighted Average Minimum Mortgage
Rate: 10.760%
Range of Loan-to-Value Ratios: 14.53% to
99.49%
Weighted Average Loan-to-Value Ratio: 79.63%
Weighted Average Initial Periodic Rate
Adjustment Cap: 1.329%
Weighted Average Subsequent Periodic
Rate Adjustment Cap: 1.000%
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Weighted Average Time Until Next
Adjustment Date: 25 months
Geographic Concentrations
in excess of 5%:
California 34.40%
Colorado 8.90%
Texas 6.16%
(1) All figures are approximate. Percentages and weighted averages are based on
principal balances as of the Cut-off Date.
DISTRIBUTION DATES
The Trust Administrator will make distributions on the certificates on the 21st
day of each calendar month beginning in January 2001 to the holder of record of
the certificates on the last business day of the previous calendar month in the
case of the any certificates held in definitive form, the Class AF-1
Certificates, the Class AF-2 Certificates, the Class AF-3 Certificates, the
Class AF-4 Certificates or on the business day preceding such date of
distribution in the case of the other Offered Certificates. If the 21st day of a
month is not a business day, then the distribution will be made on the next
business day.
PAYMENTS ON THE CERTIFICATES
INTEREST PAYMENTS
The pass-through rate for the Class AF-1 Certificates will be 7.224% per annum.
The pass-through rate for the Class AF-2 Certificates will be 6.907% per annum.
The pass-through rate for the Class AF-3 Certificates will be 7.434% per annum,
subject to the limitations described in this prospectus supplement. The pass-
through rate for the Class AF-4 Certificates will be 7.216% per annum, subject
to the limitations described in this prospectus supplement.
The pass-through rate for the Class AV-1 Certificates will be calculated at the
per annum rate of One-Month LIBOR + 26 basis points, subject to the limitations
described in this prospectus supplement.
The pass-through rate for the Class M-1 Certificates will be calculated at the
per annum rate of One-Month LIBOR + 66 basis points, subject to the limitations
described in this prospectus supplement.
The pass-through rate for the Class M-2 Certificates will be calculated at the
per annum rate of One-Month LIBOR + 110 basis points, subject to the limitations
described in this prospectus supplement.
The pass-through rate for the Class M-3 Certificates will be calculated at the
per annum rate of One-Month LIBOR + 195 basis points, subject to the limitations
described in this prospectus supplement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--PASS- THROUGH RATES" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
In addition, if the Master Servicer or Radian Insuance Inc. ("Radian") fails to
exercise its option to terminate the trust on the earliest permitted date as
described below under "Optional Termination," the pass-through rate on the Class
AF-3 Certificates will then increase to 7.934% per annum, subject to the
limitations described in this prospectus supplement; the pass-through rate on
the Class AV-1 Certificates will then increase to the per annum rate of
One-Month LIBOR + 52 basis points, subject to the limitations described in this
prospectus supplement; the pass-through rate on the Class M-1 Certificates will
then increase to the per annum rate of One-Month LIBOR + 99 basis points,
subject to the limitations described in this prospectus supplement; the
pass-through rate on the Class M-2 Certificates will then increase to the per
annum rate of One-Month LIBOR + 165 basis points, subject to the limitations
described in this prospectus supplement and the pass-through rate on the Class
M-3 Certificates will then increase to the per annum rate of One-Month LIBOR +
292.5 basis points, subject to the limitations described in this prospectus
supplement.
Interest payable on the certificates accrues during an accrual period. The
accrual period for the Group I Certificates is the calendar month preceding the
month in which such Distribution Date occurs. Interest will be calculated for
the Group I Certificates on the basis of a 360-day year consisting of twelve
30-day months. The accrual period for the Group II Certificates and the
Mezzanine Certificates for any Distribution Date is the period from the previous
Distribution Date (or, in the case of the first accrual period from the Closing
Date) to the day prior to the current Distribution Date. Interest will be
calculated for the Group II Certificates and the Mezzanine Certificates on the
basis of the actual number of days in the accrual period, based on a 360-day
year.
The Class A Certificates and each class of Mezzanine Certificates will accrue
interest on their certificate principal balance outstanding immediately prior to
each Distribution Date.
The Class C Certificates will accrue interest as provided in the pooling
agreement. The Class P Certificates and the Residual Certificates will not
accrue interest.
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WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
PRINCIPAL PAYMENTS
Principal will be distributed to holders of the Class A Certificates and each
class of Mezzanine Certificates on each Distribution Date in the amounts
described herein under "Description of the Certificates--Allocation of Available
Funds."
PAYMENT PRIORITIES
Group I Certificates
In general, on any Distribution Date, funds available for distribution from
payments and other amounts received on the Group I Mortgage Loans will be
distributed as follows:
INTEREST DISTRIBUTIONS
concurrently to pay interest on the Group I Certificates, on a PRO RATA basis
based on their respective entitlements; and
PRINCIPAL DISTRIBUTIONS
to pay principal on the Group I Certificates, but only in the amounts and to the
extent described under "Description of the Certificates--Allocation of Available
Funds" in this prospectus supplement, allocated among the Group I Certificates
as described under "Description of the Certificates--Allocation of Available
Funds" in this prospectus supplement.
Group II Certificates
In general, on any Distribution Date, funds available for distribution from
payments and other amounts received on the Group II Mortgage Loans will be
distributed as follows:
INTEREST DISTRIBUTIONS
to pay interest on the Group II Certificates; and
PRINCIPAL DISTRIBUTIONS
to pay principal on the Group II Certificates, but only in the amounts and to
the extent described under "Description of the Certificates--Allocation of
Available Funds" in this prospectus supplement.
Mezzanine Certificates
In general, on any Distribution Date, funds available for distribution from
payments and other amounts received on the Group I Mortgage Loans and the Group
II Mortgage Loans, after the distributions on the Class A Certificates described
above will be distributed as follows:
INTEREST DISTRIBUTIONS
to pay interest on the Mezzanine Certificates, but only in the order of
priority, amounts and to the extent described herein; and
PRINCIPAL DISTRIBUTIONS
to pay principal on the Mezzanine Certificates, but only in the order of
priority, amounts and to the extent described herein.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
Crosscollateralization
In certain limited circumstances, payments on the Group I Mortgage Loans may be
used to make certain distributions to the holders of the Group II Certificates
and payments on the Group II Mortgage Loans may be used to make certain
distributions to the holders of the Group I Certificates.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION
ADVANCES
The Master Servicer will make cash advances to cover delinquent payments of
principal and interest to the extent it reasonably believes that the cash
advances are recoverable from future payments on the Mortgage Loans. Advances
are intended to maintain a regular flow of scheduled interest and principal
payments on the certificates and are not intended to guarantee or insure against
losses.
WE REFER YOU TO "THE POOLING AGREEMENT--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT
AND "DESCRIPTION OF THE SECURITIES--ADVANCES BY MASTER SERVICER IN RESPECT OF
DELINQUENCIES ON THE TRUST FUND" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
OPTIONAL TERMINATION
The Master Servicer (or if the Master Servicer fails to exercise such right,
Radian) may purchase all of the Mortgage Loans in both loan groups and retire
the certificates when the current principal balance of the Mortgage Loans in
both loan groups is equal to or less than 10% of the sum of the principal
balance of the Mortgage Loans in both loan groups as of the Cut-off Date.
WE REFER YOU TO "THE POOLING AGREEMENT --TERMINATION" AND "DESCRIPTION OF THE
CERTIFICATES--PASS-THROUGH RATES" IN THIS PROSPECTUS
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SUPPLEMENT AND "DESCRIPTION OF THE SECURITIES--TERMINATION OF THE TRUST FUND AND
DISPOSITION OF TRUST FUND ASSETS" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
CREDIT ENHANCEMENT
1. SUBORDINATION
The rights of the holders of the Mezzanine Certificates and the Class C
Certificates to receive distributions will be subordinated, to the extent
described in this prospectus supplement, to the rights of the holders of the
Class A Certificates.
In addition,
o the rights of the holders of Mezzanine Certificates with higher numerical
class designations to receive distributions will be subordinated to the
rights of the holders of the Mezzanine Certificates with lower numerical
class designations; and
o the rights of the holders of the Class C Certificates to receive
distributions will be subordinated to the rights of the holders of the
Mezzanine Certificates; in each case to the extent described in this
prospectus supplement.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
such certificates protection against realized losses on the Mortgage Loans.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--CREDIT ENHANCEMENT" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
2. EXCESS INTEREST
The Mortgage Loans bear interest each month that in the aggregate is expected to
exceed the amount needed to pay monthly interest on the Offered Certificates and
to pay certain fees and expenses of the trust. The excess interest from the
Mortgage Loans each month will be available to absorb realized losses on the
Mortgage Loans and to maintain overcollateralization at required levels as
described in the pooling agreement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
AND "--OVERCOLLATERALIZATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
3. OVERCOLLATERALIZATION
As of the Closing Date, the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date will exceed the aggregate certificate principal balance of
the Offered Certificates and the Class P Certificates on the Closing Date by
approximately $20,000,495, which is equal to the initial certificate principal
balance of the Class C Certificates. Such amount represents approximately 2.00%
of the aggregate principal balance of the Mortgage Loans as of the Cut-off Date,
and is the initial amount of overcollateralization required to be provided under
the pooling agreement. The required level of overcollateralization may be
permitted to step down as provided in the pooling agreement. We cannot assure
you that sufficient interest will be generated by the Mortgage Loans to maintain
the required level of overcollateralization.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--OVERCOLLATERALIZATION
PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
4. PRIMARY MORTGAGE INSURANCE
Approximately 71.85% of the Group I Mortgage Loans and approximately 71.98% of
the Group II Mortgage Loans (in each case, by aggregate principal balance of the
related loan group as of the Cut-off Date), will be insured by an insurance
policy issued by the PMI Insurer. However, such policies will provide only
limited protection against losses on defaulted Mortgage Loans.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--THE PMI POLICY" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
5. ALLOCATION OF LOSSES
If, on any Distribution Date, there is not sufficient excess interest or
overcollateralization to absorb realized losses on the Mortgage Loans as
described under "Description of the Certificates-- Overcollateralization
Provisions" in this prospectus supplement, then realized losses on the Mortgage
Loans will be allocated to the Mezzanine Certificates as described below. If
realized losses on the Mortgage Loans are allocated to the Mezzanine
Certificates, such losses will be allocated FIRST, to the Class M-3
Certificates, SECOND, to the Class M-2 Certificates and THIRD, to the Class M-1
Certificates. The pooling agreement does not permit the allocation of realized
losses on the Mortgage Loans to the Class A Certificates or the Class P
Certificates; however investors in the Class A Certificates should realize that
under certain loss scenarios there will not be enough
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principal and interest on the Mortgage Loans to pay the Class A Certificates all
interest and principal amounts to which such certificates are then entitled.
Once realized losses are allocated to the Mezzanine Certificates, such realized
losses will not be reinstated thereafter. However, the amount of any realized
losses allocated to the Mezzanine Certificates may be paid to the holders of
these certificates according to the priorities set forth under "Description of
the Certificates--Overcollateralization Provisions" in this prospectus
supplement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES --ALLOCATION OF LOSSES;
SUBORDINATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
RATINGS
It is a condition of the issuance of the Offered Certificates that they be
assigned ratings not lower than the following by Fitch, Inc. ("Fitch"), Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"):
Fitch Moody's S&P
----- ------- ---
A AAA Aaa AAA
M-1 AA Aa2 AA
M-2 A A2 A
M-3 BBB Baa1 BBB
A security rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by any of the rating agencies.
WE REFER YOU TO "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "RATING" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
TAX STATUS
One or more elections will be made to treat designated portions of the trust
(exclusive of the reserve fund, as described more fully herein) as real estate
mortgage investment conduits for federal income tax purposes.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT
AND "FEDERAL INCOME TAX CONSEQUENCES" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
It is expected that the Class A Certificates and the Mezzanine Certificates may
be purchased by a pension or other employee benefit plan subject to the Employee
Retirement Income Security Act of 1974 or Section 4975 of the Internal Revenue
Code of 1986, as amended (the "Code") so long as certain conditions are met. A
fiduciary of an employee benefit plan must determine that the purchase of a
certificate is consistent with its fiduciary duties under applicable law and
does not result in a nonexempt prohibited transaction under applicable law.
WE REFER YOU TO "CONSIDERATIONS FOR BENEFIT PLAN INVESTORS" IN THIS PROSPECTUS
SUPPLEMENT AND "CONSIDERATIONS FOR BENEFIT PLAN INVESTORS" IN THE PROSPECTUS FOR
ADDITIONAL INFORMATION.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower than
the second highest rating category by one or more nationally recognized
statistical rating organizations and, as such, will be legal investments for
certain entities to the extent provided in SMMEA and applicable state laws.
The Class M-2 Certificates and the Class M-3 Certificates will not constitute
"mortgage related securities" for purposes of SMMEA.
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
AND "LEGAL INVESTMENT MATTERS" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
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RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS.
UNPREDICTABILITY OF PREPAYMENTS AND EFFECT ON YIELDS
Mortgagors may prepay their Mortgage Loans in whole or in part at any
time. We cannot predict the rate at which mortgagors will repay their Mortgage
Loans. A prepayment of a Mortgage Loan generally will result in a prepayment on
the certificates.
o If you purchase your certificates at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the Mortgage Loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates
decline significantly below the interest rates on the Group I Mortgage
Loans, those Mortgage Loans are more likely to prepay than if
prevailing rates remain above the interest rates on those Mortgage
Loans. In addition, if interest rates decline, prepayments for the
Group II Mortgage Loans may increase due to the availability of
fixed-rate mortgage loans or other adjustable-rate mortgage loans at
lower interest rates. Conversely, if prevailing interest rates rise
significantly, the prepayments on the Mortgage Loans in both loan
groups may decrease. Furthermore, adjustable-rate mortgage loans may
prepay at different rates and in response to different factors than do
fixed-rate mortgage loans; the inclusion of both types of mortgage
loans in the mortgage pool may increase the difficulty in analyzing
possible prepayment rates.
o Approximately 80.38% of the Group I Mortgage Loans and approximately
84.67% of the Group II Mortgage Loans (in each case, by aggregate
principal balance of the related Loan Group as of the Cut-off Date)
require the mortgagor to pay a prepayment charge in certain instances
if the mortgagor prepays the Mortgage Loan during a stated period,
which may be from one year to five years after the Mortgage Loan was
originated. A prepayment charge may or may not discourage a mortgagor
from prepaying the Mortgage Loan during the applicable period.
o The Seller may be required to purchase Mortgage Loans from the trust in
the event certain breaches of representations and warranties occur and
have not been cured. In addition, the Master Servicer has the option to
purchase Mortgage Loans that become 90 days or more delinquent, subject
to certain limitations and conditions described in this prospectus
supplement. Moreover, under certain circumstances, the Master Servicer
has the option to sell Mortgage Loans 90 days or more delinquent to
third parties at prices less than their outstanding principal balances
as further described in this prospectus supplement. These purchases
will have the same effect on the holders of the Offered Certificates as
a prepayment of the Mortgage Loans.
o The Master Servicer may purchase all of the Mortgage Loans in both loan
groups when the aggregate principal balance of the Mortgage Loans in
both loan groups is equal to or less than 10% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date.
o If the rate of default and the amount of losses on the Mortgage Loans
is higher than you expect, then your yield may be lower than you
expect.
o As a result of the absorption of realized losses on the Mortgage Loans
by excess interest and overcollateralization as described herein and
the availability of the PMI Policy (which will provide limited coverage
on some of the Mortgage Loans), liquidations of defaulted Mortgage
Loans, whether or not realized losses are incurred upon such
liquidations, will result in an earlier return of the principal of the
Offered Certificates and will influence the yield on the Offered
Certificates in a manner similar to the manner in which principal
prepayments on the Mortgage Loans will influence the yield on the
Offered Certificates.
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o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the Offered
Certificates then entitled to principal distributions at any time that
the overcollateralization provided by the mortgage pool falls below the
required level. In addition, if the Class A Certificates are entitled
to distributions of principal at any time that overcollateralization is
required to be restored to the required level, then the amounts
available for such purpose will be allocated between the Group I
Certificates and the Group II Certificates on a PRO RATA basis based on
the amount of principal actually received on the Mortgage Loans in the
related Loan Group for the related Distribution Date. This, as well as
the relative sizes of the Loan Groups, may magnify the prepayment
effect on a Certificate Group caused by the relative rates of
prepayments and defaults experienced by the Loan Groups.
o The multiple class structure of the Class A Certificates in Certificate
Group I causes the yield of certain of such classes to be particularly
sensitive to changes in the rates of prepayments of the Group I
Mortgage Loans. Because distributions of principal will be made to the
classes of Class A Certificates in Certificate Group I according to the
priorities described herein, the yield to maturity on such classes of
certificates will be sensitive to the rates of prepayment on the
Mortgage Loans experienced both before and after the commencement of
principal distributions on such class. In particular, the Class A-4
Certificates do not receive (unless the certificate principal balances
of the other classes of Class A Certificates in Certificate Group I
have been reduced to zero) any portion of the amount of principal
payable to the Group I Certificates prior to the Distribution Date in
January 2003. In addition, the Class A-4 Certificates will receive
(unless the certificate principal balances of the other classes of
Class A Certificates in Certificate Group I have been reduced to zero)
a disproportionately small or large portion of the amount of principal
then payable to the Group I Certificates thereafter. The weighted
average life of the Class A-4 Certificates will therefore be longer or
shorter than would otherwise be the case. The effect on the market
value of the Class A-4 Certificates of changes in market interest rates
or market yields for similar securities may be greater or lesser than
for the other classes of Class A Certificates in Certificate Group I.
SEE "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF FACTORS THAT MAY INFLUENCE THE RATE AND TIMING
OF PREPAYMENTS ON THE MORTGAGE LOANS.
THE UNDERWRITING STANDARDS OF THE MORTGAGE LOANS ARE NOT AS STRINGENT AS THOSE
UNDERWRITTEN IN A MORE TRADITIONAL MANNER, OR UNDERWRITTEN TO THE STANDARDS OF
FANNIE MAE AND FREDDIE MAC
The Seller's underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan and the applicant's credit standing
and ability to repay. The Seller provides loans primarily to borrowers who do
not qualify for loans conforming to Fannie Mae and Freddie Mac guidelines but
who generally have equity in their property. While the Seller's primary
consideration in underwriting a mortgage loan is the value and adequacy of the
mortgaged property as collateral, the Seller also considers, among other things,
a mortgagor's credit history, repayment ability and debt service-to- income
ratio, as well as the type and use of the mortgaged property. The Seller's
underwriting standards do not prohibit a mortgagor from obtaining secondary
financing, from the Seller or from another source, at the time of origination of
the Seller's first lien, which secondary financing would reduce the equity the
mortgagor would otherwise have in the related mortgaged property as indicated in
the Seller's loan-to-value ratio determination.
As a result of such underwriting standards, the mortgage loans in the
mortgage pool are likely to experience rates of delinquency, foreclosure and
bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the related mortgaged
properties have remained or will remain at the levels in effect on the dates of
origination of the related mortgage loans. See "Long Beach Mortgage
Company--Underwriting Standards" in this prospectus supplement.
LIMITED SERVICING HISTORY AND PERFORMANCE DATA WITH RESPECT TO THE MASTER
SERVICER
The Master Servicer began directly servicing mortgage loans in November
1998. As a result, the Master Servicer has limited experience servicing mortgage
loans similar to the Mortgage Loans. The Master Servicer's limited experience in
servicing mortgage loans may result in greater defaults and losses on the
Mortgage Loans and result in
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accelerated prepayments on the Offered Certificates. You will bear any
reinvestment risk resulting from such accelerated prepayments.
Because the Master Servicer commenced its direct servicing operations
in November 1998, the Master Servicer does not have historical delinquency,
bankruptcy, foreclosure or default experience that may be referred to for
purposes of examining the Master Servicer's performance in servicing mortgage
loans similar to the Mortgage Loans, other than to the limited extent as
described under "Long Beach Mortgage Company--General" in this prospectus
supplement. There can be no assurance that such experience is or will be
representative of the Master Servicer's performance of servicing the Mortgage
Loans.
CONFLICTS OF INTEREST BETWEEN THE MASTER SERVICER AND THE TRUST
The Master Servicer will initially, directly or indirectly, own all or
a portion of the Class C Certificates, the Class P Certificates and the Residual
Certificates. The timing of mortgage loan foreclosures and sales of the related
mortgaged properties may affect the weighted average lives and yields of the
Certificates.
Investors should consider that the timing of such foreclosures or sales
may not be in the best interests of all certificateholders and that no formal
policies or guidelines have been established to resolve or minimize such a
conflict of interest.
DELINQUENT MORTGAGE LOAN RISK
None of the Group I Mortgage Loans or the Group II Mortgage Loans were
30 days or more delinquent in their monthly payments as of November 30, 2000.
However, investors in the Offered Certificates should realize that approximately
94.48% of the Group I Mortgage Loans and approximately 82.99% of the Group II
Mortgage Loans (in each case, by aggregate principal balance of the related Loan
Group as of the Cut-off Date), have a first payment date occurring on or after
November 1, 2000 and, therefore, such mortgage loans could not have been 30 days
or more delinquent as of November 30, 2000.
BALLOON LOAN RISK
Balloon loans pose a risk because a mortgagor must make a large lump
sum payment of principal at the end of the loan term. If the mortgagor is unable
to pay the lump sum or refinance such amount, the trust will suffer a loss.
Approximately 0.08% of the Group I Mortgage Loans (by aggregate principal
balance of the Group I Mortgage Loans as of the Cut-off Date) are balloon loans.
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR THE OFFERED CERTIFICATES
The credit enhancement features described in the summary of this
prospectus supplement are intended to enhance the likelihood that holders of the
Class A Certificates, and to a limited extent, the holders of the Mezzanine
Certificates, will receive regular payments of interest and principal. However,
we cannot assure you that the applicable credit enhancement will adequately
cover any shortfalls in cash available to pay your certificates as a result of
delinquencies or defaults on the Mortgage Loans. If delinquencies or defaults
occur on the Mortgage Loans, neither the Master Servicer nor any other entity
will advance scheduled monthly payments of interest and principal on delinquent
or defaulted Mortgage Loans if such advances are not likely to be recovered.
If substantial losses occur as a result of defaults and delinquent
payments on the Mortgage Loans, you may suffer losses.
Furthermore, although loan-level primary mortgage insurance policies
have been acquired on behalf of the trust from the PMI Insurer with respect to
approximately 71.85% of the Group I Mortgage Loans and approximately 71.98% of
the Group II Mortgage Loans (in each case, by aggregate principal balance of the
related Loan Group as of the Cut- off Date), such policies will provide only
limited protection against losses on defaulted Mortgage Loans.
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO MAINTAIN
OVERCOLLATERALIZATION
The weighted average of the interest rates on the Mortgage Loans is
expected to be higher than the pass-through rates on the Offered Certificates.
The Mortgage Loans are expected to generate more interest than is needed to pay
interest owed on the Offered Certificates and to pay certain fees and expenses
of the trust. Any remaining interest
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generated by the Mortgage Loans will then be used to absorb losses that occur on
the Mortgage Loans. After these financial obligations of the trust are covered,
the available excess interest generated by the Mortgage Loans will be used to
maintain overcollateralization. We cannot assure you, however, that enough
excess interest will be generated to maintain the required level of
overcollateralization. The factors described below will affect the amount of
excess interest that the Mortgage Loans will generate:
o Every time a Mortgage Loan is prepaid in full, excess interest may be
reduced because the Mortgage Loan will no longer be outstanding and
generating interest or, in the case of a partial prepayment, will be
generating less interest.
o Every time a Mortgage Loan is liquidated or written off, excess
interest may be reduced because such Mortgage Loans will no longer be
outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the Mortgage Loans
turn out to be higher than expected, excess interest will be reduced by
the amount necessary to compensate for any shortfalls in cash available
to make required distributions on the Offered Certificates.
o The Group II Mortgage Loans have rates that adjust based on an index
that is different from the index used to determine the pass-through
rate on the Offered Certificates (other than the Group I Certificates).
In addition, the first adjustment of the rates for 82.93% of the Group
II Mortgage Loans (by aggregate principal balance of the Group II
Mortgage Loans as of the Cut-off Date) will not occur until two years
after the date of origination, the first adjustment of the rates for
15.95% of the Group II Mortgage Loans (by aggregate principal balance
of the Group II Mortgage Loans as of the Cut-off Date) will not occur
until three years after the date of origination and the first
adjustment of the rates for 0.34% of the Group II Mortgage Loans (by
aggregate principal balance of the Group II Mortgage Loans as of the
Cut-off Date) will not occur until five years after the date of
origination. As a result, the pass-through rate on the Offered
Certificates (other than the Group I Certificates) may increase
relative to interest rates on the Group II Mortgage Loans, or the
pass-through rate on the Offered Certificates may remain constant as
interest rates on the Group II Mortgage Loans decline. In either case,
this would require that more of the interest generated by the Group II
Mortgage Loans be applied to cover interest on the Offered
Certificates.
o The Group I Mortgage Loans have rates that do not adjust. The
pass-through rate on the Offered Certificates (other than the Group I
Certificates) may increase relative to the rates on the Group I
Mortgage Loans. This could require that more of the interest generated
by the Group I Mortgage Loans be applied to cover interest on the
Offered Certificates.
o If prepayments, defaults and liquidations occur more rapidly on the
Mortgage Loans with relatively higher mortgage rates than on the
Mortgage Loans with relatively lower mortgage rates, the amount of
excess interest generated by the Mortgage Loans will be less than would
otherwise be the case.
EFFECT OF MORTGAGE RATES ON THE CLASS A CERTIFICATES AND THE MEZZANINE
CERTIFICATES
The Group I Certificates accrue interest at fixed pass-through rates,
but the pass-through rates for the Class AF-3 Certificates and the Class AF-4
Certificates are subject to limits. The Class AV-1 Certificates and the
Mezzanine Certificates accrue interest at pass-through rates based on the
one-month LIBOR index plus specified margins, but are subject to a limit. The
limit on the pass-through rates for the Class AF-3 Certificates, Class AF-4
Certificates, Class AV-1 Certificates and Mezzanine Certificates is based on the
weighted average of the mortgage rates on the Mortgage Loans net of certain fees
and expenses of the trust.
A variety of factors could limit the pass-through rate and adversely
affect the yield to maturity on the Class AF- 3 Certificates, the Class AF-4
Certificates, the Class AV-1 Certificates and the Mezzanine Certificates. Some
of these factors are described below:
o The mortgage rates on the Group I Mortgage Loans will not
adjust and the mortgage rates on the Group II Mortgage Loans
are based on a six-month LIBOR index. All of the Group II
Mortgage Loans have periodic and maximum limitations on
adjustments to their mortgage rates, and 99.22% of the Group
II Mortgage Loans (by aggregate principal balance of the Group
II Mortgage Loans as of the Cut-off Date), will not have the
first adjustment to their mortgage rates until two years,
three
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years or five years after the origination thereof. As a result
of the limit on the pass-through rate for the Class AF-3
Certificates, the Class AF-4 Certificates, the Class AV-1
Certificates and the Mezzanine Certificates, such certificates
may accrue less interest than they would accrue if their pass-
through rates were based solely on the specified fixed rate
(in the case of the Class AF-3 Certificates and Class AF-4
Certificates) or on the one-month LIBOR index plus the
specified margins (in the case of the Class AV-1 Certificates
and the Mezzanine Certificates).
o Six-month LIBOR may change at different times and in different
amounts than one-month LIBOR. As a result, it is possible that
mortgage rates on certain of the Group II Mortgage Loans may
decline while the pass-through rates on the Class AV-1
Certificates and the Mezzanine Certificates are stable or
rising. It is also possible that the mortgage rates on the
Group II Mortgage Loans and the pass- through rates for the
Class AV-1 Certificates and the Mezzanine Certificates may
decline or increase during the same period, but that the
pass-through rates on these certificates may decline more
slowly or increase more rapidly.
o The pass-through rates for the Class AV-1 Certificates and the
Mezzanine Certificates adjust monthly while the mortgage rates
on the Group II Mortgage Loans adjust less frequently and
mortgage rates on the Group I Mortgage Loans do not adjust.
Consequently, the limit on the pass-through rates for the
Class AV-1 Certificates and Mezzanine Certificates may limit
increases in the pass-through rates for extended periods in a
rising interest rate environment.
o If prepayments, defaults and liquidations occur more rapidly
on the Mortgage Loans with relatively higher mortgage rates
than on the Mortgage Loans with relatively lower mortgage
rates, the pass- through rates on the Class AF-3 Certificates,
the Class AF-4 Certificates, Class AV-1 Certificates and
Mezzanine Certificates are more likely to be limited.
The holders of the Class AF-3 Certificates and the Class AF-4
Certificates will not be entitled to recover interest in excess of any
applicable limited rate on any Distribution Date or any future Distribution
Date.
If the pass-through rates on the Class AV-1 Certificates or the
Mezzanine Certificates are limited for any Distribution Date, the resulting
basis risk shortfalls may be recovered by the holders of these certificates on
the same Distribution Date or on future Distribution Dates on a subordinated
basis to the extent that on such Distribution Date or future Distribution Dates
there are available funds remaining after certain other distributions on the
Offered Certificates and the payment of certain fees and expenses of the trust.
ADDITIONAL RISKS ASSOCIATED WITH THE MEZZANINE CERTIFICATES
The weighted average lives of, and the yields to maturity on, the Class
M-1 Certificates, the Class M-2 Certificates and the Class M-3 Certificates will
be progressively more sensitive, in that order, to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Mortgage Loans. If
the actual rate and severity of losses on the Mortgage Loans is higher than
those assumed by an investor in such certificates, the actual yield to maturity
of such certificates may be lower than the yield anticipated by such holder
based on such assumption. The timing of losses on the Mortgage Loans will also
affect an investor's actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the Mortgage Loans in both loan groups are
consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater the effect on an investor's yield to maturity. Realized
losses on the Mortgage Loans, to the extent they exceed the amount of
overcollateralization following distributions of principal on the related
Distribution Date, will reduce the certificate principal balance of the Class
M-3 Certificates, the Class M-2 Certificates and the Class M-1 Certificates, in
that order. As a result of such reductions, less interest will accrue on such
class of Mezzanine Certificates than would otherwise be the case. Once a
realized loss is allocated to a Mezzanine Certificate, no principal or interest
will be distributable with respect to such written down amount. However, the
amount of any realized losses allocated to the Mezzanine Certificates may be
paid to the holders of the Mezzanine Certificates according to the priorities
set forth under "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement.
Unless the certificate principal balance of the Class A Certificates
has been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until at least January 2004 or a later date as provided
in this prospectus supplement, or during any period in which delinquencies on
the Mortgage Loans exceed certain levels. As a result, the weighted average
lives of the Mezzanine Certificates will be longer than would otherwise be the
case
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if distributions of principal were allocated among all of the certificates at
the same time. As a result of the longer weighted average lives of the Mezzanine
Certificates, the holders of such certificates have a greater risk of suffering
a loss on their investments. Further, because such certificates might not
receive any principal if certain delinquency levels occur, it is possible for
such certificates to receive no principal distributions even if no losses have
occurred on the mortgage pool.
In addition, the multiple class structure of the Mezzanine Certificates
causes the yield of such classes to be particularly sensitive to changes in the
rates of prepayment of the Mortgage Loans. Because distributions of principal
will be made to the holders of such certificates according to the priorities
described in this prospectus supplement, the yield to maturity on such classes
of certificates will be sensitive to the rates of prepayment on the Mortgage
Loans experienced both before and after the commencement of principal
distributions on such classes. The yield to maturity on such classes of
certificates will also be extremely sensitive to losses due to defaults on the
Mortgage Loans (and the timing thereof), to the extent such losses are not
covered by excess interest, the Class C Certificates or a class of Mezzanine
Certificates with a lower payment priority. Furthermore, as described in this
prospectus supplement, the timing of receipt of principal and interest by the
Mezzanine Certificates may be adversely affected by losses even if such classes
of certificates do not ultimately bear such loss.
PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS
When a Mortgage Loan is prepaid, the mortgagor is charged interest on
the amount prepaid only up to the date on which the prepayment is made, rather
than for an entire month. This may result in a shortfall in interest collections
available for payment on the next Distribution Date. The Master Servicer is
required to cover a portion of the shortfall in interest collections that are
attributable to prepayments, but only up to the amount of the Master Servicer's
servicing fee for the related calendar month. In addition, certain shortfalls in
interest collections arising from the application of the Soldiers' and Sailors'
Civil Relief Act of 1940 (the "Relief Act") will not be covered by the Master
Servicer.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest paid by the Master Servicer will be allocated,
first, to the interest distribution amount with respect to the Class C
Certificates, and thereafter, to the Monthly Interest Distributable Amounts with
respect to the Offered Certificates on a PRO RATA basis based on the respective
amounts of interest accrued on such certificates for such Distribution Date. THE
HOLDERS OF THE OFFERED CERTIFICATES WILL NOT BE ENTITLED TO REIMBURSEMENT FOR
ANY SUCH INTEREST SHORTFALLS. IF THESE SHORTFALLS ARE ALLOCATED TO THE OFFERED
CERTIFICATES THE AMOUNT OF INTEREST PAID TO THOSE CERTIFICATES WILL BE REDUCED,
ADVERSELY AFFECTING THE YIELD ON YOUR INVESTMENT.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
Substantial delays could be encountered in connection with the
liquidation of delinquent Mortgage Loans. Further, reimbursement of advances
made on a Mortgage Loan, liquidation expenses such as legal fees, real estate
taxes, hazard insurance and maintenance and preservation expenses may reduce the
portion of liquidation proceeds payable to you. If a mortgaged property fails to
provide adequate security for the Mortgage Loan, you will incur a loss on your
investment if the credit enhancements are insufficient to cover the loss.
HIGH LOAN-TO-VALUE RATIOS INCREASE RISK OF LOSS
Mortgage loans with higher loan-to-value ratios may present a greater
risk of loss than mortgage loans with loan-to-value ratios of 80% or below.
Approximately 37.52% of the Group I Mortgage Loans and approximately 47.00% of
the Group II Mortgage Loans (in each case, based on the aggregate principal
balance of the related Loan Group as of the Cut-off Date) had loan-to-value
ratios in excess of 80%, but no more than 90.60% at origination, in the case of
the Group I Mortgage Loans and no more than 99.49% at origination, in the case
of the Group II Mortgage Loans. Additionally, the Master Servicer's
determination of the value of a mortgaged property used in the calculation of
the loan-to-values ratios of the Mortgage Loans in each Loan Group may differ
from the appraised value of such mortgaged properties or the actual value of
such mortgaged properties. See "Long Beach Mortgage Company--Underwriting
Standards" in this prospectus supplement.
GEOGRAPHIC CONCENTRATION
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The chart presented under "Summary of Terms--Mortgage Loans" lists the
states with the highest concentrations of Mortgage Loans. Mortgaged properties
in California may be particularly susceptible to certain types of uninsurable
hazards, such as earthquakes, floods, mudslides and other natural disasters for
which there may or may not be insurance.
In addition, the conditions below will have a disproportionate impact
on the Mortgage Loans in general:
o Economic conditions in states with high concentrations of
Mortgage Loans may affect the ability of mortgagors to repay
their loans on time even if such conditions do not affect real
property values.
o Declines in the residential real estate markets in the states
with high concentrations of Mortgage Loans may reduce the
values of properties located in those states, which would
result in an increase in loan-to-value ratios.
o Any increase in the market value of properties located in the
states with high concentrations of Mortgage Loans would reduce
loan-to-value ratios and could, therefore, make alternative
sources of financing available to mortgagors at lower interest
rates, which could result in an increased rate of prepayment
of the Mortgage Loans.
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS
Applicable state laws generally regulate interest rates and other
charges, require certain disclosure, and require licensing of the Seller. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the mortgage loans.
The Mortgage Loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the
mortgagors regarding the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right
under the Consumer Credit Protection Act, in the extension of
credit; and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the mortgagor's credit
experience.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Mortgage Loans and in addition could subject the trust to
damages and administrative enforcement. In particular, the originator's failure
to comply with certain requirements of the Federal Truth-in-Lending Act, as
implemented by Regulation Z, could subject the trust (and other assignees of the
Mortgage Loans) to monetary penalties, and result in the obligors' rescinding
the Mortgage Loans against either the trust or subsequent holders of the
Mortgage Loans. See "Legal Aspects of Mortgage Assets--Anti-Deficiency
Legislation and Other Limitations on Lenders" in the prospectus.
The Seller will represent that as of the Closing Date, each Mortgage
Loan originated by it is in compliance with applicable federal and state laws
and regulations. In the event of a breach of such representation, the Seller
will be obligated to cure such breach or repurchase or replace the affected
mortgage loan in the manner described under "The Pooling Agreement--Assignment
of the Mortgage Loans" in this prospectus supplement.
THE CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The certificates will not represent an interest in or obligation of the
Depositor, the Master Servicer, the Seller, the Trustee, the Trust Administrator
or any of their respective affiliates. Neither the Offered Certificates nor the
underlying Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the Depositor, the Master Servicer, the
Trustee, the Trust Administrator or any of their respective affiliates. Proceeds
of the assets included in the trust and proceeds from the reserve fund will be
the sole source of payments on the Offered
S-16
<PAGE>
Certificates, and there will be no recourse to the Depositor, the Master
Servicer, the Seller, the Trustee, the Trust Administrator or any other entity
in the event that such proceeds are insufficient or otherwise unavailable to
make all payments provided for under the Offered Certificates.
LACK OF LIQUIDITY
Deutsche Bank Securities Inc., Banc of America Securities LLC, Chase
Securities Inc., Credit Suisse First Boston Corporation and Greenwich Capital
Markets, Inc. (the "Underwriters") intend to make a secondary market in the
classes of certificates actually purchased by them, but they have no obligation
to do so. There is no assurance that such a secondary market will develop or, if
it develops, that it will continue. Consequently, you may not be able to sell
your certificates readily or at prices that will enable you to realize your
desired yield. The market values of the certificates are likely to fluctuate;
these fluctuations may be significant and could result in significant losses to
you.
The secondary markets for asset-backed securities 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 securities 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.
REDUCTION OR WITHDRAWAL OF RATINGS
Each rating agency rating the Offered Certificates may change or
withdraw its initial ratings at any time in the future if, in its judgment,
circumstances warrant a change. No person is obligated to maintain the ratings
at their initial levels. If a rating agency reduces or withdraws its rating on
one or more classes of the Offered Certificates, the liquidity and market value
of the affected certificates is likely to be reduced.
SUITABILITY OF THE OFFERED CERTIFICATES AS INVESTMENTS
The Offered Certificates are not suitable investments for any investor
that requires a regular or predictable schedule of monthly payments or payment
on any specific date. The Offered Certificates are complex investments that
should be considered only by investors who, either alone or with their
financial, tax and legal advisors, have the expertise to analyze the prepayment,
reinvestment, default and market risk, the tax consequences of an investment and
the interaction of these factors.
THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided
by the Seller. Neither the Depositor nor any other affiliate of the Seller, nor
any of the Trustee, the Trust Administrator, the Underwriters or any of their
respective affiliates has made or will make any representation as to the
accuracy or completeness of such information.
The statistical information presented in this prospectus supplement
relates to the Mortgage Loans and related Mortgaged Properties in each Loan
Group as of the Cut-off Date, as adjusted for scheduled principal payments due
on or before the Cut-off Date whether or not received. Prior to the issuance of
the Certificates, Mortgage Loans may be removed from one or both Loan Groups as
a result of incomplete documentation or otherwise if the Depositor deems such
removal necessary or desirable, and may be prepaid at any time. A limited number
of other Mortgage Loans may be included in each Loan Group prior to the issuance
of the Certificates unless including such Mortgage Loans would materially alter
the characteristics of the Mortgage Loans in such Loan Group as described in
this prospectus supplement. The Depositor believes that the information set
forth in this prospectus supplement with respect to the Mortgage Loans in each
Loan Group will be representative of the characteristics of such Loan Group as
it will be constituted at the time the Certificates are issued, although the
range of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in a Loan Group may vary.
Unless otherwise noted, all statistical percentages or weighted
averages set forth in this prospectus supplement are measured as a percentage of
the aggregate Principal Balance as of the Cut-off Date of the Mortgage Loans in
the related Loan Group ("Cut-off Date Principal Balance"). The "Principal
Balance" of a Mortgage Loan as of any date is equal to the principal balance of
such Mortgage Loan at its origination, less the sum of scheduled and unscheduled
payments in respect of principal made on such Mortgage Loan. The "Pool Balance"
as of any date is equal to the aggregate of the Principal Balances of the
Mortgage Loans in both Loan Groups.
S-17
<PAGE>
Certain of the Mortgage Loans were originated after December 1, 2000
but not later than December 5, 2000. Although such Mortgage Loans were not
outstanding on the Cut-off Date, for convenience in describing the Mortgage Pool
in this prospectus supplement, such Mortgage Loans will be deemed to have been
outstanding as of the close of business on the Cut-off Date.
GENERAL
Long Beach Mortgage Loan Trust 2000-1 (the "Trust") will consist of a
pool of residential mortgage loans (the "Mortgage Loans" or the "Mortgage Pool")
which pool will in turn consist of a group of fixed-rate, first lien, fully-
amortizing and balloon mortgage loans (the "Group I Mortgage Loans") and a group
of adjustable rate, first lien, fully- amortizing Mortgage Loans (the "Group II
Mortgage Loans"). The Group I Mortgage Loans have original terms to maturity
ranging from 10 years to 30 years and a Cut-off Date Principal Balance of
approximately $72,998,895. The Group II Mortgage Loans have original terms to
maturity ranging from 15 years to 30 years and a Cut-off Date Principal Balance
of approximately $927,001,700. All of the Mortgage Loans will be secured by
first mortgages or deeds of trust or other similar security instruments (each, a
"Mortgage"). The Mortgages create first liens on one- to four-family residential
properties consisting of attached or detached one- to four-family dwelling units
and individual condominium units (each, a "Mortgaged Property"). The Group I
Mortgage Loans consist of approximately 764 Mortgage Loans and the Group II
Mortgage Loans consist of approximately 7,416 Mortgage Loans.
The Depositor will purchase the Mortgage Loans from the Seller pursuant
to the Mortgage Loan Purchase Agreement (the "Mortgage Loan Purchase Agreement")
dated as of December 12, 2000 between the Seller and the Depositor. Pursuant to
the Pooling and Servicing Agreement, dated as of December 1, 2000 (the "Pooling
Agreement"), among the Depositor, the Master Servicer, the Trust Administrator
and the Trustee, the Depositor will cause the Mortgage Loans to be assigned to
the Trustee for the benefit of the Certificateholders. See "The Pooling and
Servicing Agreement" in this prospectus supplement.
Each of the Mortgage Loans was selected from the Seller's portfolio of
mortgage loans. The Mortgage Loans were originated by the Seller or acquired by
the Seller in the secondary market in the ordinary course of its business and
were underwritten or re-underwritten by the Seller in accordance with its
underwriting standards as described under "Long Beach Mortgage
Company--Underwriting Standards" in this prospectus supplement.
Under the Mortgage Loan Purchase Agreement, the Seller will make
certain representations and warranties to the Depositor (which will be assigned
to the Trustee) relating to, among other things, the due execution and
enforceability of the Mortgage Loan Purchase Agreement and certain
characteristics of the Mortgage Loans. Subject to certain limitations, the
Seller will be obligated to repurchase or substitute a similar mortgage loan for
any Mortgage Loan as to which there exists deficient documentation or an uncured
breach of any such representation or warranty, if such breach of any such
representation or warranty materially and adversely affects the
Certificateholders' interests in such Mortgage Loan. The Depositor will make no
representations or warranties with respect to the Mortgage Loans and will have
no obligation to repurchase or substitute Mortgage Loans with deficient
documentation or that are otherwise defective. The Seller will have no
obligation with respect to the Certificates in its capacity as Seller other than
the repurchase or substitution obligations described above.
Each Mortgage Loan will accrue interest at the fixed rate (in the case
of the Group I Mortgage Loans) or adjustable-rate (in the case of the Group II
Mortgage Loans) calculated as specified under the terms of the related mortgage
note (each such rate, a "Mortgage Rate").
Each Group I Mortgage Loan has a Mortgage Rate that is fixed for the
life of such Mortgage Loan.
Each Group II Mortgage Loan accrues interest at a Mortgage Rate that is
adjustable. Generally, the Group II Mortgage Loans provide for semi-annual
adjustment to the Mortgage Rate thereon and for corresponding adjustments to the
monthly payment amount due thereon, in each case on each adjustment date
applicable thereto (each such date, an "Adjustment Date"); provided, that the
first adjustment for the Group II Mortgage Loans will occur after an initial
period of two years, in the case of approximately 82.93% of the Group II
Mortgage Loans, three years, in the case of approximately 15.95% of the Group II
Mortgage Loans and five years, in the case of approximately 0.34% of the Group
II Mortgage Loans (any Group II Mortgage Loan having such a delayed first
adjustment feature, a "Delayed First Adjustment Mortgage Loan"). On each
Adjustment Date for each Group II Mortgage Loan, the Mortgage Rate thereon will
be adjusted to equal the sum, rounded to the nearest or next highest multiple of
0.125%, of Six-Month LIBOR (as defined below) and a fixed percentage amount (the
"Gross Margin"). The Mortgage Rate on each Group II Mortgage
S-18
<PAGE>
Loan will not decrease on the first related Adjustment Date, will not increase
by more than a stated percentage (3.000% per annum, as specified in the related
mortgage note) on the first related Adjustment Date (the "Initial Periodic Rate
Cap") and will not increase or decrease by more than (1.000% per annum as
specified in the related mortgage note) on any Adjustment Date thereafter (the
"Subsequent Periodic Rate Cap"). The Group II Mortgage Loans have a weighted
average Initial Periodic Rate Cap of approximately 1.329% per annum and a
weighted average Subsequent Periodic Rate Cap of approximately 1.000% per annum.
Each Mortgage Rate on each Group II Mortgage Loan will not exceed a specified
maximum Mortgage Rate over the life of such Mortgage Loan (the "Maximum Mortgage
Rate") or be less than a specified minimum Mortgage Rate over the life of such
Mortgage Loan (the "Minimum Mortgage Rate"). Effective with the first monthly
payment due on each Group II Mortgage Loan after each related Adjustment Date,
the monthly payment amount will be adjusted to an amount that will amortize
fully the outstanding Principal Balance of the related Mortgage Loan over its
remaining term, and pay interest at the Mortgage Rate as so adjusted. Due to the
application of the Periodic Rate Caps and the Maximum Mortgage Rates, the
Mortgage Rate on each such Group II Mortgage Loan, as adjusted on any related
Adjustment Date, may be less than the sum of the Index and the related Gross
Margin, rounded as described in this prospectus supplement. None of the Group II
Mortgage Loans permits the related mortgagor to convert the adjustable Mortgage
Rate thereon to a fixed Mortgage Rate.
Approximately 80.38% of the Group I Mortgage Loans and approximately
84.67% of the Group II Mortgage Loans provide for payment by the mortgagor of a
prepayment charge in limited circumstances on certain prepayments.
Generally, each such Group I Mortgage Loan having a prepayment charge provision
will provide for payment of a prepayment charge on certain partial prepayments
and all prepayments in full made within a stated number of months that is
between 12 and 60 months from the date of origination of such Mortgage Loan. The
amount of the prepayment charge is provided in the related mortgage note and is
generally equal to six months' interest on the amount prepaid in excess of 20%
of the original principal balance of the related Mortgage Loan in any
twelve-month period. The holders of the Class P Certificates will be entitled to
all prepayment charges received on the Group I Mortgage Loans, and such amounts
will not be available for distribution on the other classes of Certificates.
Under certain circumstances, as described in the Pooling Agreement, the Master
Servicer may waive the payment of any otherwise applicable prepayment charge.
Investors should conduct their own analysis of the effect, if any, that the
prepayment charges, and decisions by the Master Servicer with respect to the
waiver thereof, may have on the prepayment performance of the Group I Mortgage
Loans. The Depositor makes no representations as to the effect that the
prepayment charges, and decisions by the Master Servicer with respect to the
waiver thereof, may have on the prepayment performance of the Group I Mortgage
Loans.
THE INDEX. With respect to the Group II Mortgage Loans, the "Index" is
the average of interbank offered rates for six-month U.S. dollar deposits in the
London market based on quotations of major banks, and most recently available as
of a day specified in the related note as published in the Western Edition of
THE WALL STREET JOURNAL ("Six-Month LIBOR"). If the Index becomes unpublished or
is otherwise unavailable, the Master Servicer will select an alternative index
which is based upon comparable information.
GROUP I MORTGAGE LOANS STATISTICS
The following statistical information, unless otherwise specified, is
based upon percentages of the Principal Balances of the Group I Mortgage Loans
as of the Cut-off Date.
Approximately 37.52% of the Group I Mortgage Loans had loan-to-value
ratios at origination in excess of 80.00%. No Group I Mortgage Loan had a
loan-to-value ratio at origination in excess of 90.60% and the weighted average
loan-to-value ratio of the Group I Mortgage Loans at origination was
approximately 77.14%. There can be no assurance that the loan-to-value ratio of
any Group I Mortgage Loan determined at any time after origination is less than
or equal to its original loan-to-value ratio. Additionally, the Master
Servicer's determination of the value of a Mortgaged Property used in the
calculation of the loan-to-value ratios of the Group I Mortgage Loans may differ
from the appraised value of such Mortgaged Property or the actual value of such
Mortgaged Property. We refer you to "Description of the Certificates--The PMI
Policy" in this prospectus supplement.
All of the Group I Mortgage Loans have a scheduled payment due each
month (the "Due Date") on the first day of the month.
The weighted average remaining term to maturity of the Group I Mortgage
Loans is approximately 348 months as of the Cut-off Date. None of the Group I
Mortgage Loans had a first Due Date prior to August 1999 or after January
S-19
<PAGE>
2001 or will have a remaining term to maturity of less than 119 months or
greater than 360 months as of the Cut-off Date. The latest maturity date of any
Group I Mortgage Loan is December 2030.
The average Principal Balance of the Group I Mortgage Loans at
origination was approximately $95,656. The average Principal Balance of the
Group I Mortgage Loans as of the Cut-off Date was approximately $95,548. No
Group I Mortgage Loan had a Principal Balance as of the Cut-off Date of greater
than $569,746 or less than $15,297.
The Group I Mortgage Loans had Mortgage Rates as of the Cut-off Date of
not less than 8.200% per annum and not more than 14.975% per annum and the
weighted average Mortgage Rate was approximately 10.962% per annum.
The Group I Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
S-20
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS AT ORIGINATION
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE ($) OF MORTGAGE LOANS OUTSTANDING AT ORIGINATION OUTSTANDING AT ORIGINATION
---------------------- ----------------- -------------------------- --------------------------
<S> <C> <C> <C>
15,300 - 50,000.... 187 $ 7,056,004.38 9.66%
50,001 - 100,000..... 344 24,503,659.00 33.53
100,001 - 150,000..... 130 15,864,696.00 21.71
150,001 - 200,000..... 44 7,668,244.00 10.49
200,001 - 250,000..... 22 4,967,800.00 6.80
250,001 - 300,000..... 13 3,566,117.80 4.88
300,001 - 350,000..... 8 2,579,055.00 3.53
350,001 - 400,000..... 7 2,691,200.00 3.68
400,001 - 450,000..... 5 2,134,215.00 2.92
450,001 - 500,000..... 3 1,480,000.00 2.03
550,001 - 570,000..... 1 570,000.00 0.78
--- --------------- -------
Total........ 764 $ 73,080,991.18 100.00%
=== =============== =======
</TABLE>
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE ($) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------- -------------- ------------------ -----------------
15,297 - 50,000..... 187 $ 7,042,763.56 9.65%
50,001 - 100,000..... 345 24,569,935.84 33.66
100,001 - 150,000..... 129 15,745,815.16 21.57
150,001 - 200,000..... 44 7,663,812.73 10.50
200,001 - 250,000..... 22 4,966,322.75 6.80
250,001 - 300,000..... 13 3,561,059.56 4.88
300,001 - 350,000..... 8 2,577,331.24 3.53
350,001 - 400,000..... 7 2,688,885.00 3.68
400,001 - 450,000..... 5 2,133,671.48 2.92
450,001 - 500,000..... 3 1,479,552.39 2.03
550,001 - 569,746..... 1 569,745.13 0.78
--- --------------- ------
Total............. 764 $ 72,998,894.84 100.00%
=== =============== ======
S-21
<PAGE>
ORIGINAL TERMS TO MATURITY OF THE GROUP I MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------- -------------- ------------------ -----------------
120................... 1 $ 112,685.85 0.15%
180................... 42 3,300,640.27 4.52
240................... 16 1,064,762.34 1.46
360................... 705 68,520,806.38 93.87
--- -------------- ------
Total............. 764 $72,998,894.84 100.00%
=== ============== ======
REMAINING TERMS TO MATURITY OF THE GROUP I MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
REMAINING TERM (MONTHS) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
119 - 120.............. 1 $ 112,685.85 0.15%
163 - 168.............. 7 489,770.15 0.67
169 - 174.............. 1 55,895.86 0.08
175 - 180.............. 34 2,754,974.26 3.77
223 - 228.............. 2 260,399.37 0.36
235 - 240.............. 14 804,362.97 1.10
343 - 348.............. 33 2,736,272.93 3.75
349 - 354.............. 4 393,587.77 0.54
355 - 360.............. 668 65,390,945.68 89.58
--- --------------- ------
Total............... 764 $72,998,894.84 100.00%
=== =============== ======
S-22
<PAGE>
PROPERTY TYPES OF THE GROUP I MORTGAGE LOANS
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------------- ----------- ----------------- -----------------
Single Family Residence... 595 $56,598,180.89 77.53%
2-4 Family................ 46 5,206,240.76 7.13
Manufactured Housing...... 65 4,595,458.08 6.30
PUD(1).................... 29 4,385,032.31 6.01
Condominium............... 28 2,177,982.80 2.98
Townhouse................. 1 36,000.00 0.05
--- -------------- ------
Total................. 764 $72,998,894.84 100.00%
=== ============== ======
--------------------
(1) Planned Unit Development.
OCCUPANCY STATUS OF THE GROUP I MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
Primary................ 703 $68,386,295.69 93.68%
Non-Owner Occupied..... 57 4,055,986.12 5.56
Second Home............ 4 556,613.03 0.76
--- -------------- ------
Total............. 764 $72,998,894.84 100.00%
=== ============== ======
--------------------
(1) Occupancy status as represented by the mortgagor at the time of origination.
PURPOSE OF THE GROUP I MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PURPOSE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
Cash Out Refinance..... 392 $39,214,861.91 53.72%
Purchase............... 269 23,270,271.81 31.88
Rate/Term Refinance.... 103 10,513,761.12 14.40
--- -------------- -------
764 $72,998,894.84 100.00%
Total............. === ============== =======
S-23
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL LOAN-TO-VALUE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATIO(%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
9.67 - 10.00........... 1 $ 18,197.27 0.02%
15.01 - 20.00........... 2 48,818.42 0.07
20.01 - 25.00........... 1 43,000.00 0.06
25.01 - 30.00........... 5 298,207.22 0.41
30.01 - 35.00........... 5 380,284.26 0.52
35.01 - 40.00........... 7 386,516.36 0.53
40.01 - 45.00........... 6 551,779.74 0.76
45.01 - 50.00........... 13 864,650.65 1.18
50.01 - 55.00........... 12 1,309,119.99 1.79
55.01 - 60.00........... 19 1,558,998.92 2.14
60.01 - 65.00........... 43 3,265,255.97 4.47
65.01 - 70.00........... 69 6,467,736.20 8.86
70.01 - 75.00........... 91 8,993,319.58 12.32
75.01 - 80.00........... 204 21,425,383.82 29.35
80.01 - 85.00........... 240 22,446,568.72 30.75
85.01 - 90.00........... 45 4,805,778.56 6.58
90.01 - 90.60........... 1 135,279.16 0.19
--- --------------- ------
Total................ 764 $ 72,998,894.84 100.00%
=== =============== ======
S-24
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES RELATING TO
THE GROUP I MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
Alabama................ 30 $ 2,061,803.95 2.82%
Arizona................ 13 922,967.53 1.26
Arkansas............... 4 198,414.49 0.27
California............. 78 13,272,822.51 18.18
Colorado............... 31 4,811,013.80 6.59
Connecticut............ 7 849,025.78 1.16
District of Columbia... 1 80,722.73 0.11
Florida................ 68 4,836,201.81 6.63
Georgia................ 9 728,193.35 1.00
Hawaii................. 10 1,226,515.16 1.68
Illinois............... 19 2,140,325.91 2.93
Indiana................ 25 1,477,614.63 2.02
Iowa................... 9 469,736.84 0.64
Kentucky............... 3 248,440.46 0.34
Louisiana.............. 26 1,665,217.08 2.28
Maine.................. 1 435,000.00 0.60
Maryland............... 5 711,133.17 0.97
Massachusetts.......... 18 3,110,859.05 4.26
Michigan............... 34 2,716,187.32 3.72
Minnesota.............. 10 1,293,839.98 1.77
Mississippi............ 14 712,877.52 0.98
Missouri............... 17 976,523.77 1.34
Montana................ 5 311,711.08 0.43
Nebraska............... 14 838,420.64 1.15
Nevada................. 3 254,103.00 0.35
New Hampshire.......... 6 791,779.68 1.08
New Jersey............. 5 420,684.75 0.58
New Mexico............. 7 401,225.11 0.55
New York............... 55 5,878,870.89 8.05
North Carolina......... 21 1,629,188.09 2.23
North Dakota........... 1 22,491.16 0.03
Ohio................... 23 1,637,554.02 2.24
Oklahoma............... 11 664,480.33 0.91
Oregon................. 8 999,469.60 1.37
Pennsylvania........... 8 959,381.11 1.31
Rhode Island........... 2 166,338.75 0.23
South Carolina......... 17 1,157,313.84 1.59
South Dakota........... 3 384,629.40 0.53
Tennessee.............. 9 795,313.77 1.09
Texas.................. 104 7,956,901.37 10.90
Utah................... 10 855,155.89 1.17
Virginia............... 9 533,410.97 0.73
Washington............. 6 1,077,243.70 1.48
West Virginia.......... 2 105,640.08 0.14
Wisconsin.............. 2 167,171.99 0.23
Wyoming................ 1 44,978.78 0.06
--- -------------- ------
Total:............ 764 $72,998,894.84 100.00%
=== ============== ======
S-25
<PAGE>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
<TABLE>
<CAPTION>
DOCUMENTATION LEVELS OF THE GROUP I MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------------------- -------------- ------------------ -----------------
<S> <C> <C> <C>
Full Documentation............. 603 $56,604,716.31 77.54%
Stated Income Documentation.... 126 11,578,854.15 15.86
Limited Documentation.......... 35 4,815,324.38 6.60
--- -------------- ------
Total..................... 764 $72,998,894.84 100.00%
=== ============== ======
</TABLE>
--------------------
(1) For a description of each documentation level, see "Long Beach Mortgage
Company--Underwriting Standards" in this prospectus supplement.
CREDIT GRADE FOR THE GROUP I MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
CREDIT GRADE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
A-1.................... 60 $ 5,741,260.46 7.86%
A-2.................... 267 28,345,285.24 38.83
A-3.................... 3 168,200.00 0.23
A-4.................... 32 4,503,303.06 6.17
A-5.................... 12 1,157,461.20 1.59
B1..................... 93 7,909,432.93 10.84
B2..................... 12 1,477,186.50 2.02
B3..................... 8 930,461.89 1.27
B4..................... 33 4,474,915.14 6.13
B-1.................... 123 9,316,076.36 12.76
B-2.................... 10 772,762.83 1.06
B-3.................... 11 980,331.86 1.34
B-4.................... 1 97,576.27 0.13
C...................... 87 6,132,734.88 8.40
D...................... 12 991,906.22 1.36
--- -------------- ------
Total........... 764 $72,998,894.84 100.00%
=== ============== ======
S-26
<PAGE>
MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
CURRENT MORTGAGE RATE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
(%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
8.200 - 8.500...... 8 $ 897,466.71 1.23%
8.501 - 9.500...... 46 6,320,412.70 8.66
9.501 - 10.500...... 148 19,357,354.97 26.52
10.501 - 11.500...... 241 23,275,194.69 31.88
11.501 - 12.500...... 194 15,153,349.18 20.76
12.501 - 13.500...... 96 6,522,393.32 8.93
13.501 - 14.500...... 25 1,222,502.62 1.67
14.501 - 14.975...... 6 250,220.65 0.34
--- -------------- ------
Total.............. 764 $72,998,894.84 100.00%
=== ============== ======
GROUP II MORTGAGE LOANS STATISTICS
The following statistical information, unless otherwise specified, is
based upon percentages of the Principal Balances of the Group II Mortgage Loans
as of the Cut-off Date.
Approximately 47.00% of the Group II Mortgage Loans had loan-to-value
ratios at origination in excess of 80.00%. No Group II Mortgage Loan had a
loan-to-value ratio at origination in excess of 99.49% and the weighted average
loan-to-value ratio of the Group II Mortgage Loans at origination was
approximately 79.63%. There can be no assurance that the loan-to-value ratio of
any Group II Mortgage Loan determined at any time after origination is less than
or equal to its original loan-to-value ratio. Additionally, the Master
Servicer's determination of the value of a Mortgaged Property used in the
calculation of the loan-to-value ratios of the Group II Mortgage Loans may
differ from the appraised value of such Mortgaged Property or the actual value
of such Mortgaged Property. We refer you to "Description of the
Certificates--The PMI Policy" in this prospectus supplement.
All of the Group II Mortgage Loans have a Due Date on the first day of
the month.
The weighted average remaining term to maturity of the Group II Mortgage
Loans is approximately 358 months as of the Cut-off Date. None of the Group II
Mortgage Loans had a first Due Date prior to December 1998 or after February
2001 or will have a remaining term to maturity of less than 177 months or
greater than 360 months as of the Cut-off Date. The latest maturity date of any
Group II Mortgage Loan is January 2031.
The average Principal Balance of the Group II Mortgage Loans at
origination was approximately $125,102. The average Principal Balance of the
Group II Mortgage Loans as of the Cut-off Date was approximately $125,000. No
Group II Mortgage Loan had a Principal Balance as of the Cut-off Date of greater
than $749,334 or less than $15,750.
The Group II Mortgage Loans had Mortgage Rates as of the Cut-off Date of
not less than 7.500% per annum and not more than 15.100% per annum and the
weighted average Mortgage Rate was approximately 10.762% per annum. As of the
Cut-off Date, the Group II Mortgage Loans had Gross Margins ranging from 4.750%
to 8.700%, Minimum Mortgage Rates ranging from 7.500% per annum to 15.100% per
annum and Maximum Mortgage Rates ranging from 13.500% per annum to 21.100% per
annum. As of the Cut-off Date, the Group II Mortgage Loans had a weighted
average Gross Margin of approximately 6.132%, a weighted average Minimum
Mortgage Rate of approximately 10.760% per annum and a weighted average Maximum
Mortgage Rate of approximately 16.764% per annum. The latest next Adjustment
Date following the Cut-off Date on any Group II Mortgage Loan occurs on January
S-27
<PAGE>
1, 2006, and the weighted average time until the next Adjustment Date for the
Group II Mortgage Loans following the Cut-off Date is 25 months.
The Group II Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS AT ORIGINATION
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE ($) OF MORTGAGE LOANS OUTSTANDING AT ORIGINATION OUTSTANDING AT ORIGINATION
---------------------- ----------------- -------------------------- --------------------------
<S> <C> <C> <C>
15,750 - 50,000..... 939 $ 36,599,722.45 3.94%
50,001 - 100,000..... 2,945 217,782,344.05 23.47
100,001 - 150,000..... 1,675 205,602,809.00 22.16
150,001 - 200,000..... 759 131,288,484.60 14.15
200,001 - 250,000..... 417 93,326,930.65 10.06
250,001 - 300,000..... 245 67,015,593.00 7.22
300,001 - 350,000..... 165 53,406,769.25 5.76
350,001 - 400,000..... 97 36,630,623.00 3.95
400,001 - 450,000..... 62 26,420,565.00 2.85
450,001 - 500,000..... 58 27,851,182.70 3.00
500,001 - 550,000..... 18 9,493,260.00 1.02
550,001 - 600,000..... 22 12,855,428.00 1.39
600,001 - 650,000..... 5 3,212,000.00 0.35
650,001 - 700,000..... 7 4,771,500.00 0.51
700,001 - 750,000..... 2 1,500,000.00 0.16
----- ------------ ----
Total............. 7,416 $927,757,211.70 100.00%
===== =============== ======
</TABLE>
S-28
<PAGE>
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE ($) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------- -------------- ------------------ -----------------
15,750 - 50,000..... 939 $ 36,567,889.58 3.94%
50,001 - 100,000..... 2,946 217,716,535.07 23.49
100,001 - 150,000..... 1,676 205,646,230.19 22.18
150,001 - 200,000..... 757 130,876,546.86 14.12
200,001 - 250,000..... 417 93,253,266.43 10.06
250,001 - 300,000..... 246 67,263,205.30 7.26
300,001 - 350,000..... 164 53,036,991.42 5.72
350,001 - 400,000..... 97 36,603,999.79 3.95
400,001 - 450,000..... 62 26,397,995.08 2.85
450,001 - 500,000..... 58 27,826,860.67 3.00
500,001 - 550,000..... 18 9,489,240.88 1.02
550,001 - 600,000..... 22 12,845,551.40 1.39
600,001 - 650,000..... 5 3,210,314.29 0.35
650,001 - 700,000..... 7 4,768,753.63 0.51
700,001 - 749,334..... 2 1,498,319.28 0.16
----- --------------- ------
Total.......... 7,416 $927,001,699.87 100.00%
===== =============== ======
ORIGINAL TERMS TO MATURITY OF THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------- -------------- ------------------ -----------------
180................... 4 $ 243,434.69 0.03%
240................... 1 57,693.56 0.01
360................... 7,411 926,700,571.62 99.97
----- --------------- ------
Total............. 7,416 $927,001,699.87 100.00%
===== =============== ======
S-29
<PAGE>
REMAINING TERMS TO MATURITY OF THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
REMAINING TERM (MONTHS) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ----------------- -----------------
175 - 180.............. 4 $ 243,434.69 0.03%
235 - 240.............. 1 57,693.56 0.01
331 - 336.............. 1 122,640.54 0.01
337 - 342.............. 2 185,075.11 0.02
343 - 348.............. 120 17,141,727.21 1.85
349 - 354.............. 52 5,553,874.79 0.60
355 - 360.............. 7,236 903,697,253.97 97.49
----- --------------- -----
Total.............. 7,416 $927,001,699.87 100.00%
===== =============== ======
PROPERTY TYPES OF THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ----------------- -----------------
Single Family.......... 5,397 $670,244,894.70 72.30%
PUD(1)................. 535 99,164,210.37 10.70
Manufactured Home...... 812 64,922,846.78 7.00
Condominium............ 369 49,786,800.37 5.37
2-4 Family............. 279 40,600,558.92 4.38
Townhouse.............. 24 2,282,388.73 0.25
----- --------------- -------
Total............ 7,416 $927,001,699.87 100.00%
===== =============== ======
--------------------
(1) Planned Unit Development.
S-30
<PAGE>
OCCUPANCY STATUS OF THE GROUP II MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ----------------- -----------------
Primary................ 6,976 $882,023,842.04 95.15%
Non-owner Occupied..... 401 40,318,374.42 4.35
Second Home............ 39 4,659,483.41 0.50
----- --------------- -------
Total............. 7,416 $927,001,699.87 100.00%
===== =============== =======
--------------------
(1) Occupancy status as represented by the mortgagor at the time of
origination.
PURPOSE OF THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PURPOSE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ----------------- -----------------
Purchase............... 3,794 $456,739,326.02 49.27%
Cash Out Refinance..... 2,501 328,047,578.00 35.39
Rate/Term Refinance.... 1,121 142,214,795.85 15.34
----- --------------- ------
Total............. 7,416 $927,001,699.87 100.00%
===== =============== =======
S-31
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL LOAN-TO-VALUE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATIO(%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
14.53 - 15.00.......... 1 $ 24,983.95 0.00%
15.01 - 20.00.......... 3 194,817.44 0.02
20.01 - 25.00.......... 7 428,032.79 0.05
25.01 - 30.00.......... 9 573,677.23 0.06
30.01 - 35.00.......... 24 1,830,699.26 0.20
35.01 - 40.00.......... 22 1,756,800.71 0.19
40.01 - 45.00.......... 28 2,804,134.92 0.30
45.01 - 50.00.......... 72 6,006,121.70 0.65
50.01 - 55.00.......... 76 7,657,332.82 0.83
55.01 - 60.00.......... 146 16,638,742.84 1.79
60.01 - 65.00.......... 336 37,930,623.48 4.09
65.01 - 70.00.......... 434 55,287,894.86 5.96
70.01 - 75.00.......... 806 100,268,440.34 10.82
75.01 - 80.00.......... 2,132 259,893,767.18 28.04
80.01 - 85.00.......... 2,659 322,573,368.40 34.80
85.01 - 90.00.......... 655 112,637,002.52 12.15
90.01 - 95.00.......... 4 343,119.20 0.04
95.01 - 99.49.......... 2 152,140.23 0.02
----- -------------- ------
Total.............. 7,416 $927,001,699.87 100.00%
===== =============== ======
S-32
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES RELATING TO
THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ----------------- -----------------
Alabama................ 92 $ 7,556,252.67 0.82%
Alaska................. 8 916,558.91 0.10
Arizona................ 221 24,354,437.62 2.63
Arkansas............... 26 1,559,868.09 0.17
California............. 1,598 318,846,612.77 34.40
Colorado............... 560 82,503,536.63 8.90
Connecticut............ 43 6,924,781.20 0.75
District of Columbia... 10 1,211,157.20 0.13
Florida................ 331 31,673,043.40 3.42
Georgia................ 71 6,707,238.85 0.72
Hawaii................. 23 4,455,323.29 0.48
Idaho.................. 46 4,205,143.85 0.45
Illinois............... 248 27,134,461.91 2.93
Indiana................ 102 7,488,419.09 0.81
Iowa................... 98 6,724,493.24 0.73
Kansas................. 44 2,975,420.42 0.32
Kentucky............... 17 1,149,995.18 0.12
Louisiana.............. 69 4,974,653.29 0.54
Maine.................. 27 2,024,894.98 0.22
Maryland............... 37 4,480,522.24 0.48
Massachusetts.......... 148 23,819,722.32 2.57
Michigan............... 354 31,826,586.61 3.43
Minnesota.............. 142 16,110,750.36 1.74
Mississippi............ 61 3,998,663.74 0.43
Missouri............... 142 9,651,277.39 1.04
Montana................ 44 4,812,682.99 0.52
Nebraska............... 88 6,835,659.71 0.74
Nevada................. 134 16,902,019.38 1.82
New Hampshire.......... 25 2,714,219.32 0.29
New Jersey............. 46 6,833,914.73 0.74
New Mexico............. 87 9,026,267.16 0.97
New York............... 93 13,899,192.07 1.50
North Carolina......... 256 20,402,937.48 2.20
North Dakota........... 3 227,045.96 0.02
Ohio................... 229 18,397,208.35 1.98
Oklahoma............... 84 5,398,503.27 0.58
Oregon................. 215 27,120,400.38 2.93
Pennsylvania........... 63 5,521,192.61 0.60
Rhode Island........... 6 454,101.33 0.05
South Carolina......... 215 16,247,979.27 1.75
South Dakota........... 16 958,659.14 0.10
Tennessee.............. 84 6,634,767.45 0.72
Texas.................. 619 57,064,153.91 6.16
Utah................... 194 25,154,745.63 2.71
Vermont................ 3 400,825.85 0.04
Virginia............... 48 5,216,829.71 0.56
Washington............. 286 38,846,027.58 4.19
West Virginia.......... 15 829,579.40 0.09
Wisconsin.............. 33 2,858,675.59 0.31
Wyoming................ 12 970,296.35 0.10
----- --------------- ------
Total....... 7,416 $927,001,699.87 100.00%
===== =============== ======
S-33
<PAGE>
<TABLE>
<CAPTION>
DOCUMENTATION LEVELS OF THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Full Documentation............ 6,101 $742,449,181.58 80.09%
Stated Income Documentation... 1,095 146,608,587.64 15.82
Limited Documentation......... 220 37,943,930.65 4.09
----- --------------- ------
Total.................... 7,416 $927,001,699.87 100.00%
===== =============== ======
</TABLE>
--------------------
(1) For a description of each documentation level, see "Long Beach Mortgage
Company--Underwriting Standards" in this prospectus supplement.
CREDIT GRADE FOR THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
CREDIT GRADE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------- -------------- ----------------- -----------------
A-1................. 500 $ 72,310,735.38 7.80%
A-2................. 2,467 368,019,478.57 39.70
A-3................. 32 4,589,774.77 0.50
A-4................. 270 47,005,363.74 5.07
A-5................. 163 24,557,770.12 2.65
B1.................. 831 94,245,788.69 10.17
B2.................. 98 13,847,017.27 1.49
B3.................. 62 7,011,165.39 0.76
B4.................. 304 45,049,287.16 4.86
B-1................. 1,308 123,173,894.24 13.29
B-2................. 129 14,086,490.63 1.52
B-3................. 73 7,228,669.69 0.78
B-4................. 15 1,568,574.96 0.17
B-5................. 20 2,694,514.24 0.29
C................... 934 82,451,428.94 8.89
D................... 210 19,161,746.08 2.07
--- --------------- ------
Total......... 7,416 $927,001,699.87 100.00%
===== =============== ======
S-34
<PAGE>
MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
CURRENT MORTGAGE RATE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
(%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
7.500 - 8.000........ 12 $ 1,944,555.85 0.21%
8.001 - 9.000........ 142 21,162,801.44 2.28
9.001 - 10.000........ 1,378 232,494,014.92 25.08
10.001 - 11.000........ 2,666 370,855,126.73 40.01
11.001 - 12.000........ 2,028 205,965,344.88 22.22
12.001 - 13.000........ 879 73,166,830.70 7.89
13.001 - 14.000........ 276 19,518,695.34 2.11
14.001 - 15.000........ 34 1,862,632.08 0.20
15.001 - 15.100........ 1 31,697.93 0.00
----- --------------- ------
Total............ 7,416 $927,001,699.87 100.00%
===== =============== ======
MAXIMUM MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM MORTGAGE RATE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
(%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
13.500 - 14.000........ 12 $ 1,944,555.85 0.21%
14.001 - 15.000........ 143 21,494,907.50 2.32
15.001 - 16.000........ 1,375 232,347,005.89 25.06
16.001 - 17.000........ 2,661 369,976,748.65 39.91
17.001 - 18.000........ 2,023 205,574,838.37 22.18
18.001 - 19.000........ 884 73,830,386.92 7.96
19.001 - 20.000........ 278 19,459,613.31 2.10
20.001 - 21.000........ 39 2,341,945.45 0.25
21.001 - 21.100........ 1 31,697.93 0.00
----- --------------- -------
Total........... 7,416 $927,001,699.87 100.00%
===== =============== ======
S-35
<PAGE>
MINIMUM MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM MORTGAGE RATE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
(%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
7.500 - 8.000........ 12 $ 1,944,555.85 0.21%
8.001 - 9.000........ 143 21,494,907.50 2.32
9.001 - 10.000........ 1,380 232,841,438.08 25.12
10.001 - 11.000........ 2,666 370,622,823.18 39.98
11.001 - 12.000........ 2,025 205,518,119.21 22.17
12.001 - 13.000........ 879 73,166,830.70 7.89
13.001 - 14.000........ 276 19,518,695.34 2.11
14.001 - 15.100........ 35 1,894,330.01 0.20
----- -------------- ------
Total................ 7,416 $927,001,699.87 100.00%
===== =============== ======
GROSS MARGINS OF THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGINS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------- -------------- ------------------ -----------------
4.750 - 5.000......... 4 $ 476,511.94 0.05%
5.001 - 6.000......... 3,744 520,214,752.46 56.12
6.001 - 7.000......... 3,661 405,833,235.02 43.78
7.001 - 8.000......... 6 412,465.57 0.04
8.001 - 8.700......... 1 64,734.88 0.01
----- --------------- ------
Total............. 7,416 $927,001,699.87 100.00%
===== =============== ======
S-36
<PAGE>
NEXT ADJUSTMENT DATE FOR THE GROUP II MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
NEXT ADJUSTMENT DATE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------- -------------- ------------------ -----------------
March 2001............ 1 $ 332,106.06 0.04%
April 2001............ 5 1,076,210.28 0.12
May 2001.............. 18 2,392,123.50 0.26
June 2001............. 16 2,471,777.27 0.27
July 2001............. 6 1,290,595.00 0.14
August 2001........... 9 1,477,733.23 0.16
September 2001........ 53 6,398,055.53 0.69
October 2001.......... 39 6,115,714.84 0.66
December 2001......... 1 69,584.79 0.01
February 2002......... 1 274,596.58 0.03
April 2002............ 1 131,484.48 0.01
May 2002.............. 2 556,728.76 0.06
June 2002............. 23 2,296,091.18 0.25
July 2002............. 26 2,383,092.86 0.26
August 2002........... 18 1,471,890.39 0.16
September 2002........ 37 4,851,400.12 0.52
October 2002.......... 839 109,337,478.39 11.79
November 2002......... 1,829 236,403,925.96 25.50
December 2002......... 1,614 208,712,490.89 22.51
January 2003.......... 1,432 188,907,816.99 20.38
February 2003......... 13 1,435,670.00 0.15
September 2003........ 3 326,853.32 0.04
October 2003.......... 186 20,029,619.95 2.16
November 2003......... 471 48,931,553.91 5.28
December 2003......... 421 44,336,200.68 4.78
January 2004.......... 320 31,646,881.00 3.41
February 2004......... 1 233,750.00 0.03
September 2005........ 1 62,932.65 0.01
October 2005.......... 2 101,134.87 0.01
November 2005......... 11 1,603,409.64 0.17
December 2005......... 9 595,286.75 0.06
January 2006.......... 8 747,510.00 0.08
----- --------------- ------
Total........ 7,416 $927,001,699.87 100.00%
===== =============== ======
S-37
<PAGE>
INITIAL PERIODIC RATE CAPS OF THE GROUP II MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
INITIAL PERIODIC RATE CAP NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
(%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------------- -------------- ----------------- -----------------
1.000................ 5,948 $774,236,794.00 83.52%
2.000................ 3 295,436.53 0.03
3.000................ 1,465 152,469,469.34 16.45
----- --------------- -------
Total........ 7,416 $927,001,699.87 100.00%
===== =============== ======
------------------
(1) Relates solely to initial rate adjustments.
<TABLE>
<CAPTION>
SUBSEQUENT PERIODIC RATE CAPS OF THE GROUP II MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
SUBSEQUENT PERIODIC RATE CAP NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
(%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
1.000....................... 7,416 $927,001,699.87 100.00%
----- --------------- ------
Total........... 7,416 $927,001,699.87 100.00%
===== =============== ======
</TABLE>
------------------
(1) Relates to all rate adjustments subsequent to initial rate adjustments.
LONG BEACH MORTGAGE COMPANY
GENERAL
The information set forth in the following paragraphs has been provided
by the Master Servicer. None of the Depositor or any other affiliate of the
Master Servicer, the Trustee, the Trust Administrator, the Underwriters or any
of their affiliates has made or will make any representation as to the accuracy
or completeness of such information.
The Master Servicer, a Delaware corporation, is a specialty finance
company engaged in the business of originating, purchasing, selling and
servicing sub-prime mortgage loans secured by one- to four-family residences.
The Master Servicer began originating sub-prime mortgage loans in 1988 as a
division of Long Beach Bank, F.S.B. To gain greater operating flexibility and
improve its ability to compete against other financial services companies, in
October 1994, Long Beach Bank, F.S.B. ceased operations, voluntarily surrendered
its federal thrift charter and transferred its mortgage banking business to a
new Delaware corporation called Long Beach Mortgage Company ("Old Long Beach").
In May 1997, Old Long Beach completed a reorganization (the
"Reorganization") of its business operations by transferring to its wholly-owned
subsidiary, Long Beach Financial Corporation ("LBFC"), the assets and personnel
related to Old Long Beach's broker-sourced mortgage lending and loan sales
operations and approximately $40 million in cash. The assets received from Old
Long Beach by LBFC were then transferred to the Master Servicer, a wholly-owned
subsidiary of LBFC. Immediately following the Reorganization, LBFC became a
S-38
<PAGE>
publicly traded company in connection with a public offering of its stock. The
Master Servicer continued the activities previously conducted by the
broker-sourced and loan sales divisions of Old Long Beach.
In October 1999, Washington Mutual, Inc. ("WM"), a publicly traded
financial services company headquartered in Seattle, Washington, acquired LBFC
in a transaction in which LBFC merged into WM. As a result of this transaction,
the Master Servicer became a wholly-owned subsidiary of WM.
Substantially all of the loans originated by the Master Servicer while
it operated as a division of Old Long Beach were serviced by the servicing
division of Old Long Beach. Following the Reorganization, loans originated by
the Master Servicer were master serviced by the Master Servicer and directly
serviced by another entity. In November 1998, the Master Servicer began directly
servicing loans and will directly service all of the Mortgage Loans in the
Mortgage Pool.
The Master Servicer is approved as a seller/servicer for Fannie Mae, as
a servicer for Freddie Mac and as a non-supervised mortgagee by the U.S.
Department of Housing and Urban Development.
The Master Servicer anticipates that its servicing operations and
personnel will be relocated to another location in Southern California within
the next six months. The Master Servicer expects to experience some disruption
in servicing as a result of the relocation, which could result in increased
delinquencies, defaults and losses on the Mortgage Loans.
LENDING ACTIVITIES AND LOAN SALES. The Master Servicer originates real
estate loans through its network of offices and loan origination centers. The
Master Servicer also participates in secondary market activities by originating
and selling mortgage loans while continuing to service the majority of the loans
sold. In other cases the Master Servicer's whole loan sale agreements provide
for the transfer of servicing rights.
The Master Servicer's primary lending activity is funding loans to
enable mortgagors to purchase or refinance residential real property, which
loans are secured by first or second liens on the related real property. The
Master Servicer's single-family real estate loans are predominantly
"conventional" mortgage loans, meaning that they are not insured by the Federal
Housing Administration or partially guaranteed by the U.S. Department of
Veterans Affairs.
The following table summarizes the Master Servicer's one- to four-family
residential mortgage loan origination and sales activity for the periods shown
below. Sales activity may include sales of mortgage loans purchased by the
Master Servicer from other loan originators.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1995(1) 1996(1) 1997(1) 1998 1999(4) 2000(2)(4)
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Originations and
Purchases... $592,542 $1,058,122 $1,685,742 $2,575,965 $3,181,948 $2,806,959
Sales(3)......... $580,366 $1,029,789 $1,679,522 $2,521,606 $2,814,656 $2,637,536
</TABLE>
-----------------
(1) Reflects activity of broker-sourced business of Old Long Beach up to May
1997.
(2) Through September 30, 2000.
(3) Sales are net of loans repurchased in the normal course of business.
(4) Excludes $475,125,156 of loans which were originated and sold to Washington
Mutual, Inc. in 1999 (included in the 1999 balances) and were subsequently
repurchased in 2000 and sold.
LOAN SERVICING. The Master Servicer services all of the mortgage loans
it originates that are retained in its portfolio and continues to service at
least a majority of the loans that have been sold to investors. Servicing
includes collecting and remitting loan payments, accounting for principal and
interest, contacting delinquent mortgagors, and supervising foreclosure in the
event of unremedied defaults. The Master Servicer's servicing
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activities are audited periodically by applicable regulatory authorities.
Certain financial records of the Master Servicer relating to its loan servicing
activities are reviewed annually as part of the audit of the Master Servicer's
financial statements conducted by its independent accountants.
COLLECTION PROCEDURES; DELINQUENCY AND LOSS EXPERIENCE. When a mortgagor
fails to make a required payment on a residential mortgage loan, the Master
Servicer attempts to cause the deficiency to be cured by corresponding with the
mortgagor. In most cases, deficiencies are cured promptly. Pursuant to the
Master Servicer's customary procedures for residential mortgage loans serviced
by it for its own account, the Master Servicer generally mails a notice of
intent to foreclose to the mortgagor after the loan is delinquent two payments
and, within one month thereafter, if the loan remains delinquent, typically
institutes appropriate legal action to foreclose on the property securing the
loan. If foreclosed, the property is sold at public or private sale and may be
purchased by the Master Servicer. In California, real estate lenders are
generally unable as a practical matter to obtain a deficiency judgment against
the mortgagor on a loan secured by single-family real estate.
LOAN SERVICING PORTFOLIO. The following table sets forth the delinquency
and loss experience at the dates indicated for the Master Servicer's total
servicing portfolio:
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<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total Outstanding Principal Balance................. $5,258,364 $3,951,592 $546,581
Number of Loans..................................... 46,780 35,359 4,865
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance................................ $91,229 $63,403 $312
Number of Loans.................................. 945 645 2
Delinquency as a Percentage of Total Outstanding
Principal Balance............................ 1.73% 1.60% 0.06%
Delinquency as a Percentage of Number of Loans.. 2.02% 1.82% 0.04%
61-90 Days
Principal Balance................................ $43,670 $31,376 $0.00
Number of Loans.................................. 457 278 0
Delinquency as a Percentage of Total Outstanding
Principal Balance............................ 0.83% 0.79% 0.00%
Delinquency as a Percentage of Number of Loans... 0.98% 0.79% 0.00%
91 Days or More
Principal Balance................................ $199,963 $97,653 $7,695
Number of Loans.................................. 1,883 939 97
Delinquency as a Percentage of Total Outstanding
Principal Balance............................ 3.80% 2.47% 1.41%
Delinquency as a Percentage of Number of Loans... 4.03% 2.66% 1.99%
Total Delinquencies:
Principal Balance................................ $334,862 $192,433 $8,007
Number of Loans.................................. 3,285 1,862 99
Delinquency as a Percentage of Total Outstanding
Principal Balance............................ 6.37% 4.87% 1.46%
Delinquency as a Percentage of Number of Loans... 7.02% 5.27% 2.03%
FORECLOSURES PENDING(1)
Principal Balance................................ $161,150 $97,661 $7,597
Number of Loans.................................. 1,452 930 96
Foreclosures Pending as a Percentage of Total
Outstanding Principal Balance................ 3.06% 2.47% 1.39%
Foreclosures Pending as a Percentage of Number
of Loans..................................... 3.10% 2.63% 1.97%
NET LOAN LOSSES for the Period(2).................. $4,119 $2,771 $0.00
NET LOAN LOSSES as a Percentage of Total
Outstanding Principal Balance.................... 0.08% 0.07% 0.00%
</TABLE>
----------------
(1) Includes mortgage loans which are in foreclosure but as to which title to
the mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Losses is calculated for all loans as the aggregate of the net
loan loss for all such loans liquidated during the period indicated. The
net loan loss for any such loan is equal to the difference between (a) the
principal balance plus accrued interest through the date of
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liquidation plus all liquidation expenses related to such loan and (b) all
amounts received in connection with the liquidation of such loan. The
majority of residential loans serviced by the Master Servicer have been
conveyed to REMIC trust funds.
As of September 30, 2000, 325 one- to four-family residential properties
relating to loans in the Master Servicer's servicing portfolio had been acquired
through foreclosure or deed in lieu of foreclosure and were not liquidated.
There can be no assurance that the delinquency and loss experience of
the Mortgage Loans will correspond to the loss experience of the Master
Servicer's mortgage portfolio set forth in the foregoing table. The statistics
shown above represent the delinquency and loss experience for the Master
Servicer's total servicing portfolio only for the periods presented, whereas the
aggregate delinquency and loss experience on the Mortgage Loans will depend on
the results obtained over the life of the Trust. The Master Servicer's portfolio
includes mortgage loans with payment and other characteristics which are not
representative of the payment and other characteristics of the Mortgage Loans. A
substantial number of the Mortgage Loans may also have been originated based on
Long Beach Underwriting Guidelines that are less stringent than those generally
applicable to the servicing portfolio reflected in the foregoing table. If the
residential real estate market should experience an overall decline in property
values, the actual rates of delinquencies, foreclosures and losses could be
higher than those previously experienced by the Master Servicer. 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 Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of residential loans serviced by the Master
Servicer has increased from $546,581,000 at December 31, 1998 to $5,258,364,000
at September 30, 2000, the total outstanding principal balance of originated
loans serviced as of the end of any indicated period includes many loans that
will not have been outstanding long enough to give rise to some or all of the
indicated periods of delinquency. In the absence of such substantial and
continual additions of newly originated loans to the total amount of loans
serviced, the percentages indicated above would be higher and could be
substantially higher. The actual delinquency percentages with respect to the
Mortgage Loans may be expected to be substantially higher than the delinquency
percentages indicated above because the composition of the Mortgage Loans will
not change.
UNDERWRITING STANDARDS
The Mortgage Loans have been acquired by the Depositor from the Seller
(referred to in this section as "Long Beach"). All of the Mortgage Loans were
originated or acquired by Long Beach generally in accordance with the
underwriting criteria described below.
The information regarding Long Beach's underwriting standards has been
provided by Long Beach. None of the Depositor, the Trustee, the Trust
Administrator, the Underwriters or any of their affiliates has made any
independent investigation of such information or has made or will make any
representation as to the accuracy or completeness of such information.
The Mortgage Loans were originated generally in accordance with
guidelines established by Long Beach under its Full Documentation, Limited Doc
or Stated Income residential loan programs. Long Beach's underwriting guidelines
are primarily intended to evaluate the value and adequacy of the mortgaged
property as collateral and are also intended to consider the mortgagor's credit
standing and repayment ability. On a case-by-case basis and only with the
approval of two or more senior lending officers, Long Beach may determine that,
based upon compensating factors, a prospective mortgagor not strictly qualifying
under the underwriting risk category guidelines described below warrants an
underwriting exception. Compensating factors may include, but are not limited
to, low loan-to-value ratio, low debt-to-income ratio, good credit history,
stable employment and time in residence at the applicant's current address. It
is expected that a substantial number of the Mortgage Loans to be included in
the Mortgage Pool will represent exceptions to the underwriting guidelines.
Under Long Beach's programs, during the underwriting process, Long Beach
reviews and verifies the loan applicant's sources of income (except under the
Stated Income and Limited Doc loan programs), calculates the amount of income
from all such sources indicated on the loan application, reviews the credit
history of the applicant and calculates the debt-to-income ratio to determine
the applicant's ability to repay the loan, and reviews the mortgaged property
for compliance with Long Beach's underwriting guidelines. Long Beach applies its
underwriting guidelines in accordance with a procedure which complies with
applicable federal and state laws and
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regulations and requires (i) an appraisal of the mortgaged property which
generally conforms to Freddie Mac and Fannie Mae standards and (ii) a review of
that appraisal. The appraisal review may be conducted by a representative of
Long Beach or a staff appraiser and, depending upon the original principal
balance and loan-to-value ratio of the mortgaged property, may include a desk
review of the original appraisal or a drive-by review appraisal of the mortgaged
property.
Long Beach's underwriting guidelines permit loans with loan-to-value
ratios at origination of up to 90%. The maximum allowable loan-to-value ratio
varies based upon the income documentation, property type, creditworthiness,
debt service-to-income ratio of the mortgagor and the overall risks associated
with the loan decision. Under the residential loan programs, the maximum
combined loan-to-value ratio, including any second deeds of trust subordinate to
Long Beach's first lien, is generally 100% for owner occupied mortgaged
properties and 90% for non-owner occupied mortgaged properties.
All of the mortgage loans originated under Long Beach's underwriting
programs are based on loan application packages submitted through mortgage
brokerage companies or Long Beach's retail division, or are purchased from
approved originators. Loan application packages submitted through mortgage
brokerage companies, containing relevant credit, property and underwriting
information on the loan request, are compiled by the mortgage brokerage company
and submitted to Long Beach for approval and funding. The mortgage brokerage
companies receive a portion of the loan origination fee charged to the mortgagor
at the time the loan is made. No single mortgage brokerage company accounts for
more than 5%, measured by outstanding principal balance, of the single-family
mortgage loans originated by Long Beach.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information.
Long Beach obtains a credit report on each applicant from a credit reporting
company. The applicant must generally provide to Long Beach or the correspondent
originator a letter explaining all late payments on mortgage debt and,
generally, non-mortgage consumer debt. The report typically contains information
relating to such matters as credit history with local and national merchants and
lenders, installment debt payments and any record of defaults, bankruptcy,
repossession, suits or judgments. Under the "Full Documentation" residential
loan program, self-employed individuals are generally required to submit their
most recent federal income tax return. As part of its quality control system,
Long Beach re-verifies information with respect to the foregoing matters that
has been provided by the mortgage brokerage company prior to funding a loan and
periodically audits files based on a random sample of closed loans. In the
course of its pre-funding audit, Long Beach re-verifies the income of each
mortgagor or, for a self-employed individual, reviews the income documentation
obtained (except under the Stated Income residential loan program). Long Beach
generally verifies the source of funds for the down payment.
The mortgaged properties are appraised by qualified independent
appraisers who are approved by Long Beach's internal valuation managers. In most
cases, below-average properties, including properties requiring major deferred
maintenance, are not acceptable under the Long Beach underwriting programs. Each
appraisal includes a market data analysis based on recent sales of comparable
homes in the area and, where deemed appropriate, replacement cost analysis based
on the current cost of constructing a similar home. Every independent appraisal
is reviewed by a representative of Long Beach or by a staff appraiser before the
loan is funded.
Long Beach's underwriting guidelines are less stringent than the
standards generally acceptable to Fannie Mae and Freddie Mac with regard to the
mortgagor's credit standing and repayment ability. Mortgagors who qualify under
the Long Beach's underwriting programs generally have payment histories and debt
ratios which would not satisfy Fannie Mae and Freddie Mac underwriting
guidelines and may have a record of major derogatory credit items such as
outstanding judgments or prior bankruptcies. Long Beach's underwriting
guidelines establish the maximum permitted loan-to-value ratio for each loan
type based upon these and other risk factors.
Under the "Limited Doc" and "Stated Income" residential loan programs,
the mortgagor's employment and income sources must be stated on the mortgagor's
application. The mortgagor's income as stated must be reasonable for the related
occupation and such determination as to reasonableness is subject to the loan
underwriter's discretion. However, the mortgagor's income as stated on the
application is not independently verified. Verification of employment is
required for salaried mortgagors only. Maximum loan-to-value ratios are
generally lower under the Limited Doc and Stated Income residential loan
programs than those permitted under the Full Documentation residential loan
program. Except as otherwise stated above, the same mortgage credit, consumer
credit and collateral property underwriting guidelines that apply to the Full
Documentation residential loan program apply to the Limited Doc and Stated
Income residential loan programs.
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<PAGE>
Long Beach requires that all mortgage loans in its underwriting
programs have title insurance and be secured by liens on real property. Long
Beach also requires that fire and extended coverage casualty insurance be
maintained on the secured property in an amount at least equal to the principal
balance of the mortgage loan or the replacement cost of the property, whichever
is less. Long Beach does not require that the mortgage loans originated under
its underwriting programs be covered by a primary mortgage insurance policy.
RISK CATEGORIES
Under Long Beach's underwriting programs, various risk categories are
used to grade the likelihood that the mortgagor will satisfy the repayment
conditions of the mortgage loan. These risk categories establish the maximum
permitted loan-to-value ratio and loan amount, given the occupancy status of the
mortgaged property and the mortgagor's credit history and debt ratio. In
general, higher credit risk mortgage loans are graded in categories which permit
higher debt ratios and more (or more recent) major derogatory credit items such
as outstanding judgments or prior bankruptcies; however, Long Beach's
underwriting programs establish lower maximum loan-to-value ratios and maximum
loan amounts for loans graded in such categories.
Long Beach's underwriting guidelines have the following categories and
criteria for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
Credit Grade: "A-." Under the "A-" risk categories, the applicant
generally must have repaid installment or revolving debt according to its terms
and have demonstrated steady employment over the last two years. Some
non-consumer credit, collections or judgments may be disregarded on a
case-by-case basis. Any and all delinquent payments made within the past 12
months may not represent more than 35% of the credit reported during that
period. Minor derogatory items are permitted on a case-by-case basis as to
non-mortgage credit when the majority of the consumer credit is good. No
bankruptcy filings may have occurred during the preceding one year and no
discharge or notice of default filings may have occurred during the preceding
three years. The mortgaged property must be in at least average condition. A
maximum loan-to-value ratio of 90% is permitted for owner occupied purchase
money and/or refinance mortgage loans on single family, two unit and condominium
properties, and a maximum loan-to-value ratio of 85% is permitted on an owner
occupied mortgaged property consisting of three- to four-units or second homes.
A maximum loan-to-value ratio of 80% is permitted for non-owner occupied
purchase money and/or refinance mortgage loans on single family, two unit and
condominium properties, and a maximum loan-to-value ratio of 75% is permitted on
a non-owner occupied mortgaged property consisting of three-to-four units.
Generally, the debt service-to-income ratio maximum may be 55% based on the
mortgagor's net disposable income and if the loan-to-value ratio is less than or
equal to 85%.
Credit Grade: "A-1." Under the "A-1" risk sub-category, in
addition to the characteristics described under the "A" risk
category above, no late payments are permitted during the
previous twelve months on an existing mortgage loan, either on
the property which is being made subject to Long Beach's lien
or any mortgage on any other property for which the applicant
is listed as borrower. In addition, the applicant must have a
credit score of 620 or higher and a debt service-to-income
ratio of 45% or less.
Credit Grade "A-2." Under the "A-2" risk sub-category, in
addition to the characteristics described under the "A" risk
category above, no late payments are permitted during the
previous twelve months on an existing mortgage loan, either on
the property which is being made subject to Long Beach's lien
or any mortgage on any other property for which the applicant
is listed as borrower.
Credit Grade "A-3." Under the "A-3" risk sub-category, in
addition to the characteristics described under the "A" risk
category above, no late payments are permitted during the
previous twelve months on an existing Mortgage Loan on the
property which is being made subject to Long Beach's lien.
Credit Grade "A-4." Under the "A-4" risk sub-category, in
addition to the characteristics described under the "A" risk
category above, a maximum of one 30-day late payment and no
60-day late payments during the previous twelve months are
permitted on an existing mortgage loan, on the property which
is being made subject to Long Beach's lien or any mortgage on
any other property for which the applicant is listed as
mortgagor.
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<PAGE>
Credit Grade "A-5." Under the "A-5" risk sub-category, in
addition to the characteristics described under the "A" risk
category above, a maximum of two 30-day late payments and no
60-day late payments during the previous twelve months are
permitted on an existing mortgage loan, on the property which
is being made subject to Long Beach's lien or any mortgage on
any other property for which the applicant is listed as
mortgagor.
Credit Grade: "B." Under the "B" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. Certain non-consumer
credit, collections or judgments may be disregarded on a case-by-case basis. Any
and all delinquent payments within the past 12 months may not represent more
than 50% of the credit reported during that period. No bankruptcy filings may
have occurred during the preceding one year and no discharge or notice of
default filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition.
A maximum loan-to-value ratio of 85% is permitted for owner occupied purchase
money and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 80% is permitted for non-owner
occupied purchase money and/or refinance Mortgage Loans on single family and
condominium properties, and a maximum loan-to-value ratio of 70% is permitted on
a non-owner occupied mortgaged property consisting of three- to four-units or
second homes. Generally, the debt service-to-income ratio must be 55% or less
based on the mortgagor's net disposable income and/or loan-to-value ratio.
Credit Grade "B1." Under the "B1" risk sub-category, in
addition to the characteristics described under the "B" risk
category described above, no late payments are permitted
during the previous twelve months on an existing mortgage
loan, on the property which is being made subject to Long
Beach's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
Credit Grade "B2." Under the "B2" risk sub-category, in
addition to the characteristics described under the "B" risk
category described above, a maximum of one 30-day late payment
and no 60-day late payments are permitted during the previous
twelve months on an existing mortgage loan, on the property
which is being made subject to Long Beach's lien or any
mortgage on any other property for which the applicant is
listed as mortgagor.
Credit Grade "B3." Under the "B3" risk sub-category, in
addition to the characteristics described under the "B" risk
category described above, a maximum of two 30-day late
payments and no 60-day late payments are permitted during the
previous twelve months on an existing mortgage loan, on the
property which is being made subject to Long Beach's lien or
any mortgage on any other property for which the applicant is
listed as mortgagor.
Credit Grade "B4." Under the "B4" risk sub-category, in
addition to the characteristics described under the "B" risk
category described above, a maximum of three 30-day late
payments and generally no 60-day late payments during the
previous twelve months are permitted on an existing mortgage
loan, on the property which is being made subject to Long
Beach's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
Credit Grade: "B-." Under the "B-" risk category, the applicant must
have generally repaid installment or revolving debt according to its terms and
have demonstrated steady employment over the last two years. No payment
delinquent more than 30 days at the time of application is permitted on an
existing mortgage loan. Certain non-consumer credit, collections or judgments
may be disregarded on a case-by-case basis. No bankruptcy filings may have
occurred during the preceding twelve months and no discharge or notice of
default filings may have occurred during the preceding two years. The mortgaged
property must be in at least average condition. A maximum loan-to-value ratio of
85% is permitted for owner occupied purchase money and/or refinance mortgage
loans on single family, two unit and condominium properties, and a maximum
loan-to-value ratio of 75% is permitted on an owner occupied mortgaged property
consisting of two-to-four units or second homes. A maximum loan-to-value ratio
of 75% is permitted for non-owner occupied purchase money and/or refinance
mortgage loans on single family, two unit and condominium properties, and a
maximum loan-to-value ratio of 70% is permitted on a non-owner occupied
mortgaged property consisting of three-to-four units or second homes. Generally,
the debt service-to-income ratio must not exceed 55%.
Credit Grade "B-1." Under the "B-1" risk sub-category, in
addition to the characteristics described under the "B-" risk
category described above, no late payments are permitted
during the previous twelve months on an existing mortgage
loan, on the property which is being made
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subject to Long Beach's lien or any mortgage on any other
property for which the applicant is listed as mortgagor.
Credit Grade "B-2." Under the "B-2" risk sub-category, in
addition to the characteristics described under the "B-" risk
category described above, a maximum of one 30-day late payment
and no 60-day late payments are permitted during the previous
twelve months on an existing mortgage loan, on the property
which is being made subject to Long Beach's lien or any
mortgage on any other property for which the applicant is
listed as mortgagor.
Credit Grade "B-3." Under the "B-3" risk sub-category, in
addition to the characteristics described under the "B-" risk
category described above, a maximum of two 30-day late
payments and no 60-day late payments are permitted during the
previous twelve months on an existing mortgage loan, on the
property which is being made subject to Long Beach's lien or
any mortgage on any other property for which the applicant is
listed as mortgagor.
Credit Grade "B-4." Under the "B-4" risk sub-category, in
addition to the characteristics described under the "B-" risk
category described above, a maximum of three 30-day late
payments and generally no 60-day late payments during the
previous twelve months are permitted on an existing mortgage
loan, on the property which is being made subject to Long
Beach's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
Credit Grade "B-5." Under the "B-5" risk sub-category, in
addition to the characteristics described under the "B-" risk
category described above, a maximum of one 60-day late payment
during the previous twelve months are permitted on an existing
mortgage loan, on the property which is being made subject to
Long Beach's lien or any mortgage on any other property for
which the applicant is listed as mortgagor.
Credit Grade: "C." Under the "C" risk category, the applicant may have
experienced significant credit problems in the past. A maximum of four 60-day
late payments and no 90-day late payments, or three 60-day late payments and one
90-day late payment within the last 12 months is permitted on an existing
mortgage loan. An existing mortgage loan is not required to be current at the
time the application is submitted. Consumer credit derogatory items will be
considered on a case-by-case basis. No bankruptcy, discharge or notice of
default filings may have occurred during the preceding twelve months. The
mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 75% (80% with no cash out to the borrower) is permitted
for owner occupied purchase money and/or refinance mortgage loans on single
family, two unit and condominium properties, and a maximum loan-to-value ratio
of 70% is permitted on an owner occupied mortgaged property consisting of
three-to-four units or second homes. A maximum loan-to-value ratio of 70% is
permitted for non-owner occupied purchase money and/or refinance mortgage loans
on single family, two unit and condominium properties, and a maximum
loan-to-value ratio of 65% is permitted on a non-owner occupied mortgaged
property consisting of three-to-four units or second homes. Generally, the debt
service-to-income ratio must not exceed 55%; however, a debt service-to-income
ratio of 55% to 60% will be considered on a case-by-case basis.
Credit Grade: "D." Under the "D" risk category, the applicant may have
experienced significant credit problems in the past. The applicant may be in
bankruptcy or have a notice of default or foreclosure, and in any such case must
provide a reasonable explanation including why the problem no longer exists. The
mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 65% is permitted for owner occupied purchase money and/or
refinance mortgage loans on single family, two unit and condominium properties,
and a maximum loan-to-value ratio of 60% is permitted on an owner occupied
mortgaged property consisting of three-to-four units or second homes. A maximum
loan-to-value ratio of 60% is permitted for non-owner occupied purchase money
and/or refinance mortgage loans on single family and condominium properties, and
a maximum loan-to-value ratio of 50% is permitted on a non-owner occupied
mortgaged property consisting of three-to-four units or second homes. Generally,
the debt service-to-income ratio must not exceed 55%; however, a debt
service-to-income ratio of 55% to 60% will be considered on a case-by-case
basis.
The Seller will make representations and warranties as of the Closing
Date with respect to the Mortgage Loans, and will be obligated to replace or
repurchase any such Mortgage Loan in respect of which a breach of the
representations and warranties it has made has occurred (other than those
breaches which have been cured) if such breach of any such representation or
warranty materially and adversely affects the Certificateholders' interests in
such Mortgage Loan.
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THE POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. The
Trust created under the Pooling Agreement will consist of (i) all of the
Depositor's right, title and interest in the Mortgage Loans, the related
mortgage notes, mortgages and other related documents, (ii) all payments on or
collections in respect of the Mortgage Loans due after the Cut-off Date,
together with any proceeds thereof, (iii) any Mortgaged Properties acquired on
behalf of Certificateholders by foreclosure or by deed in lieu of foreclosure,
and any revenues received thereon, (iv) the rights of the Trustee under all
insurance policies, including the PMI Policy, required to be maintained pursuant
to the Pooling Agreement, (v) the Reserve Fund and (vi) certain rights of the
Depositor under the Mortgage Loan Purchase Agreement. The Offered Certificates
will be transferable and exchangeable at the corporate trust offices of the
Trust Administrator.
Radian Insurance Inc. ("Radian") will be a third party beneficiary of
the Pooling Agreement to the extent set forth in the Pooling Agreement.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will transfer to the Trust all of
its right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgage, assignment of mortgage in recordable form in blank or to the
Trustee and other related documents (collectively, the "Related Documents"),
including all scheduled payments with respect to each such Mortgage Loan due
after the Cut-off Date. The Trust Administrator, concurrently with such
transfer, will deliver the Certificates to the Depositor. Each Mortgage Loan
transferred to the Trust will be identified on a schedule (the "Mortgage Loan
Schedule") delivered to the Trust Administrator pursuant to the Pooling
Agreement. The Mortgage Loan Schedule will include information such as the
Principal Balance of each Mortgage Loan as of the Cut-off Date, its Mortgage
Rate as well as other information with respect to each Mortgage Loan.
The Pooling Agreement will require that, within the time period
specified therein, the Depositor will deliver or cause to be delivered to the
Trust Administrator as custodian for the Trustee (or another custodian, as the
Trust Administrator's agent for such purpose) the mortgage notes endorsed to the
Trustee on behalf of the Certificateholders and the Related Documents. In lieu
of delivery of original mortgages or mortgage notes, if such original is not
available or lost, the Depositor may deliver or cause to be delivered true and
correct copies thereof, or, with respect to a lost mortgage note, a lost note
affidavit executed by the Seller. The assignments of mortgage are generally
required to be recorded by or on behalf of the Depositor in the appropriate
offices for real property records; provided, however, that such assignments of
mortgage are not required to be recorded if the Depositor furnishes to the
Trustee and the Trust Administrator, on or before the Closing Date, at the
Depositor's expense, an opinion of counsel with respect to the relevant
jurisdictions that such recording is not necessary to perfect the Trustee's
interest in the related Mortgage Loan; provided further, however,
notwithstanding the delivery of such opinion of counsel, upon the occurrence of
certain events set forth in the Pooling Agreement, each such assignment of
mortgage shall be recorded by the Master Servicer or the Trust Administrator as
set forth in the Pooling Agreement. The Depositor expects to deliver such an
opinion of counsel and as a result of which the assignments of mortgage for
substantially all of the Mortgage Loans will not initially be recorded. Any cost
associated with the recording of such assignments of mortgage will be borne by
the Seller; provided, however, if the Seller fails to pay the cost of recording,
such expense will be paid by the Master Servicer or the Trust Administrator, as
applicable, and will be reimbursable to such party (other than the Master
Servicer so long as the Master Servicer is also the Seller) by the Trust prior
to any distribution to Certificateholders.
On or prior to the Closing Date, the Trust Administrator will review
the Mortgage Loans and the Related Documents pursuant to the Pooling Agreement
and if any Mortgage Loan or Related Document is found to be defective in any
material respect and such defect is not cured within 90 days following
notification thereof to the Seller by the Trust Administrator, the Seller will
be obligated to either (i) substitute for such Mortgage Loan a Qualified
Substitute Mortgage Loan; however, such substitution is permitted only within
two years of the Closing Date and may not be made unless an opinion of counsel
is provided to the effect that such substitution will not disqualify any of the
REMICs (as defined in the Pooling Agreement) as a REMIC or result in a
prohibited transaction tax under the Code or (ii) purchase such Mortgage Loan at
a price (the "Purchase Price") equal to the outstanding Principal Balance of
such Mortgage Loan as of the date of purchase, plus all accrued and unpaid
interest thereon, computed at the Mortgage Rate through the end of the calendar
month in which the purchase is effected, plus the amount of any unreimbursed
Advances and Servicing Advances (each as defined in this
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prospectus supplement) made by the Master Servicer. The Purchase Price will be
required to be remitted to the Master Servicer for deposit in the Collection
Account (as defined in this prospectus supplement) on or prior to the next
succeeding Determination Date (as defined in this prospectus supplement) after
such obligation arises. The obligation of the Seller to repurchase or substitute
for a Deleted Mortgage Loan (as defined in this prospectus supplement) is the
sole remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Trust Administrator, the Trustee or the Certificateholders.
In connection with the substitution of a Qualified Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Deleted Mortgage Loan over the Principal Balance of such
Qualified Substitute Mortgage Loan.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted
by the Seller for a Deleted Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Deleted Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Deleted Mortgage Loan; (ii) have a Mortgage Rate
not less than the Mortgage Rate of the Deleted Mortgage Loan and not more than
1% in excess of the Mortgage Rate of such Deleted Mortgage Loan; (iii) with
respect to a Group II Mortgage Loan, have a Maximum Mortgage Rate and Minimum
Mortgage Rate not less than the respective rate for the Deleted Mortgage Loan
and have a Gross Margin equal to or greater than the Deleted Mortgage Loan, have
the same Adjustment Date frequency as the Deleted Mortgage Loan; (iv) have the
same Due Date as the Deleted Mortgage Loan; (v) have a remaining term to
maturity not more than one year earlier and not later than the remaining term to
maturity of the Deleted Mortgage Loan; (vi) comply with each representation and
warranty as to the Mortgage Loans set forth in the Mortgage Loan Purchase
Agreement (deemed to be made as of the date of substitution); (vii) have been
underwritten or reunderwritten by the Seller in accordance with the same
underwriting criteria and guidelines as the Mortgage Loans being replaced;
(viii) be of the same or better credit quality as the Mortgage Loan being
replaced, (ix) satisfy certain other conditions specified in the Pooling
Agreement and (x) be covered by the PMI Policy if the Mortgage Loan being
replaced was covered by the PMI Policy.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee and the Trust Administrator with respect to each Mortgage Loan (e.g.,
Cut-off Date Principal Balance and the Mortgage Rate). In addition, the Seller
will represent and warrant, on the Closing Date, that, among other things: (i)
at the time of transfer to the Depositor, the Seller has transferred or assigned
all of its right, title and interest in each Mortgage Loan and the Related
Documents, free of any lien and (ii) each Mortgage Loan complied, at the time of
origination, in all material respects with applicable state and federal laws.
Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the value of any Mortgage Loan or the interests
of the Certificateholders in the related Mortgage Loan and Related Documents,
the Seller will have a period of 90 days after the earlier of discovery or
receipt of written notice of the breach to effect a cure. If the breach cannot
be cured within the 90-day period, the Seller will be obligated to (i)
substitute for such Deleted Mortgage Loan a Qualified Substitute Mortgage Loan
or (ii) purchase such Deleted Mortgage Loan from the Trust. The same procedure
and limitations that are set forth above for the substitution or purchase of
Deleted Mortgage Loans as a result of deficient documentation relating thereto
will apply to the substitution or purchase of a Deleted Mortgage Loan as a
result of a breach of a representation or warranty in the Mortgage Loan Purchase
Agreement that materially and adversely affects the interests of the
Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Deleted Mortgage Loans."
Pursuant to the Pooling Agreement, the Master Servicer will service and
administer the Mortgage Loans as more fully set forth therein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer shall establish and maintain or cause to be
maintained a separate trust account (the "Collection Account") for the benefit
of the Certificateholders. The Collection Account will be an Eligible Account
(as defined in the Pooling Agreement). Upon receipt by the Master Servicer of
amounts in respect of the Mortgage Loans (excluding amounts representing the
Servicing Fee or other servicing compensation, reimbursement for Advances and
Servicing Advances (each, as defined below) and insurance proceeds to be applied
to the restoration or repair of a Mortgaged Property or similar items), the
Master Servicer will deposit such amounts in the Collection Account. Amounts so
deposited may be invested in Permitted Investments (as described in the Pooling
Agreement)
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maturing no later than one business day prior to the date on which the amount on
deposit therein is required to be deposited in the Distribution Account. The
Trust Administrator will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date and payment of certain
fees and expenses of the Trust. The Distribution Account will be an Eligible
Account. Amounts on deposit therein may be invested in Permitted Investments
maturing on or before the business day prior to the related Distribution Date
unless such Permitted Investments are invested in investments managed or advised
by the Trust Administrator or an affiliate thereof, in which case such Permitted
Investments may mature on the related Distribution Date.
ADVANCES
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each Distribution Date
its own funds, or funds in the Collection Account that are not included in the
Available Funds for such Distribution Date, in an amount equal to the aggregate
of all payments of principal and interest (net of Servicing Fees) that were due
during the related Due Period on the Mortgage Loans, other than balloon
payments, and that were delinquent on the related Determination Date, plus
certain amounts representing assumed payments not covered by any current net
income on the Mortgaged Properties acquired by foreclosure or deed in lieu of
foreclosure, and, with respect to balloon loans, with respect to which the
balloon payment is not made when due, an assumed monthly payment that would have
been due on the related Due Date based on the original principal amortization
schedule for such balloon loan (any such advance, an "Advance" and together, the
"Advances").
Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, insurance
proceeds, condemnation proceeds or liquidation proceeds. The purpose of making
such Advances is to maintain a regular cash flow to the Certificateholders,
rather than to guarantee or insure against losses. The Master Servicer will not
be required, however, to make any Advances with respect to reductions in the
amount of the monthly payments on the Mortgage Loans due to bankruptcy
proceedings or the application of the Relief Act. Subject to the recoverability
standard above, the Master Servicer's obligation to make Advances as to any
Mortgage Loan will continue until the Mortgage Loan is paid in full or until the
recovery of all Liquidation Proceeds thereon.
All Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds, condemnation proceeds and liquidation proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made unless
such amounts are deemed to be nonrecoverable by the Master Servicer from the
proceeds of the related Mortgage Loan, in which event reimbursement will be made
to the Master Servicer from general funds in the Collection Account. The Master
Servicer may recover from amounts in the Collection Account the amount of any
Advance that remains unreimbursed to the Master Servicer from the related
liquidation proceeds after the final liquidation of the related Mortgage Loan,
and such reimbursement amount will not be available for remittance to the Trust
Administrator for distribution on the Certificates. In the event the Master
Servicer fails in its obligation to make any required Advance, the Trust
Administrator in its capacity as successor Master Servicer, will be obligated to
make any such Advance, to the extent required in the Pooling Agreement.
In the course of performing its servicing obligations, the Master
Servicer will pay all reasonable and customary "out-of-pocket" costs and
expenses (including reasonable attorneys' fees and disbursements) incurred in
the performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration, inspection and protection of the
Mortgaged Properties, (ii) environmental audit reports, (iii) any enforcement or
judicial proceedings, including foreclosures, (iv) the management and
liquidation of Mortgaged Properties acquired in satisfaction of the related
mortgage and (v) certain insurance premiums and certain ongoing expenses
associated with the Mortgage Pool and incurred by the Master Servicer in
connection with its responsibilities under the Pooling Agreement. Each such
expenditure will constitute a "Servicing Advance."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including liquidation
proceeds, condemnation proceeds, released mortgaged property proceeds, insurance
proceeds and such other amounts as may be collected by the Master Servicer from
the related mortgagor or otherwise relating to the Mortgage Loan in respect of
which such unreimbursed amounts are owed, unless such amounts are deemed to be
nonrecoverable by the Master Servicer from the proceeds of the related Mortgage
Loan, in which event reimbursement will be made to the Master Servicer from
general funds in the Collection Account.
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The Pooling Agreement provides that the Master Servicer may enter into
a facility with any person which provides that such person (an "Advancing
Person") may fund Advances and/or Servicing Advances, although no such facility
shall reduce or otherwise affect the Master Servicer's obligation to fund such
Advances and/or Servicing Advances. Any Advances and/or Servicing Advances made
by an Advancing Person will be reimbursed to the Advancing Person in the same
manner as reimbursements would be made to the Master Servicer.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its servicing activities (the "Servicing Fee") for the Certificates will be
at the "Servicing Fee Rate" of 0.50% per annum on the Principal Balance of each
Mortgage Loan. As additional servicing compensation, the Master Servicer is
entitled to retain all service-related fees, including assumption fees,
modification fees, extension fees, late payment charges, non- sufficient fund
fees and other ancillary fees (but not prepayment charges, which will be
distributed to the holders of the Class P Certificates), to the extent collected
from mortgagors, together with any interest or other income earned on funds held
in the Collection Account and any servicing accounts. The Master Servicer is
obligated to deposit into the Collection Account the amount of any Prepayment
Interest Shortfall (payments made by the Master Servicer in satisfaction of such
obligation, "Compensating Interest") but only in an amount up to its Servicing
Fee for the related Distribution Date.
The "Determination Date" with respect to any Distribution Date will be
the 15th day of the calendar month in which such Distribution Date occurs or, if
such 15th day is not a business day, the business day immediately preceding such
15th day. With respect to any Determination Date and each Mortgage Loan as to
which a principal prepayment was applied during the portion of the related
Prepayment Period (as defined below) occurring in the month preceding the month
of such Determination Date, the "Prepayment Interest Shortfall" is an amount
equal to the interest at the applicable Mortgage Rate (net of the Servicing Fee)
on the amount of such principal prepayment for the number of days from the date
on which the principal prepayment is applied until the last day of such
preceding calendar month.
EVENTS OF DEFAULT
In addition to those Events of Default (as defined in the prospectus)
described under "Description of the Securities--Events of Default under the
Governing Agreement and Rights Upon Events of Default" in the prospectus, upon
the occurrence of certain loss triggers with respect to the Mortgage Loans, the
Master Servicer may be removed as master servicer of the Mortgage Loans in
accordance with the terms of the Pooling Agreement.
Any successor to the Master Servicer appointed under the Pooling
Agreement, which may be the Trust Administrator, must be a housing loan
servicing institution acceptable to each Rating Agency (as defined in the
prospectus) with a net worth at the time of such appointment of at least
$15,000,000. We refer you to "Description of the Securities--Events of Default
under the Governing Agreement and Rights Upon Events of Default" in the
prospectus.
THE TRUSTEE
First Union National Bank, a national banking association organized and
existing under the laws of the United States, will be named Trustee pursuant to
the Pooling Agreement. The Trustee's offices for notices under the Pooling
Agreement are located at 401 South Tryon Street, Charlotte, North Carolina
28288. The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling Agreement will be the amounts paid by the Trust
Administrator pursuant to a letter agreement between the Trustee and the Trust
Administrator. The Pooling Agreement will provide that the Trustee and any
director, officer, employee or agent of the Trustee will be indemnified by the
Trust and will be held harmless against any loss, liability or expense incurred
by the Trustee arising out of or in connection with the acceptance or
administration of its obligations and duties under the Pooling Agreement, other
than any loss, liability or expense (i) resulting from the Master Servicer's
actions or omissions in connection with the Pooling Agreement, (ii) that
constitutes a specific liability of the Trustee under certain specific sections
of the Pooling Agreement or (iii) incurred by reason of willful misfeasance, bad
faith or negligence in the performance of the Trustee's duties under the Pooling
Agreement or as a result of a breach, or by reason of reckless disregard, of the
Trustee's obligations and duties under the Pooling Agreement.
The indemnification provided to the Trustee in the Pooling Agreement
shall not include expenses, disbursements and advances incurred or made by the
Trustee, including the compensation and the expenses and
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disbursements of its agents and counsel, in the ordinary course of the Trustee's
performance in accordance with the provisions of the Pooling Agreement.
THE TRUST ADMINISTRATOR
Bankers Trust Company of California, N.A., a national banking
association organized and existing under the laws of the United States, will be
named Trust Administrator pursuant to the Pooling Agreement. The Trust
Administrator's offices for notices under the Pooling Agreement are located at
1761 East St. Andrew Place, Santa Ana, California 92705-4934, and its telephone
number is (714) 247-6320. The Trust Administrator will perform administrative
functions on behalf of the Trustee and will act as initial paying agent and
custodian.
The principal compensation to be paid to the Trust Administrator in
respect of its obligations under the Pooling Agreement will be the amounts paid
by the Seller pursuant to a letter agreement between the Trust Administrator and
the Seller, as well as certain investment income earnings on amounts on deposit
in the Distribution Account. The Pooling Agreement will provide that the Trust
Administrator and any director, officer, employee or agent of the Trust
Administrator will be indemnified by the Trust and will be held harmless against
any loss, liability or expense incurred by the Trust Administrator arising out
of or in connection with the acceptance or administration of its obligations and
duties under the Pooling Agreement, other than any loss, liability or expense
(i) resulting from the Master Servicer's actions or omissions in connection with
the Pooling Agreement, (ii) that constitutes a specific liability of the Trust
Administrator under certain specific sections of the Pooling Agreement or (iii)
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the Trust Administrator's duties under the Pooling Agreement or
as a result of a breach, or by reason of reckless disregard, of the Trust
Administrator's obligations and duties under the Pooling Agreement.
The indemnification provided to the Trust Administrator in the Pooling
Agreement shall not include expenses, disbursements and advances incurred or
made by the Trust Administrator, including the compensation and expenses and
disbursements of its agents and counsel, in the ordinary course of the Trust
Administrator's performance in accordance with the provisions of the Pooling
Agreement.
VOTING RIGHTS
At all times 98% of all Voting Rights will be allocated among the
holders of the Class A Certificates, the Mezzanine Certificates and the Class C
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates. At all times 1% of all Voting Rights
will be allocated to the holders of the Class P Certificates and 1% of all
Voting Rights will be allocated to the holders of the Class R Certificates. The
Voting Rights allocated to any class of Certificates shall be allocated among
all Certificateholders of such class in proportion to the outstanding percentage
interests of such holders in such class.
AMENDMENT
The Pooling Agreement may be amended under the circumstances set forth
under "Description of the Securities--Amendment of the Governing Agreements" in
the prospectus.
TERMINATION
The Master Servicer (or if the Master Servicer fails to exercise such
right, Radian) will have the right to repurchase all of the Mortgage Loans and
REO Properties in both Loan Groups and thereby effect the early retirement of
the Certificates, on any Distribution Date on which the aggregate Principal
Balance of such Mortgage Loans and REO Properties in both Loan Groups is equal
to or less than 10% of the aggregate Principal Balance of the Mortgage Loans in
both Loan Groups as of the Cut-off Date. The first Distribution Date on which
such option could be exercised is referred to in this prospectus supplement as
the "Optional Termination Date." In the event that the option is exercised, the
repurchase will be made at a price (the "Termination Price") generally equal to
the greater of par or the fair market value of the Mortgage Loans and REO
Properties, in each case plus accrued interest for each Mortgage Loan at the
related Mortgage Rate to but not including the first day of the month in which
such repurchase price is paid. In the event the Master Servicer exercises this
option, the portion of the purchase price allocable to the Offered Certificates
will be, to the extent of available funds, and payable in accordance with the
priorities described under "Description of the Certificates--Allocation of
Available Funds" and "--Overcollateralization Provisions" in this prospectus
supplement:
(i) 100% of the then outstanding Certificate Principal Balance of
the Offered Certificates, plus
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(ii) interest for the final Accrual Period on the then outstanding
Certificate Principal Balance of the Offered Certificates at
the then applicable Pass-Through Rate for the class, plus
(iii) any previously accrued but unpaid interest thereon to which
the holders of the Offered Certificates are entitled, together
with the amount of any Net WAC Rate Carryover Amounts (payable
to and from the Reserve Fund), plus
(iv) in the case of the Mezzanine Certificates, any previously
unpaid Allocated Realized Loss Amount.
The holders of the Residual Certificates shall pledge any amount
received in a termination in excess of par to the holders of the Class C
Certificates.
MASTER SERVICER ALTERNATIVES TO FORECLOSURE
The Master Servicer may foreclose on any delinquent Mortgage Loan or,
subject to certain limitations set forth in the Pooling Agreement, work out an
agreement with the mortgagor, which may involve waiving or modifying any term of
the mortgage loan. The Master Servicer may also sell any Mortgage Loan that is
at least 90 days delinquent. If the Master Servicer sells any such Mortgage Loan
for less than its outstanding Principal Balance plus all prior Advances and
Servicing Advances thereon in accordance with the servicing standard set forth
in the Pooling Agreement or extends the payment period or accepts a lesser
amount than stated in the mortgage note in satisfaction of the mortgage note,
your yield may be reduced.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 90 days or
more, the Master Servicer may, at its option, purchase such Mortgage Loan from
the Trust at the Purchase Price for such Mortgage Loan; provided, however, that
the Seller must first purchase the Mortgage Loan that, as of the time of such
purchase, has been delinquent for the greatest period before purchasing Mortgage
Loans that have been delinquent for lesser periods.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. Set
forth below are summaries of the specific terms and provisions pursuant to which
the Offered Certificates will be issued. The following summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Pooling Agreement. When particular
provisions or terms used in the Pooling Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference.
The trust will issue (i) the Class AF-1 Certificates, the Class AF-2
Certificates, the Class AF-3 Certificates, the Class AF-4 Certificates and the
Class AV-1 Certificates (collectively, the "Class A Certificates"), (ii) the
Class M-1 Certificates, the Class M-2 Certificates and the Class M-3
Certificates (collectively, the "Mezzanine Certificates"), (iii) the Class C
Certificates (together with the Mezzanine Certificates, the "Subordinate
Certificates"), (iv) the Class P Certificates and (v) the Class R Certificates
(the "Residual Certificates"). The Class A Certificates, the Mezzanine
Certificates, the Class C Certificates, the Class P Certificates and the
Residual Certificates are collectively referred to in this prospectus supplement
as the "Certificates." Only the Class A Certificates and the Mezzanine
Certificates are offered hereby (the "Offered Certificates").
The Class A Certificates and the Mezzanine Certificates will have the
Original Certificate Principal Balance specified on the cover hereof, subject to
a permitted variance of plus or minus five percent. The Class C Certificates
will have an Original Certificate Principal Balance equal to the excess of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date over
the Original Certificate Principal Balances of the Class A Certificates, the
Mezzanine Certificates and the Class P Certificates. The Class P Certificates
will have an Original Certificate Principal Balance of $100 and will not bear
interest. The Class P Certificates will be entitled to all prepayment charges
received in respect of the Mortgage Loans and such amounts will not be available
for distribution to the holders of the Offered Certificates. The Class R
Certificates will not have Original Certificate Principal Balances and will not
bear interest.
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The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $50,000 and integral multiples of $1.00 in excess thereof. The assumed final
maturity date (the "Assumed Final Distribution Date") for the Certificates is
the Distribution Date in January 2031. The actual final Distribution Date for
any class of the Certificates may occur earlier or later than the Assumed Final
Distribution Date.
Distributions on the Offered Certificates will be made by the Trust
Administrator on the 21st day of each month, or if such day is not a business
day, on the first business day thereafter, commencing in January 2001 (each, a
"Distribution Date"), to the persons in whose names such Certificates are
registered at the close of business on the Record Date. The "Record Date" for
the Class AF-1 Certificates, Class AF-2 Certificates, Class AF-3 Certificates
and Class AF-4 Certificates is the last business day of the month immediately
preceding the month in which the related Distribution Date occurs and the Record
Date for the Class AV-1 Certificates and the Mezzanine Certificates is the
business day immediately preceding such Distribution Date.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (for so long
as they are registered in the name of the applicable depository or its nominee,
the "Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in the Book-Entry Certificates ("Certificate Owners") will hold such
Certificates through The Depository Trust Company ("DTC") in the United States,
or Clearstream Banking Luxembourg, formerly known as Cedelbank SA
("Clearstream"), or the Euroclear System ("Euroclear") (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate Certificate Principal Balance of
such Certificates and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Clearstream and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream'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 will act as
depositary for Clearstream 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 Certificates in minimum denominations of $50,000.
Except as described below, no Certificate Owner acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling Agreement. Certificate Owners are only permitted to exercise
their rights indirectly through DTC and participants of DTC ("DTC
Participants").
The Certificate Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trust Administrator through DTC
and DTC Participants. While the Book-Entry Certificates are outstanding (except
under the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among DTC Participants on whose behalf it
acts with respect to the Book-Entry Certificates and is required to receive and
transmit distributions of principal of, and interest on, the Book-Entry
Certificates. DTC Participants and indirect participants with whom Certificate
Owners have accounts with respect to Book-Entry Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates representing their
respective interests in the Book-Entry Certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificate Owners who are not DTC
Participants may transfer ownership of Book-Entry Certificates only through DTC
Participants and indirect participants by instructing such DTC Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for
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the account of the purchasers of such Book-Entry Certificates, which account is
maintained with their respective DTC Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Book-Entry
Certificates will be executed through DTC and the accounts of the respective DTC
Participants at DTC will be debited and credited. Similarly, the DTC
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Certificate
Owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear Participants or Clearstream Participants (each as defined
below) on such business day. Cash received in Clearstream or Euroclear as a
result of sales of securities by or through a Clearstream Participant (as
defined below) or Euroclear Participant (as defined below) to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Federal Income Tax
Consequences--REMICS--Backup Withholding With Respect to REMIC Certificates" and
"--Foreign Investors in REMIC Certificates" 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 DTC Participants will occur in accordance with DTC
rules. Transfers between Clearstream 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 Clearstream
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 funds settlement applicable to
DTC. Clearstream 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 DTC 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
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois, "IML," the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("Clearstream
Participants") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with Morgan Guaranty Trust as
the Euroclear Operator (as defined below) in Brussels to facilitate settlement
of trades between systems. Clearstream currently accepts over 70,000 securities
issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream
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is available to other institutions which clear through or maintain a custodial
relationship with an account holder of Clearstream.
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 29 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 (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The 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 the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments 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.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trust Administrator to Cede & Co. 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 Certificate
Owners of the Book-Entry Certificates 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 Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trust Administrator to Cede & Co.
Distributions with respect to Certificates held through Clearstream or Euroclear
will be credited to the cash accounts of Clearstream 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--REMICS--Backup Withholding
With Respect to REMIC Certificates" and "--Foreign Investors in REMIC
Certificates" in the prospectus. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Certificate Owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to Certificate Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Certificate Owners are credited.
DTC has advised the Trust Administrator that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Pooling Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates
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are credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. Clearstream
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under the Pooling Agreement on
behalf of a Clearstream 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 DTC Participants, with respect to
some Book-Entry Certificates which conflict with actions taken with respect to
other Book-Entry Certificates.
Definitive Certificates will be issued to Certificate Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC or its nominee,
only if (a) DTC or the Depositor advises the Trust Administrator in writing that
DTC is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Certificates and the Depositor or the Trust Administrator is unable to locate a
qualified successor, (b) the Depositor, at its sole option, with the consent of
the Trust Administrator, elects to terminate a book-entry system through DTC or
(c) after the occurrence of a Master Servicer Event of Default (as defined in
the Pooling Agreement), Certificate Owners having percentage interests
aggregating not less than 51% of the Book-Entry Certificates advise the Trust
Administrator and DTC through the Financial Intermediaries and the DTC
Participants in writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interests of Certificate
Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trust Administrator will be required to notify all
Certificate Owners of the occurrence of such event and the availability through
DTC of Definitive Certificates. Upon surrender by DTC of the global certificate
or certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trust Administrator will issue Definitive Certificates, and
thereafter the Trust Administrator will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among DTC
Participants of DTC, Clearstream 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 Depositor, the Master Servicer, the Trust Administrator or
the Trustee will have any responsibility for any aspect of the records relating
to or payments made on account of beneficial ownership interests of the
Book-Entry Certificates held by Cede & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each class of Offered Certificates will be
made on each Distribution Date from Group I Available Funds and Group II
Available Funds (the "Group I Available Funds" and the "Group II Available
Funds"). With respect to any Distribution Date and Loan Group I and Loan Group
II, respectively, Group I Available Funds and Group II Available Funds,
respectively, will be equal to the sum of the following amounts with respect to
the related Mortgage Loans, net of amounts reimbursable therefrom to the Master
Servicer, the Trust Administrator or the Trustee: (i) the aggregate amount of
monthly payments on the Mortgage Loans due on the related Due Date and received
by the Trust Administrator by the Master Servicer Remittance Date (as defined in
the Pooling Agreement), after deduction of the Servicing Fee for such
Distribution Date, any accrued and unpaid Servicing Fees in respect of any prior
Distribution Dates and the PMI Insurer Fee, if applicable, for such Distribution
Date, (ii) certain unscheduled payments in respect of the Mortgage Loans,
including prepayments, Insurance Proceeds, Net Liquidation Proceeds and proceeds
from repurchases of and substitutions for such Mortgage Loans occurring during
the related Prepayment Period, excluding prepayment charges and (iii) payments
from the Master Servicer in connection with Advances and Prepayment Interest
Shortfalls for such Distribution Date. The holders of the Class P Certificates
will be entitled to all prepayment charges received on the Mortgage Loans and
such amounts will not be available for distribution to the holders of the
Offered Certificates.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
I. On each Distribution Date the Trust Administrator shall withdraw
from the Distribution Account that portion of Group I Available Funds for such
Distribution Date consisting of the Group I Interest Remittance Amount for such
Distribution Date, and make the following disbursements and transfers in the
order of priority described below, in each case to the extent of the Group I
Interest Remittance Amount remaining for such Distribution Date.
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(i) concurrently, to the holders of the Group I Certificates, the
related Monthly Interest Distributable Amount for such Certificates and the
Unpaid Interest Shortfall Amount, if any, for such Certificates, in each case on
a PRO RATA basis based on the entitlement of each such class pursuant to this
clause (i); and
(ii) to the holders of the Group II Certificates, an amount equal to
the excess, if any, of (x) the amount required to be distributed pursuant to
clause II(i) below for such Distribution Date over (y) the amount actually
distributed pursuant to such clause from the Group II Interest Remittance
Amount.
II. On each Distribution Date the Trust Administrator shall withdraw
from the Distribution Account that portion of Group II Available Funds for such
Distribution Date consisting of the Group II Interest Remittance Amount for such
Distribution Date, and make the following disbursements and transfers in the
order of priority described below, in each case to the extent of the Group II
Interest Remittance Amount remaining for such Distribution Date.
(i) concurrently, to the holders of the Group II Certificates, the
related Monthly Interest Distributable Amount for such Certificates and the
Unpaid Interest Shortfall Amount, if any, for such Certificates, in each case on
a PRO RATA basis based on the entitlement of each such class pursuant to this
clause (i); and
(ii) to the holders of the Group I Certificates, an amount equal to the
excess, if any, of (x) the amount required to be distributed pursuant to clause
I(i) above for such Distribution Date over (y) the amount actually distributed
pursuant to such clause from the Group I Interest Remittance Amount.
III. On each Distribution Date, following the distributions made
pursuant to clauses I and II above, the Trust Administrator shall make the
following disbursements and transfers in the order of priority described below,
in each case to the extent of the sum of the Group I Interest Remittance Amount
and the Group II Interest Remittance Amount remaining undistributed for such
Distribution Date.
(i) first, to the holders of the Class M-1 Certificates, the related
Monthly Interest Distributable Amount;
(ii) second, to the holders of the Class M-2 Certificates, the related
Monthly Interest Distributable Amount; and
(iii) third, to the holders of the Class M-3 Certificates, the related
Monthly Interest Distributable Amount.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest paid by the Master Servicer will be allocated,
first, to the interest distribution amount with respect to the Class C
Certificates, and thereafter, to the Monthly Interest Distributable Amounts with
respect to the Offered Certificates on a PRO RATA basis based on the respective
amounts of interest accrued on such Certificates for such Distribution Date. THE
HOLDERS OF THE OFFERED CERTIFICATES WILL NOT BE ENTITLED TO REIMBURSEMENT FOR
ANY SUCH INTEREST SHORTFALLS.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
I. On each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, the holders of the Class A Certificates in
Certificate Group I shall be entitled to receive distributions in respect of
principal to the extent of the Group I Principal Distribution Amount in the
following amounts and order of priority:
(i) first, to the holders of the Group I Certificates, allocated among
the classes of Group I Certificates as described below, until the Certificate
Principal Balances thereof have been reduced to zero;
(ii) second, to the holders of the Group II Certificates, an amount
equal to the excess, if any, of (x) the amount required to be distributed
pursuant to clause II(i) below for such Distribution Date over (y) the amount
actually distributed pursuant to such clause from the Group II Principal
Distribution Amount.
II. On each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, the holders of the Class A Certificates in
Certificate Group II shall be entitled to receive distributions in
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respect of principal to the extent of the Group II Principal Distribution Amount
in the following amounts and order of priority:
(i) first, to the holders of the Group II Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(ii) second, to the holders of the Group I Certificates, an amount
equal to the excess, if any, of (x) the amount required to be distributed
pursuant to clause I(i) above for such Distribution Date over (y) the amount
actually distributed pursuant to such clause from the Group I Principal
Distribution Amount.
III. On each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, the holders of each class of Mezzanine
Certificates shall be entitled to receive distributions in respect of principal
to the extent of the sum of the Group I Principal Distribution Amount and the
Group II Principal Distribution Amount remaining undistributed for such
Distribution Date in the following amounts and order of priority:
(i) first, to the holders of the Class M-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(ii) second, to the holders of the Class M-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(iii) third, to the holders of the Class M-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero.
IV. On each Distribution Date (a) on or after the Stepdown Date and (b)
on which a Trigger Event is not in effect, the holders of the Class A
Certificates in Certificate Group I shall be entitled to receive distributions
in respect of principal to the extent of the Group I Principal Distribution
Amount in the following amounts and order of priority:
(i) first, to the holders of the Group I Certificates, allocated among
the classes of Group I Certificates as described below, the Group I Class A
Principal Distribution Amount until the Certificate Principal Balances thereof
have been reduced to zero;
(ii) second, to the holders of the Group II Certificates, an amount
equal to the excess, if any, of (x) the amount required to be distributed
pursuant to clause V(i) below for such Distribution Date over (y) the amount
actually distributed pursuant to such clause from the Group II Principal
Distribution Amount.
V. On each Distribution Date (a) on or after the Stepdown Date and (b)
on which a Trigger Event is not in effect, the holders of the Class A
Certificates in Certificate Group II shall be entitled to receive distributions
in respect of principal to the extent of the Group II Principal Distribution
Amount in the following amounts and order of priority:
(i) first, to the holders of the Group II Certificates, the Group II
Class A Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero;
(ii) second, to the holders of the Group I Certificates, an amount
equal to the excess, if any, of (x) the amount required to be distributed
pursuant to clause IV(i) above for such Distribution Date over (y) the amount
actually distributed pursuant to such clause from the Group I Principal
Distribution Amount.
VI. On each Distribution Date (a) on or after the Stepdown Date and (b)
on which a Trigger Event is not in effect, the holders of each class of
Mezzanine Certificates shall be entitled to receive distributions in respect of
principal to the extent of the sum of the Group I Principal Distribution Amount
and the Group II Principal Distribution Amount remaining undistributed for such
Distribution Date in the following amounts and order of priority:
(i) first, to the holders of the Class M-1 Certificates, the Class M-1
Principal Distribution Amount until the Certificate Principal Balance thereof
has been reduced to zero;
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(ii) second, to the holders of the Class M-2 Certificates, the Class
M-2 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero; and
(iii) third, to the holders of the Class M-3 Certificates, the Class
M-3 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero.
The allocation of distributions in respect of principal to the Class A
Certificates on each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the principal balance
of the Mortgage Loans evidenced by the Subordinate Certificates. Increasing the
respective percentage interest in the Trust of the Subordinate Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Subordinate Certificates.
The distributions to the Group I Certificates set forth in clause I(i)
and IV(i) under "Allocation of Available Funds--PRINCIPAL DISTRIBUTIONS ON THE
OFFERED CERTIFICATES" above shall be paid as follows: (i) FIRST, to the holders
of the Class AF-4 Certificates, the Lockout Distribution Percentage of the
amount to be distributed pursuant to such subclause, until the Certificate
Principal Balance of the Class AF-4 Certificates has been reduced to zero; (ii)
SECOND, to the holders of the Class AF-1 Certificates until the Certificate
Principal Balance of the Class AF-1 Certificates has been reduced to zero, (iii)
THIRD, to the holders of the Class AF-2 Certificates until the Certificate
Principal Balance of the Class AF-2 Certificates has been reduced to zero, (iv)
FOURTH, to the holders of the Class AF-3 Certificates until the Certificate
Principal Balance of the Class AF-3 Certificates has been reduced to zero and
(v) FIFTH, to the holders of the Class AF-4 Certificates until the Certificate
Principal Balance of the Class AF-4 Certificates has been reduced to zero.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the
Class A Certificates consists of subordination, as described below, excess
interest and overcollateralization, as described under "--Overcollateralization
Provisions" in this prospectus supplement, the PMI Policy as described under
"--The PMI Policy" in this prospectus supplement and crosscollateralization as
described under "--Allocation of Available Funds" above.
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described in this prospectus
supplement, to the rights of the holders of the Class A Certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class A Certificates of the full amount of their scheduled
monthly payments of interest and principal and to afford such holders protection
against Realized Losses.
The protection afforded to the holders of the Class A Certificates by
means of the subordination of the Subordinate Certificates will be accomplished
by (i) the preferential right of the holders of the Class A Certificates to
receive on any Distribution Date, prior to distribution on the Subordinate
Certificates, distributions in respect of interest and principal, subject to
funds available for such distributions and (ii) if necessary, the right of the
holders of the Class A Certificates to receive future distributions of amounts
that would otherwise be payable to the holders of the Subordinate Certificates.
In addition, the holders of the Class M-1 Certificates, the Class M-2
Certificates and the Class M-3 Certificates will have the right to receive
distributions in that order, and the rights of the holders of the Mezzanine
Certificates to receive distributions in respect of the Mortgage Loans will be
senior to the rights of the holders of the Class C Certificates, in each case to
the extent described in this prospectus supplement. This subordination is
intended to enhance the likelihood of regular receipt by the holders of more
senior Certificates of distributions in respect of interest and principal and to
afford such holders protection against Realized Losses.
THE PMI POLICY
Approximately 71.85% of the Group I Mortgage Loans and approximately
71.98% of the Group II Mortgage Loans (the "PMI Mortgage Loans") (in each case,
by aggregate principal balance of the related Loan Group as of the Cut-off Date)
will be insured by Mortgage Guaranty Insurance Corporation (the "PMI Insurer")
pursuant to a primary mortgage insurance policy (the "PMI Policy"). The amount
of coverage provided by the PMI Policy, which is also referred to below as the
"insured percentage of the claim," varies based on loan-to-value
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stratifications which provide coverage that ranges between 8% and 37% based upon
the original loan-to-value ratio of the mortgage loan.
The PMI Policy is required to remain in force with respect to each PMI
Mortgage Loan until (i) the Principal Balance of the PMI Mortgage Loan is paid
in full, (ii) the Principal Balance of the PMI Mortgage Loan has amortized down
to a level that results in a loan-to-value ratio for the mortgage loan of 55% or
less; provided, however, that no coverage of any PMI Mortgage Loan under the PMI
Policy is required where prohibited by applicable law or (iii) any event
specified in the PMI Policy occurs that allows for the termination of the PMI
Policy by the PMI Insurer.
The PMI Policy may not be assigned or transferred without the prior
written consent of the PMI Insurer, provided, however that the PMI Insurer has
previously provided written consent to the assignment of the PMI Policy from the
original insured to the Trustee. The PMI Insurer has also given consent for the
assignment of coverage on individual loans from the Trustee to the Seller in
connection with any Mortgage Loan repurchased or substituted for by the Seller.
The PMI Policy generally requires that delinquencies on any PMI
Mortgage Loan must be reported to the PMI Insurer within four months of default,
and appropriate proceedings to obtain title to the property securing the PMI
Mortgage Loan must be commenced within six months of default. The PMI Policy
under which the PMI Mortgage Loans are insured contains provisions substantially
as follows: (i) for the insured to present a claim, the insured must have
acquired, and tendered to the PMI Insurer, good and merchantable title to the
property securing the PMI Mortgage Loan, free and clear of all liens and
encumbrances, including, but not limited to, any right of redemption by the
mortgagor unless such acquisition of good and merchantable title is excused
under the terms of the PMI Policy; (ii) a claim generally includes unpaid
principal, accrued interest to the date of such tender to the PMI Insurer by the
insured, and certain expenses; (iii) when a claim is presented the PMI Insurer
will have the option of either (A) paying the claim in full, taking title to the
property securing the PMI Mortgage Loan, and arranging for its sale or (B)
paying the insured percentage of the claim and with the insured retaining title
to the property securing the PMI Mortgage Loan; (iv) claims generally must be
filed within 60 days after the insured has acquired good and merchantable title
to the property securing the PMI Mortgage Loan and (v) a claim generally must be
paid within 60 days after the claim is filed by the insured.
No payment for a loss will be made under the PMI Policy unless the
property securing the PMI Mortgage Loan is in the same physical condition as
when the PMI Mortgage Loan was originally insured, except for reasonable wear
and tear and unless premiums on the standard homeowner's insurance policy, real
estate taxes and foreclosure protection and preservation expenses have been
advanced by or on behalf of the insured.
Unless approved in writing by the PMI Insurer, the insured under the
PMI Policy may not make any change in the terms of a PMI Mortgage Loan,
including the borrowed amount, interest rate, term or amortization schedule of
the PMI Mortgage Loan, except as specifically permitted by terms of the PMI
Mortgage Loan; nor make any change in the property or other collateral securing
the PMI Mortgage Loan; nor release any mortgagor under the PMI Mortgage Loan
from liability. If a PMI Mortgage Loan is assumed with the insured's approval,
the PMI Insurer's liability for coverage of the PMI Mortgage Loan under the PMI
Policy generally will terminate as of the date of such assumption, unless the
PMI Insurer approves the assumption in writing.
The PMI Policy specifically excludes coverage of: (1) any claim arising
from the failure of the mortgagor under a PMI Mortgage Loan to make any balloon
payment under the PMI Mortgage Loan; (2) any claim resulting from a default
existing at the inception of coverage or occurring after lapse or cancellation
of coverage; (3) certain claims where there is an environmental condition which
existed on the property securing the PMI Mortgage Loan (whether or not known by
the person or persons submitting an application for coverage of the PMI Mortgage
Loan) as of the effective date of coverage; (4) any claim involving a PMI
Mortgage Loan which is for the purchase of the mortgaged property, and for which
the mortgagor did not make a down payment as described in the application for
coverage; (5) any claim, if the mortgage, deed of trust or other similar
instrument did not provide the insured at origination with a first lien on the
property securing the PMI Mortgage Loan; and (6) certain claims involving or
arising out of any breach by the insured of its obligations under, or its
failure to comply with the terms of, the PMI Policy or of its obligations as
imposed by operation of law.
In issuing the PMI Policy, the PMI Insurer has relied upon certain
information and data regarding the PMI Mortgage Loans furnished to the PMI
Insurer by the Seller. The PMI Policy will not insure against a loss sustained
by reason of a default arising from or involving certain matters, including (i)
fraud or negligence in origination or servicing of the PMI Mortgage Loans,
including, but not limited to, misrepresentation by the lender or certain other
persons involved in the origination of the PMI Mortgage Loan or the application
for insurance; (ii) failure to
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construct a property securing a PMI Mortgage Loan in accordance with specified
plans or (iii) physical damage to a property securing a PMI Mortgage Loan.
The preceding description of the PMI Policy is only a brief outline and
does not purport to summarize or describe all of the provisions, terms and
conditions of the PMI Policy. For a more complete description of these
provisions, terms and conditions, reference is made to the PMI Policy, a copy of
which is available upon request from the Trust Administrator.
OVERCOLLATERALIZATION PROVISIONS
The weighted average net Mortgage Rate for the Mortgage Loans is
generally expected to be higher than the weighted average of the Pass-Through
Rates on the Offered Certificates. As a result of the foregoing and as a result
of overcollateralization, interest collections on the Mortgage Loans are
expected to be generated in excess of the amount of interest payable to the
holders of the Offered Certificates and the fees and expenses payable by the
Trust. The Pooling Agreement requires that, on each Distribution Date, the Net
Monthly Excess Cashflow, if any, be applied on such Distribution Date as an
accelerated payment of principal on the class or classes of Offered Certificates
then entitled to receive distributions in respect of principal, but only to the
limited extent hereafter described.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
shall be paid as follows:
(i) to the holders of the class or classes of Certificates then
entitled to receive distributions in respect of principal, in an amount equal to
any Extra Principal Distribution Amount, payable to such holders as part of the
Group I Principal Distribution Amount and/or the Group II Principal Distribution
Amount as described under "--Allocation of Available Funds--PRINCIPAL
DISTRIBUTIONS ON THE OFFERED CERTIFICATES" above;
(ii) to the holders of the Class M-1 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(iii) to the holders of the Class M-1 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to the Class M-1 Certificates;
(iv) to the holders of the Class M-2 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(v) to the holders of the Class M-2 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to the Class M-2 Certificates;
(vi) to the holders of the Class M-3 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(vii) to the holders of the Class M-3 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to the Class M-3 Certificates;
(viii) to make payments to the Reserve Fund, to the extent required to
pay the holders of the Class A Certificates and the Mezzanine Certificates any
Net WAC Rate Carryover Amounts for such classes;
(ix) to the holders of the Class C Certificates as provided in the
Pooling Agreement;
(x) if such Distribution Date follows the Prepayment Period during
which occurs the latest date on which a prepayment charge may be required to be
paid in respect of any Mortgage Loan, to the holders of the Class P
Certificates, in reduction of the Certificate Principal Balance thereof, until
the Certificate Principal Balance thereof is reduced to zero; and
(xi) any remaining amounts to the holders of the Residual Certificates
as provided in the Pooling Agreement.
On each Distribution Date, after making the distributions of the Group
I Available Funds and the Group II Available Funds as described above, the Trust
Administrator will withdraw from the Reserve Fund the amount deposited therein
pursuant to clause (viii) above and will distribute these amounts to the holders
of the Class A
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Certificates and the Mezzanine Certificates, respectively, in the order and
priority set forth under "Allocation of Available Funds--INTEREST DISTRIBUTIONS
ON THE OFFERED CERTIFICATES" in this prospectus supplement.
On each Distribution Date, the Trust Administrator will withdraw from
the Distribution Account all amounts representing prepayment charges in respect
of the Mortgage Loans received during the related Prepayment Period and will
distribute these amounts to the holders of the Class P Certificates.
ALLOCATION OF LOSSES; SUBORDINATION
Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date, first, to Net Monthly Excess Cashflow, second, to the Class C
Certificates, third, to the Class M-3 Certificates, fourth, to the Class M-2
Certificates, and fifth, to the Class M-1 Certificates.
The Pooling Agreement does not permit the allocation of Realized Losses
to the Class A Certificates or the Class P Certificates. Investors in the Class
A Certificates should note that although Realized Losses cannot be allocated to
the Class A Certificates, under certain loss scenarios there will not be enough
principal and interest on the Mortgage Loans to pay the Class A Certificates all
interest and principal amounts to which they are then entitled.
Once Realized Losses have been allocated to the Mezzanine Certificates,
such amounts with respect to such Certificates will no longer accrue interest
nor will such amounts be reinstated thereafter. However, Allocated Realized Loss
Amounts may be paid to the holders of the Mezzanine Certificates from Net
Monthly Excess Cashflow, according to the priorities set forth under
"--Overcollateralization Provisions" above.
Any allocation of a Realized Loss to a Certificate will be made by
reducing the Certificate Principal Balance thereof by the amount so allocated as
of the Distribution Date in the month following the calendar month in which such
Realized Loss was incurred. Notwithstanding anything to the contrary described
in this prospectus supplement, in no event will the Certificate Principal
Balance of any Certificate be reduced more than once in respect of any
particular amount both (i) allocable to such Certificate in respect of Realized
Losses and (ii) payable as principal to the holder of such Certificate from Net
Monthly Excess Cashflow.
DEFINITIONS
Many of the defined terms listed below may apply to both Loan
Groups/Certificate Groups and are sometimes used in this prospectus supplement
to refer to a particular Loan Group/Certificate Group by the use of the words
"Group I" and "Group II."
The "Accrual Period" (a) for the Class AF-1 Certificates, the Class
AF-2 Certificates, the Class AF-3 Certificates and the Class AF-4 Certificates
for any Distribution Date will be the calendar month preceding the month of such
Distribution Date based on a 360-day year consisting of twelve 30-day months and
(b) for the Class AV-1 Certificates and the Mezzanine Certificates for any
Distribution Date will be the actual number of days (based on a 360-day year)
included in the period commencing on the immediately preceding Distribution Date
(or, in the case of the first such Accrual Period, commencing on the Closing
Date) and ending on the day immediately preceding such Distribution Date.
An "Allocated Realized Loss Amount" with respect to any class of the
Mezzanine Certificates and any Distribution Date is an amount equal to the sum
of any Realized Loss allocated to that class of Certificates on the Distribution
Date and any Allocated Realized Loss Amount for that class remaining unpaid from
the previous Distribution Date.
The "Basic Principal Distribution Amount" means with respect to any
Distribution Date the excess of (i) the aggregate Principal Remittance Amount
for both Loan Groups for such Distribution Date over (ii) the
Overcollateralization Release Amount, if any, for such Distribution Date.
The "Certificate Principal Balance" of any Class A Certificate,
Mezzanine Certificate or Class P Certificate immediately prior to any
Distribution Date will be equal to the Certificate Principal Balance thereof on
the Closing Date (the "Original Certificate Principal Balance") reduced by the
sum of all amounts actually distributed in respect of principal of such class
and, in the case of a Mezzanine Certificate, Realized Losses allocated thereto
on all prior Distribution Dates. The "Certificate Principal Balance" of the
Class C Certificates as of any date of determination is equal to the excess, if
any, of (a) the then aggregate Principal Balance of the
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Mortgage Loans over (b) the then aggregate Certificate Principal Balances of the
Class A Certificates, the Mezzanine Certificates and the Class P Certificates.
The "Class A Principal Distribution Amount" is an amount equal to the
excess of (x) the Certificate Principal Balance of the Class A Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 78.00% and (ii) the aggregate principal balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate principal balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $5,000,000.
The "Class M-1 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the Certificate Principal Balance of the Class A
Certificates (after taking into account the payment of the Class A Principal
Distribution Amount on such Distribution Date) and (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) 85.50% and (ii)
the aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $5,000,000.
The "Class M-2 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the Certificate Principal Balance of the Class A
Certificates (after taking into account the payment of the Class A Principal
Distribution Amount on such Distribution Date), (ii) the Certificate Principal
Balance of the Class M-1 Certificates (after taking into account the payment of
the Class M-1 Principal Distribution Amount on such Distribution Date) and (iii)
the Certificate Principal Balance of the Class M-2 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
92.50% and (ii) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $5,000,000.
The "Class M-3 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the Certificate Principal Balance of the Class A
Certificates (after taking into account the payment of the Class A Principal
Distribution Amount on such Distribution Date), (ii) the Certificate Principal
Balance of the Class M-1 Certificates (after taking into account the payment of
the Class M-1 Principal Distribution Amount on such Distribution Date), (iii)
the Certificate Principal Balance of the Class M-2 Certificates (after taking
into account the payment of the Class M-2 Principal Distribution Amount on such
date) and (iv) the Certificate Principal Balance of the Class M-3 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 96.00% and (ii) the aggregate principal balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate principal balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $5,000,000.
The "Credit Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the aggregate Certificate Principal Balance
of the Subordinate Certificates by (y) the aggregate principal balance of the
Mortgage Loans, calculated prior to taking into account distributions of
principal on the Mortgage Loans and distribution of the Principal Distribution
Amount to the Certificateholders then entitled to distributions of principal on
such Distribution Date.
A Mortgage Loan is "Delinquent" if any monthly payment due on a Due
Date is not made by the close of business on the next scheduled Due Date for
such Mortgage Loan. A Mortgage Loan is "30 days Delinquent" if such monthly
payment has not been received by the close of business on the corresponding day
of the month
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immediately succeeding the month in which such monthly payment was due or, if
there was no such corresponding day (E.G., as when a 30-day month follows a
31-day month in which a payment was due on the 31st day of such month), then on
the last day of such immediately succeeding month; and similarly for "60 days
Delinquent" and "90 days Delinquent," etc.
A "Due Period" with respect to any Distribution Date is the period
commencing on the second day of the month preceding the month in which such
Distribution Date occurs and ending on the first day of the month in which such
Distribution Date occurs.
The "Extra Principal Distribution Amount" with respect to any
Distribution Date is the lesser of (x) the Net Monthly Excess Cashflow for such
Distribution Date and (y) the Overcollateralization Deficiency Amount for such
Distribution Date.
The "Group I Basic Principal Distribution Amount" with respect to the
Group I Certificates and any Distribution Date, the Basic Principal Distribution
Amount multiplied by a fraction, the numerator of which is the Principal
Remittance Amount for the Group I Mortgage Loans and the denominator of which is
the Principal Remittance Amount for both Loan Groups for such Distribution Date.
The "Group II Basic Principal Distribution Amount" with respect to the
Group II Certificates and any Distribution Date, the Basic Principal
Distribution Amount multiplied by a fraction, the numerator of which is the
Principal Remittance Amount for the Group II Mortgage Loans and the denominator
of which is the Principal Remittance Amount for both Loan Groups for such
Distribution Date.
The "Group I Class A Principal Distribution Amount" with respect to the
Group I Certificates and any Distribution Date, the Class A Principal
Distribution Amount multiplied by a fraction, the numerator of which is the
Principal Remittance Amount for the Group I Mortgage Loans and the denominator
of which is the Principal Remittance Amount for both Loan Groups for such
Distribution Date.
The "Group II Class A Principal Distribution Amount" with respect to
the Group II Certificates and any Distribution Date, the Class A Principal
Distribution Amount multiplied by a fraction, the numerator of which is the
Principal Remittance Amount for the Group II Mortgage Loans and the denominator
of which is the Principal Remittance Amount for both Loan Groups for such
Distribution Date.
The "Group I Extra Principal Distribution Amount" with respect to the
Group I Certificates and any Distribution Date, the Extra Principal Distribution
Amount multiplied by a fraction, the numerator of which is the Principal
Remittance Amount for the Group I Mortgage Loans and the denominator of which is
the Principal Remittance Amount for both Loan Groups for such Distribution Date.
The "Group II Extra Principal Distribution Amount" with respect to the
Group II Certificates and any Distribution Date, the Extra Principal
Distribution Amount multiplied by a fraction, the numerator of which is the
Principal Remittance Amount for the Group II Mortgage Loans and the denominator
of which is the Principal Remittance Amount for both Loan Groups for such
Distribution Date.
The "Group I Interest Remittance Amount" for any Distribution Date and
Certificate Group I is that portion of the Group I Available Funds for such
Distribution Date attributable to interest received or advanced on the related
Mortgage Loans.
The "Group II Interest Remittance Amount" for any Distribution Date and
Certificate Group II is that portion of the Group II Available Funds for such
Distribution Date attributable to interest received or advanced on the related
Mortgage Loans.
The "Group I Principal Distribution Amount" for any Distribution Date
and the Group I Certificates is the related Basic Principal Distribution Amount
plus the related Extra Principal Distribution Amount.
The "Group II Principal Distribution Amount" for any Distribution Date
and the Group II Certificates is the related Basic Principal Distribution Amount
plus the related Extra Principal Distribution Amount.
"Insurance Proceeds" means the proceeds of any title policy, hazard
policy or other insurance policy covering a Mortgage Loan, including the PMI
Policy, to the extent such proceeds are not to be applied to the restoration of
the related Mortgaged Property or released to the mortgagor in accordance with
the procedures that
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the Master Servicer would follow in servicing mortgage loans held for its own
account, subject to the terms and conditions of the related mortgage note and
Mortgage.
The "Lockout Certificate Percentage" for the Class AF-4 Certificates
will be calculated for each Distribution Date to be the percentage equal to the
aggregate Certificate Principal Balance of the Class AF-4 Certificates
immediately prior to such Distribution Date divided by the aggregate Certificate
Principal Balances of the Class A Certificates in Certificate Group I
immediately prior to such Distribution Date.
The "Lockout Distribution Percentage" for the Class AF-4 Certificates
and for any Distribution Date means the indicated percentage of the Lockout
Certificate Percentage for such Distribution Date:
PERCENTAGE OF LOCKOUT
DISTRIBUTION DATE CERTIFICATE PERCENTAGE
----------------- ----------------------
January 2001 to December 2002 0%
January 2003 to December 2004 20%
January 2005 to December 2005 80%
January 2006 to December 2006 100%
January 2007 and thereafter 300%
Notwithstanding the foregoing, if the Certificate Principal Balances of
the Class A Certificates in Certificate Group I (other than the Class A-4
Certificates) have been reduced to zero, the Lockout Distribution Percentage
will be equal to 100%.
The "Monthly Interest Distributable Amount" for any Distribution Date
and each class of Offered Certificates equals the amount of interest accrued
during the related Accrual Period at the related Pass-Through Rate on the
Certificate Principal Balance of such class immediately prior to such
Distribution Date, in each case, reduced by any Prepayment Interest Shortfalls
allocated to such class and shortfalls resulting from the application of the
Relief Act allocated to such class (allocated to each such class in the manner
described under "--Allocation of Available Funds--INTEREST DISTRIBUTIONS ON THE
OFFERED CERTIFICATES" above) based on its respective entitlement to interest
irrespective of any Prepayment Interest Shortfalls or shortfalls resulting from
the application of the Relief Act for such Distribution Date).
"Net Monthly Excess Cashflow" for any Distribution Date is equal to the
sum of (a) any Overcollateralization Release Amount and (b) the excess of (x)
the Group I Available Funds plus the Group II Available Funds for such
Distribution Date over (y) the sum for such Distribution Date of (A) the Monthly
Interest Distributable Amounts for the Offered Certificates, (B) the Unpaid
Interest Shortfall Amounts for the Class A Certificates and (C) the Principal
Remittance Amount.
An "Overcollateralization Deficiency Amount" with respect to any
Distribution Date equals the amount, if any, by which the Overcollateralization
Target Amount exceeds the Overcollateralized Amount on such Distribution Date
(after giving effect to distributions in respect of the Basic Principal
Distribution Amount on such Distribution Date).
The "Overcollateralization Release Amount" means, with respect to any
Distribution Date, the lesser of (x) the aggregate Principal Remittance Amount
for both Loan Groups for such Distribution Date and (y) the excess, if any, of
(i) the Overcollateralized Amount for such Distribution Date (assuming that 100%
of the aggregate Principal Remittance Amount for both Loan Groups is applied as
a principal payment on such Distribution Date) over (ii) the
Overcollateralization Target Amount for such Distribution Date.
The "Overcollateralization Target Amount" means with respect to any
Distribution Date (i) prior to the Stepdown Date, $20,000,000, (ii) on or after
the Stepdown Date provided a Trigger Event is not in effect, the greater of (x)
4.00% of the aggregate Stated Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) and (y) $5,000,000, and (iii) on or after the Stepdown Date if a Trigger
Event is in effect, the Overcollateralization Target Amount for the immediately
preceding Distribution Date. The Overcollateralization Target Amount should
never exceed the initial Overcollateralization Target Amount.
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The "Overcollateralized Amount" for any Distribution Date is the
amount, if any, by which (i) the Pool Balance on the last day of the related Due
Period exceeds (ii) the sum of the aggregate Certificate Principal Balance of
the Class A Certificates, the Mezzanine Certificates and the Class P
Certificates as of such Distribution Date (after giving effect to distributions
to be made on such Distribution Date).
The "PMI Insurer Fee" for any Distribution Date is the premium payable
to the PMI Insurer at the PMI Insurer Fee Rate on the then current aggregate
Principal Balance of the PMI Mortgage Loans.
The "PMI Insurer Fee Rate" for any Distribution Date is the rate per
annum set forth in the Pooling Agreement.
The "Prepayment Period" for any Distribution Date is the calendar month
immediately preceding the month in which the Distribution Date occurs.
The "Principal Remittance Amount" means with respect to each Loan Group
and any Distribution Date, the sum of (i) all scheduled payments of principal
collected or advanced on the related Mortgage Loans by the Master Servicer that
were due during the related Due Period, (ii) the principal portion of all
partial and full principal prepayments of the related Mortgage Loans applied by
the Master Servicer during such Prepayment Period, (iii) the principal portion
of all related Net Liquidation Proceeds and Insurance Proceeds received during
such Prepayment Period, (iv) that portion of the Purchase Price, representing
principal of any repurchased Mortgage Loan in such Loan Group, deposited to the
Collection Account during such Prepayment Period, (v) the principal portion of
any related Substitution Adjustments deposited in the Collection Account during
such Prepayment Period and (vi) on the Distribution Date on which the Trust is
to be terminated in accordance with the Pooling Agreement, that portion of the
Termination Price, in respect of principal.
"Realized Loss" means, with respect to any defaulted Mortgage Loan that
is finally liquidated (a "Liquidated Mortgage Loan"), the amount of loss
realized equal to the portion of the Principal Balance remaining unpaid after
application of all liquidation proceeds net of amounts reimbursable to the
Master Servicer for related Advances, Servicing Advances and Servicing Fees
(such amount, the "Net Liquidation Proceeds") in respect of such Mortgage Loan.
The "Stepdown Date" means the Distribution Date in January 2004.
A "Trigger Event" is in effect with respect to any Distribution Date if
the percentage obtained by dividing (x) the principal amount of Mortgage Loans
Delinquent 60 days or more by (y) the aggregate principal balance of the
Mortgage Loans, in each case, as of the last day of the previous calendar month,
exceeds 65% the Credit Enhancement Percentage.
The "Unpaid Interest Shortfall Amount" means (i) for each class of
Offered Certificates and the first Distribution Date, zero, and (ii) with
respect to each class of Offered Certificates and any Distribution Date after
the first Distribution Date, the amount, if any, by which (a) the sum of (1) the
Monthly Interest Distributable Amount for such class for the immediately
preceding Distribution Date and (2) the outstanding Unpaid Interest Shortfall
Amount, if any, for such class for such preceding Distribution Date exceeds (b)
the aggregate amount distributed on such class in respect of interest pursuant
to clause (a) of this definition on such preceding Distribution Date, plus
interest on the amount of interest due but not paid on the Certificates of such
class on such preceding Distribution Date, to the extent permitted by law, at
the Pass-Through Rate for such class for the related Accrual Period.
PASS-THROUGH RATES
The "Pass-Through Rate" for each class of the Offered Certificates for
any Distribution Date will be, with respect to:
(i) the Class AF-1 Certificates, 7.224% per annum;
(ii) the Class AF-2 Certificates, 6.907% per annum;
(iii) the Class AF-3 Certificates, (a) on or prior to the Optional
Termination Date, the lesser of (x) 7.434% per annum and (y)
the Net WAC Rate and (b) after the Optional Termination Date,
the lesser of (x) 7.934% per annum and (y) the Net WAC Rate;
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(iv) the Class AF-4 Certificates, the lesser of (x) 7.216% per
annum and (y) the Net WAC Rate;
(v) the Class AV-1 Certificates and the Mezzanine Certificates,
the lesser of (x) the related Formula Rate for such
Distribution Date and (y) the Net WAC Rate for such
Distribution Date.
The "Net WAC Rate" for any Distribution Date with respect to the Class
AF-3 Certificates, the Class AF-4 Certificates, the Class AV-1 Certificates and
the Mezzanine Certificates, is a per annum rate (subject, in the case of the
Class AV-1 Certificates and the Mezzanine Certificates, to adjustment based on
the actual number of days elapsed in the related Accrual Period) equal to the
weighted average of the Adjusted Net Mortgage Rates of the Mortgage Loans in
both Loan Groups
The "Adjusted Net Mortgage Rate" for any Mortgage Loan for any
Distribution Date shall be a per annum rate equal to the applicable Mortgage
Rate for such Mortgage Loan as of the first day of the month preceding the month
in which such Distribution Date occurs minus the sum of (i) the Servicing Fee
Rate and (ii) the PMI Insurer Fee Rate, if applicable.
The "Formula Rate" for the Class AV-1 Certificates and any class of the
Mezzanine Certificates is the lesser of (a) the sum of the interbank offered
rate for one-month United States dollar deposits in the London market (the
"Certificate Index") as of the related LIBOR Determination Date (as defined in
this prospectus supplement) plus a related margin (the "Certificate Margin") or
(b) the Maximum Cap. The Certificate Margin with respect to the Class AV-1
Certificates on each Distribution Date on or prior to the Optional Termination
Date will equal 0.260% and on each Distribution Date after the Optional
Termination Date will equal 0.520%. The Certificate Margin with respect to the
Class M-1 Certificates on each Distribution Date on or prior to the Optional
Termination Date will equal 0.660% and on each Distribution Date after the
Optional Termination Date will equal 0.990%. The Certificate Margin with respect
to the Class M-2 Certificates on each Distribution Date on or prior to the
Optional Termination Date will equal 1.100% and on each Distribution Date after
the Optional Termination Date will equal 1.650%. The Certificate Margin with
respect to the Class M-3 Certificates on each Distribution Date on or prior to
the Optional Termination Date will equal 1.950% and on each Distribution Date
after the Optional Termination Date will equal 2.925%.
The "Maximum Cap" for any Distribution Date is a per annum rate
(subject to adjustment based on the actual number of days elapsed in the related
Accrual Period) equal to the weighted average of the Adjusted Net Maximum
Mortgage Rates of the Mortgage Loans in both Loan Groups.
The "Adjusted Net Maximum Mortgage Rate" for any Mortgage Loan for any
Distribution Date shall be a per annum rate equal to the applicable Maximum
Mortgage Rate for such Mortgage Loan (or the Mortgage Rate in the case of any
Group I Mortgage Loans) as of the first day of the month preceding the month in
which the Distribution Date occurs minus the sum of (i) the Servicing Fee Rate
and (ii) the PMI Insurer Fee Rate, if applicable.
On the Closing Date, the Trust Administrator will establish a Reserve
Fund account (the "Reserve Fund") from which payments in respect of Net WAC Rate
Carryover Amounts on the Class AV-1 Certificates and the Mezzanine Certificates
will be made. The Reserve Fund will be an asset of the Trust but not of any
REMIC. On each Distribution Date, to the extent required following the
distribution of the Group I Available Funds and the Group II Available Funds as
described under "--Allocation of Available Funds" above, the Trust Administrator
will withdraw from amounts in the Reserve Fund to pay the Class AV-1
Certificates and the Mezzanine Certificates any Net WAC Rate Carryover Amounts
in the following order of priority, in each case to the extent of amounts
remaining in the Reserve Fund:
(i) to the Class A Certificates;
(ii) to the Class M-1 Certificates;
(iii) to the Class M-2 Certificates; and
(iv) to the Class M-3 Certificates.
If on any Distribution Date, the Pass-Through Rate for the Class AV-1
Certificates or any class of Mezzanine Certificates is the Net WAC Rate, then
the "Net WAC Rate Carryover Amount" for such class for such Distribution Date is
an amount equal to the sum of (i) the excess of (x) the amount of interest such
class of
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Certificates would have been entitled to receive on such Distribution Date had
such Pass-Through Rate been the related Formula Rate over (y) the amount of
interest such class of Certificates accrued for such Distribution Date at the
Net WAC Rate and (ii) the unpaid portion of any related Net WAC Rate Carryover
Amount from the prior Distribution Date together with interest accrued on such
unpaid portion for the most recently ended Accrual Period at the Formula Rate
applicable for such class for such Accrual Period. Any Net WAC Rate Carryover
Amount on the Class AV-1 Certificates and the Mezzanine Certificates will be
paid on such Distribution Date or future Distribution Dates from and to the
extent of funds available therefor in accordance with the priorities described
above.
If on any Distribution Date, the Pass-Through Rate for the Class AF-3
Certificates or the Class AF-4 Certificates is the related Net WAC Rate, the
holders of such class will not be entitled to recover on such Distribution Date
or on any future Distribution Date the resulting shortfall in the amount of
interest such holders would have been entitled to receive had such Pass-Through
Rate not been the related Net WAC Rate.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period for the Class AV-1 Certificates and the
Mezzanine Certificates (each such date, a "LIBOR Determination Date"), the Trust
Administrator will determine the Certificate Index for such Accrual Period for
the Class AV-1 Certificates and the Mezzanine Certificates on the basis of the
London interbank offered rate for one-month United States dollar deposits, as
such rates appear on the Telerate Page 3750, as of 11:00 a.m. (London time) on
such LIBOR Determination Date. If such rate does not appear on Telerate Page
3750, the rate for that day will be determined on the basis of the offered rates
of the Reference Banks (as defined in this prospectus supplement) for one-month
United States dollar deposits, as of 11:00 a.m. (London time) on such LIBOR
Determination Date. The Trust Administrator will request the principal London
office of each of the Reference Banks to provide a quotation of its rate. If on
such LIBOR Determination Date two or more Reference Banks provide such offered
quotations, the Certificate Index for the related Accrual Period will be the
arithmetic mean of such offered quotations (rounded upwards if necessary to the
nearest whole multiple of 0.0625%). If on such LIBOR Determination Date fewer
than two Reference Banks provide such offered quotations, the Certificate Index
for the related Accrual Period shall be the higher of (x) the Certificate Index
as determined on the previous LIBOR Determination Date and (y) the Reserve
Interest Rate (as defined in this prospectus supplement).
As used in this section, "LIBOR Business Day" means a day on which
banks are open for dealing in foreign currency and exchange in London and New
York City; "Telerate Page 3750" means the display page currently so designated
on the Dow Jones Telerate Capital Markets Report (or such other page as may
replace that page on that service for the purpose of displaying comparable rates
or prices); "Reference Banks" means leading banks selected by the Trust
Administrator and engaged in transactions in Eurodollar deposits in the
international Eurocurrency market (i) with an established place of business in
London, (ii) which have been designated as such by the Trust Administrator and
(iii) not controlling, controlled by or under common control with, the
Depositor, the Master Servicer or any successor Master Servicer or the Seller;
and "Reserve Interest Rate" shall be the rate per annum that the Trust
Administrator determines to be either (i) the arithmetic mean (rounded upwards
if necessary to the nearest whole multiple of 0.0625%) of the one-month United
States dollar lending rates which New York City banks selected by the Trust
Administrator are quoting on the relevant LIBOR Determination Date to the
principal London offices of leading banks in the London interbank market or (ii)
in the event that the Trust Administrator can determine no such arithmetic mean,
the lowest one-month United States dollar lending rate which New York City banks
selected by the Trust Administrator are quoting on such LIBOR Determination Date
to leading European banks.
The establishment of the Certificate Index on each LIBOR Determination
Date by the Trust Administrator and the Trust Administrator's calculation of the
rate of interest applicable to the Class AV-1 Certificates and the Mezzanine
Certificates for the related Accrual Period will (in the absence of manifest
error) be final and binding.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trust Administrator will provide or make
available to each holder of a Certificate and the Rating Agencies a statement
(based on information received from the Master Servicer) setting forth, among
other things, the information set forth in the prospectus under "Description of
the Securities--Form of Reports to Securityholders." The Trust Administrator
will make such statement (and, at its option, any additional files containing
the same information in an alternative format) available each month to via the
Trust Administrator's internet website. The Trust Administrator's internet
website shall initially be located at "http:\\www-
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apps.gis.deutsche-bank.com/invr. Assistance in using the website can be obtained
by calling the Trust Administrator's customer service desk at 1-800-735-7777.
Parties that are unable to use the above distribution options are entitled to
have a paper copy mailed to them via first class mail by calling the customer
service desk and indicating such. The Trust Administrator shall have the right
to change the way such statements are distributed in order to make such
distribution more convenient and/or more accessible to the above parties and the
Trust Administrator shall provide timely and adequate notification to all above
parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trust Administrator will prepare and deliver to each holder
of a Certificate of record during the previous calendar year a statement
containing information necessary to enable Certificateholders to prepare their
tax returns. Such statements will not have been examined and reported upon by an
independent public accountant.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Offered Certificates will be sensitive to
defaults on the Mortgage Loans. If a purchaser of an Offered Certificate
calculates its anticipated yield based on an assumed rate of default and amount
of losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity will be lower than that so calculated. In
general, the earlier a loss occurs, the greater is the effect on an investor's
yield to maturity. There can be no assurance as to the delinquency, foreclosure
or loss experience with respect to the Mortgage Loans. Because the Mortgage
Loans were underwritten in accordance with standards less stringent than those
generally acceptable to Fannie Mae and Freddie Mac with regard to a mortgagor's
credit standing and repayment ability, the risk of delinquencies with respect
to, and losses on, the Mortgage Loans will be greater than that of mortgage
loans underwritten in accordance with Fannie Mae and Freddie Mac standards.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the Offered Certificates will be affected by the
rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or condemnations
and repurchases by the Seller or Master Servicer). Because certain of the
Mortgage Loans contain prepayment charges, the rate of principal payments may be
less than the rate of principal payments for mortgage loans that did not have
prepayment charges. The Mortgage Loans are subject to the "due-on-sale"
provisions included therein which provide that the Mortgage Loan is due upon the
transfer of the related Mortgaged Property or is assumable by a creditworthy
purchaser of the related Mortgaged Property, subject to limitations described
under "Legal Aspects of Mortgage Assets--Enforceability of Provisions" in the
prospectus. We refer you to "The Mortgage Pool" in this prospectus supplement.
Prepayments, liquidations and purchases of the Mortgage Loans
(including any optional purchase) will result in distributions on the Offered
Certificates of principal amounts which would otherwise be distributed over the
remaining terms of the Mortgage Loans. Since the rate of payment of principal on
the Mortgage Loans will depend on future events and a variety of other factors,
no assurance can be given as to such rate or the rate of principal prepayments.
The extent to which the yield to maturity of a class of Offered Certificates may
vary from the anticipated yield will depend upon the degree to which such class
of Certificates is purchased at a discount or premium. Further, an investor
should consider the risk that, in the case of any Offered Certificate purchased
at a discount, a slower than anticipated rate of principal payments (including
prepayments) on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, a faster than anticipated rate of
principal payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Mortgage Rates on the
Mortgage Loans, such Mortgage Loans could be subject to higher prepayment rates
than if prevailing interest rates were to remain at or above the Mortgage Rates
on such Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. The Mortgage Loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, mortgagors with adjustable-rate Mortgage
Loans may be inclined to refinance their adjustable-rate Mortgage Loans with a
fixed-rate loan to "lock in" a lower interest
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rate or to refinance their adjustable-rate Mortgage Loans with other more
competitive adjustable-rate mortgage loans. The existence of the applicable
Periodic Rate Cap and Maximum Rate with respect to the Group II Mortgage Loans
also may affect the likelihood of prepayments resulting from refinancings. No
assurances can be given as to the rate of prepayments on the Mortgage Loans in
stable or changing interest rate environments. In addition, the delinquency and
loss experience of the Group I Mortgage Loans may differ from that of the Group
II Mortgage Loans because the amount of the monthly payments on the Group II
Mortgage Loans are subject to adjustment on each Adjustment Date. In addition, a
majority of the Group II Mortgage Loans will not have their initial Adjustment
Date for two, three or five years after the origination thereof. The Group II
Mortgage Loans may be subject to greater rates of prepayments as they approach
their initial Adjustment Dates even if market interest rates are only slightly
higher or lower than the Mortgage Rates on the Group II Mortgage Loans as
mortgagors seek to avoid changes in their monthly payments.
Because principal distributions are paid to certain classes of Group I
Certificates before other such classes, holders of classes of Group I
Certificates having a later priority of payment bear a greater risk of losses
than holders of classes having earlier priorities for distribution of principal.
In particular, with respect to the Class A-4 Certificates, during certain
periods, no principal payments or a disproportionately small portion of the
amount of principal then payable to the Group I Certificates will be distributed
on the Class A-4 Certificates, and during certain other periods, a
disproportionately large portion of the amount of principal then payable to the
Group I Certificates will be distributed on the Class A-4 Certificates. Unless
the Certificate Principal Balances of the Group I Certificates (other than the
Class A-4 Certificates) have been reduced to zero, the Class A-4 Certificates
will not be entitled to receive any distributions of principal payments prior to
the Distribution Date in January 2003.
Except in the circumstances described in this prospectus supplement,
principal distributions on the Group I Certificates relate to principal payments
on the Group I Mortgage Loans and principal distributions on the Group II
Certificates relate to principal payments on the Group II Mortgage Loans.
Approximately 80.38% of the Group I Mortgage Loans and approximately
84.67% of the Group II Mortgage Loans (in each case, by aggregate principal
balance of the related Loan Group as of the Cut-off Date) provide for payment by
the mortgagor of a prepayment charge in limited circumstances on certain
prepayments. The holders of the Class P Certificates will be entitled to all
prepayment charges received on the Mortgage Loans, and such amounts will not be
available for distribution on the other classes of Certificates. Under certain
circumstances, as described in the Pooling Agreement, the Master Servicer may
waive the payment of any otherwise applicable prepayment charge. Investors
should conduct their own analysis of the effect, if any, that the prepayment
charges, and decisions by the Master Servicer with respect to the waiver
thereof, may have on the prepayment performance of the Mortgage Loans. The
Depositor makes no representations as to the effect that the prepayment charges,
and decisions by the Master Servicer with respect to the waiver thereof, may
have on the prepayment performance of the Mortgage Loans.
To the extent the Net WAC Rate is paid on the Class AV-1 Certificates
or any class of the Mezzanine Certificates, a shortfall in interest equal to the
Net WAC Rate Carryover Amount will occur. Such shortfall will only be payable
from the Net Monthly Excess Cashflow (through the use of the Reserve Fund), only
to the extent that the Overcollateralization Target Amount has been reached, and
only in the priorities described under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
If the Net WAC Rate is paid on the Class AF-3 Certificates or the Class AF-4
Certificates, the resulting shortfall will not be payable from any source on the
applicable Distribution Date or any future Distribution Date.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to the Offered Certificates with the Securities and
Exchange Commission (the "Commission") in a report on Form 8-K and may file
certain additional yield tables and other computational materials with respect
to the Offered Certificates with the Commission in a report on Form 8-K. Such
tables and materials were prepared by the Underwriters at the request of certain
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, such prospective investors. Such tables and assumptions
may be based on assumptions that differ from the Structuring Assumptions (as
defined in this prospectus supplement). Accordingly, such tables and other
materials may not be relevant to or appropriate for investors other than those
specifically requesting them.
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WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
Mortgage Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The weighted average life of an Offered Certificate is the average
amount of time that will elapse from the Closing Date, until each dollar of
principal is repaid to the investors in such Certificate. Because it is expected
that there will be prepayments and defaults on the Mortgage Loans, the actual
weighted average lives of these Certificates are expected to vary substantially
from the weighted average remaining terms to stated maturity of the Mortgage
Loans as set forth in this prospectus supplement under "The Mortgage Pool."
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement (the
"Prepayment Assumption") assumes:
(i) In the case of the Group I Mortgage Loans, 100% of the related
Vector. In the case of the Group I Mortgage Loans, the related "Vector"
means a constant prepayment rate ("CPR") of 4.00% per annum of the then
unpaid principal balance of such Mortgage Loans in the first month of
the life of such Mortgage Loans and an additional approximately 1.455%
(precisely 16/11%) per annum in each month thereafter until the 12th
month, and then beginning in the 12th month and in each month
thereafter during the life of such Mortgage Loans, a CPR of 20% per
annum.
(ii) In the case of the Group II Mortgage Loans, 27% CPR.
CPR is a prepayment assumption that represents a constant assumed rate
of prepayment each month relative to the then outstanding principal balance of a
pool of mortgage loans for the life of such 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 mortgage loans, including the Mortgage
Loans to be included in the Trust. Each of the Prepayment Scenarios in the table
below assumes the respective percentages of CPR or the Vector, as applicable,
indicated for such scenario.
The table entitled "Percent of Original Certificate Principal Balance
Outstanding" was prepared on the basis of the assumptions in the following
paragraph and the tables set forth below. There are certain differences between
the loan characteristics included in such assumptions and the characteristics of
the actual Mortgage Loans. Any such discrepancy may have an effect upon the
percentages of Original Certificate Principal Balances outstanding and weighted
average lives of the Offered Certificates set forth in the table. In addition,
since the actual Mortgage Loans in the Trust will have characteristics that
differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Offered Certificates may be made earlier or
later than indicated in the table.
The percentages and weighted average lives in the table entitled
"Percent of Original Certificate Principal Balance Outstanding" were determined
assuming that (the "Structuring Assumptions"): (i) the Mortgage Loans have the
characteristics set forth in the table below, (ii) the closing date for the
Offered Certificates occurs on December 15, 2000 and the Offered Certificates
are sold to investors on such date, (iii) distributions on the Certificates are
made on the 21st day of each month regardless of the day on which the
Distribution Date actually occurs, commencing in January 2001, in accordance
with the allocation of Available Funds set forth above under "Description of the
Certificates--Allocation of Available Funds," (iv) the prepayment rates are
those indicated in the "Prepayment Scenarios" table below, (v) prepayments
include thirty days' interest thereon, (vi) the Seller is not required to
substitute or repurchase any or all of the Mortgage Loans pursuant to the
Pooling Agreement and no optional termination is exercised, except with respect
to the entries identified by the row captioned "Weighted Average Life (years) to
Optional Termination" in the tables below, (vii) the Overcollateralization
Target Amount is as set forth herein, (viii) scheduled payments for all Mortgage
Loans are received on the first day of each month commencing in January 2001,
the principal portion of such payments being computed prior to giving effect to
prepayments received in the previous month and there are no losses or
delinquencies with respect to such Mortgage Loans, (ix) all related Mortgage
Loans prepay at the same rate and all such payments are treated as prepayments
in full of individual Mortgage Loans, with no shortfalls in collection of
interest, (x) such prepayments are received on
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<PAGE>
the last day of each month commencing in the month of the Closing Date, (xi) the
Certificate Index is at all times equal to 6.71750%, (xii) the Pass-Through
Rates for the Offered Certificates are as set forth in this prospectus
supplement, (xiii) the Mortgage Rate for each Group II Mortgage Loan is adjusted
on its next Adjustment Date (and on subsequent Adjustment Dates, if necessary)
to equal the sum of (a) the assumed level of Six-Month LIBOR and (b) the
respective Gross Margin (such sum being subject to the applicable Periodic Rate
Caps, Minimum Mortgage Rates and Maximum Mortgage Rates), (xiv) with respect to
the Group II Mortgage Loans, Six-Month LIBOR at all times is equal to 6.44875%
and (xv) the Servicing Fee Rate is equal to 0.50% per annum and the PMI Insurer
Fee Rate with respect to the PMI Mortgage Loans is the per annum rate set forth
in the Pooling Agreement. Nothing contained in the foregoing assumptions should
be construed as a representation that the Mortgage Loans will not experience
delinquencies or losses.
<TABLE>
<CAPTION>
PREPAYMENT SCENARIOS
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Group I Mortgage Loans(1) 0% 50% 120% 150% 200%
Group II Mortgage Loans(2) 0% 15% 27% 35% 45%
</TABLE>
--------------------------------------
(1) Percentage of the Prepayment Vector.
(2) Percentage of CPR.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
MONTHS TO
INITIAL NEXT MAXIMUM MINIMUM
LOAN RATE ADJUSTMENT GROSS LOAN RATE LOAN RATE
DESCRIPTION PRINCIPAL BALANCE ($) (%) DATE MARGIN(%) (%) (%)
----------- --------------------- --- ---- --------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Group I
Mortgage Loans:
1 $112,685.85 11.2500% N/A N/A N/A N/A
2 $432,808.51 11.7753% N/A N/A N/A N/A
3 $225,705.77 11.2775% N/A N/A N/A N/A
4 $13,549,964.67 11.5580% N/A N/A N/A N/A
5(1) $2,867,831.76 10.4482% N/A N/A N/A N/A
6 $839,056.57 11.0879% N/A N/A N/A N/A
7 $54,970,841.71 10.8312% N/A N/A N/A N/A
Group II
Mortgage Loans(2):
1 $414,171.80 9.8085% 4 5.8542% 15.8085% 9.8085%
2 $1,539,020.90 10.9523% 5 6.1938% 16.9523% 10.9523%
3 $1,068,913.64 9.8808% 6 6.0483% 15.8808% 9.8808%
4 $1,142,675.00 10.2931% 7 6.2400% 16.2931% 10.2931%
5 $1,029,395.14 9.8982% 9 6.2631% 15.8982% 9.8982%
6 $149,714.93 9.1294% 10 6.3263% 15.1294% 9.1294%
7 $78,180.84 10.6000% 18 6.7500% 16.6000% 10.6000%
8(3) $89,999.74 10.3750% 19 6.0000% 16.3750% 10.3750%
9(4) $75,950.48 11.8900% 20 6.0000% 17.8900% 11.8900%
10 $1,957,558.31 11.4743% 21 6.2892% 17.4743% 11.4743%
11 $19,831,332.36 10.8370% 22 6.1799% 16.8370% 10.8370%
12 $45,942,052.05 10.9089% 23 6.1091% 16.9075% 10.9075%
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL REMAINING
INITIAL PERIODIC TERM TO TERM TO
PERIODIC RATE RATE CAP MATURITY MATURITY
DESCRIPTION CAP(%) (%) (MONTHS) (MONTHS)
----------- ------ --- -------- --------
<S> <C> <C> <C> <C>
Group I
Mortgage Loans:
1 N/A N/A 120 119
2 N/A N/A 180 177
3 N/A N/A 240 232
4 N/A N/A 360 359
5(1) N/A N/A 180 177
6 N/A N/A 240 237
7 N/A N/A 360 359
Group II
Mortgage Loans(2):
1 1.0000% 1.0000% 360 357
2 1.0000% 1.0000% 360 357
3 1.0000% 1.0000% 360 359
4 1.0000% 1.0000% 360 360
5 1.0000% 1.0000% 360 344
6 1.0000% 1.0000% 360 345
7 1.0000% 1.0000% 360 353
8(3) 1.0000% 1.0000% 360 354
9(4) 3.0000% 1.0000% 360 355
10 1.3318% 1.0000% 360 355
11 1.0000% 1.0000% 360 357
12 1.0000% 1.0000% 360 358
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
MONTHS TO
INITIAL NEXT MAXIMUM MINIMUM
LOAN RATE ADJUSTMENT GROSS LOAN RATE LOAN RATE
DESCRIPTION PRINCIPAL BALANCE ($) (%) DATE MARGIN(%) (%) (%)
----------- --------------------- --- ---- --------- --- ---
<S> <C> <C> <C> <C> <C> <C>
13 $38,209,295.01 11.3483% 24 6.1354% 17.3510% 11.3483%
14 $22,067,953.45 11.3147% 25 6.1589% 17.3147% 11.3147%
15 $199,500.00 12.9500% 26 6.7500% 18.9500% 12.9500%
16 $1,111,058.96 11.2791% 34 6.0030% 17.3554% 11.2791%
17 $3,728,559.01 11.2162% 35 5.9586% 17.2162% 11.2162%
18 $1,434,952.30 12.1758% 36 6.1927% 18.1758% 12.1758%
19 $1,631,614.00 11.8512% 37 6.0858% 17.8512% 11.8512%
20 $417,013.24 10.4500% 59 5.2500% 16.4500% 10.4500%
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL REMAINING
INITIAL PERIODIC TERM TO TERM TO
PERIODIC RATE RATE CAP MATURITY MATURITY
DESCRIPTION CAP(%) (%) (MONTHS) (MONTHS)
----------- ------ --- -------- --------
<S> <C> <C> <C> <C>
13 1.0053% 1.0000% 360 359
14 1.0000% 1.0000% 360 360
15 1.0000% 1.0000% 360 360
16 3.0000% 1.0000% 360 357
17 2.9148% 1.0000% 360 358
18 3.0000% 1.0000% 360 359
19 2.9559% 1.0000% 360 360
20 3.0000% 1.0000% 360 358
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
MONTHS TO
INITIAL NEXT MAXIMUM MINIMUM
LOAN RATE ADJUSTMENT GROSS LOAN RATE LOAN RATE
DESCRIPTION PRINCIPAL BALANCE ($) (%) DATE MARGIN(%) (%) (%)
----------- --------------------- --- ---- --------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Group II
Mortgage Loans(2):
21 $332,106.06 10.5000% 3 5.6500% 14.5000% 8.5000%
22 $662,038.48 9.7182% 4 6.8201% 15.1339% 9.1339%
23 $853,102.60 11.3590% 5 6.5379% 17.0515% 11.0515%
24 $1,402,863.63 10.0586% 6 6.0671% 15.9712% 9.9712%
25 $147,920.00 12.7000% 7 6.7500% 18.7000% 12.7000%
26 $1,477,733.23 9.2094% 8 6.9072% 15.2094% 9.2094%
27 $5,368,660.39 9.5347% 9 6.6988% 15.5543% 9.5347%
28 $5,965,999.91 9.6134% 10 6.7958% 15.6134% 9.6134%
29 $69,584.79 13.2000% 12 6.7500% 20.2000% 13.2000%
30 $274,596.58 9.9900% 14 6.7500% 15.9900% 9.9900%
31 $131,484.48 10.2500% 16 6.2500% 16.2500% 10.2500%
32 $556,728.76 10.4577% 17 6.0846% 16.4577% 10.4577%
33 $2,217,910.34 11.1163% 18 6.3802% 17.1480% 11.1163%
34 $2,293,093.12 11.0143% 19 6.4280% 17.0752% 11.0143%
35 $1,395,939.91 10.4684% 20 6.2533% 16.5602% 10.4684%
36 $2,893,841.81 10.1231% 21 6.4774% 16.1616% 10.1231%
37 $89,506,146.03 10.6310% 22 6.1576% 16.6324% 10.6314%
38 $190,461,873.91 10.5956% 23 6.1282% 16.5975% 10.5956%
39 $170,503,195.88 10.5977% 24 6.1087% 16.5977% 10.5977%
40 $166,839,863.54 10.6140% 25 6.0827% 16.6142% 10.6140%
41 $1,236,170.00 11.0191% 26 6.1171% 17.0191% 11.0191%
42 $326,853.32 12.4503% 33 6.7273% 18.4503% 12.4503%
43 $18,918,560.99 11.1928% 34 6.2185% 17.2266% 11.1928%
44 $45,202,994.90 11.1971% 35 6.1165% 17.2255% 11.1971%
45 $42,901,248.38 11.2074% 36 6.1281% 17.2139% 11.2074%
46 $30,015,267.00 11.2727% 37 6.0870% 17.2788% 11.2727%
47 $233,750.00 11.7000% 38 5.7500% 17.7000% 11.7000%
48 $62,932.65 12.7000% 57 6.2500% 18.7000% 12.7000%
49 $101,134.87 11.8964% 58 6.5464% 17.8964% 11.8964%
50 $1,186,396.40 11.5120% 59 5.9793% 17.5120% 11.5120%
51 $595,286.75 12.6173% 60 6.1607% 18.6173% 12.6173%
52 $747,510.00 10.9471% 61 6.3484% 16.9471% 10.9471%
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL REMAINING
INITIAL PERIODIC TERM TO TERM TO
PERIODIC RATE RATE CAP MATURITY MATURITY
DESCRIPTION CAP(%) (%) (MONTHS) (MONTHS)
----------- ------ --- -------- --------
<S> <C> <C> <C> <C>
Group II
Mortgage Loans(2):
21 1.0000% 1.0000% 360 344
22 1.0000% 1.0000% 360 353
23 1.0000% 1.0000% 339 335
24 1.0000% 1.0000% 360 356
25 1.0000% 1.0000% 360 360
26 1.0000% 1.0000% 360 343
27 1.0392% 1.0000% 360 344
28 1.0000% 1.0000% 360 345
29 3.0000% 1.0000% 360 359
30 1.0000% 1.0000% 360 349
31 1.0000% 1.0000% 360 351
32 1.3386% 1.0000% 360 352
33 1.0634% 1.0000% 360 353
34 1.2477% 1.0000% 360 354
35 1.1835% 1.0000% 360 354
36 2.0850% 1.0000% 360 351
37 1.0409% 1.0000% 360 357
38 1.0073% 1.0000% 360 358
39 1.0000% 1.0000% 360 359
40 1.0012% 1.0000% 360 360
41 1.0000% 1.0000% 360 360
42 3.0000% 1.0000% 360 356
43 3.0000% 1.0000% 360 357
44 3.0000% 1.0000% 360 358
45 2.9769% 1.0000% 360 359
46 2.9495% 1.0000% 360 360
47 3.0000% 1.0000% 360 360
48 3.0000% 1.0000% 360 356
49 3.0000% 1.0000% 360 357
50 3.0000% 1.0000% 360 358
51 3.0000% 1.0000% 360 359
52 3.0000% 1.0000% 360 360
</TABLE>
---------------
(1) The remaining amortizing term is 180 months.
(2) The Group II Mortgage Loans will adjust every six months after their next
Adjustment Date.
(3) The remaining amortizing term is 356 months.
(4) The remaining amortizing term is 358 months.
The fifth through seventh hypothetical Group I Mortgage Loans above
are Mortgage Loans that by their terms have prepayment charges and the 21st
through 52nd hypothetical Group II Mortgage Loans above are Mortgage Loans that
by their terms have prepayment charges.
Based on the foregoing assumptions, the following tables set forth the
percentages of the Original Certificate Principal Balance of the Class A
Certificates and the Mezzanine Certificates that would be outstanding after each
of the dates shown, at various Prepayment Scenarios and the corresponding
weighted average lives.
S-74
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS AF-1
PREPAYMENT SCENARIO
-------------------------------------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
----------------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
December 2001.............. 97 68 27 9 0
December 2002.............. 95 26 0 0 0
December 2003.............. 91 0 0 0 0
December 2004.............. 88 0 0 0 0
December 2005.............. 84 0 0 0 0
December 2006.............. 80 0 0 0 0
December 2007.............. 77 0 0 0 0
December 2008.............. 74 0 0 0 0
December 2009.............. 69 0 0 0 0
December 2010.............. 65 0 0 0 0
December 2011.............. 60 0 0 0 0
December 2012.............. 54 0 0 0 0
December 2013.............. 47 0 0 0 0
December 2014.............. 39 0 0 0 0
December 2015.............. 30 0 0 0 0
December 2016.............. 22 0 0 0 0
December 2017.............. 14 0 0 0 0
December 2018.............. 3 0 0 0 0
December 2019.............. 0 0 0 0 0
December 2020.............. 0 0 0 0 0
December 2021.............. 0 0 0 0 0
December 2022.............. 0 0 0 0 0
December 2023.............. 0 0 0 0 0
December 2024.............. 0 0 0 0 0
December 2025.............. 0 0 0 0 0
December 2026.............. 0 0 0 0 0
December 2027.............. 0 0 0 0 0
December 2028.............. 0 0 0 0 0
December 2029.............. 0 0 0 0 0
December 2030.............. 0 0 0 0 0
Weighted Average Life
(years)
to maturity (1)............ 11.46 1.48 0.80 0.69 0.58
Weighted Average Life
(years)
to Optional
Termination(1)(2).......... 11.46 1.48 0.80 0.69 0.58
</TABLE>
-------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such class of Certificates.
(2) Calculated pursuant to footnote (1) but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans on the earliest
possible Distribution Date on which it is permitted to exercise such
option.
S-75
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS AF-2
PREPAYMENT SCENARIO
-------------------------------------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
----------------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
December 2001.............. 100 100 100 100 80
December 2002.............. 100 100 44 12 0
December 2003.............. 100 89 0 0 0
December 2004.............. 100 59 0 0 0
December 2005.............. 100 38 0 0 0
December 2006.............. 100 22 0 0 0
December 2007.............. 100 12 0 0 0
December 2008.............. 100 2 0 0 0
December 2009.............. 100 0 0 0 0
December 2010.............. 100 0 0 0 0
December 2011.............. 100 0 0 0 0
December 2012.............. 100 0 0 0 0
December 2013.............. 100 0 0 0 0
December 2014.............. 100 0 0 0 0
December 2015.............. 100 0 0 0 0
December 2016.............. 100 0 0 0 0
December 2017.............. 100 0 0 0 0
December 2018.............. 100 0 0 0 0
December 2019.............. 92 0 0 0 0
December 2020.............. 80 0 0 0 0
December 2021.............. 67 0 0 0 0
December 2022.............. 52 0 0 0 0
December 2023.............. 35 0 0 0 0
December 2024.............. 16 0 0 0 0
December 2025.............. 0 0 0 0 0
December 2026.............. 0 0 0 0 0
December 2027.............. 0 0 0 0 0
December 2028.............. 0 0 0 0 0
December 2029.............. 0 0 0 0 0
December 2030.............. 0 0 0 0 0
Weighted Average Life
(years)
to maturity (1)............ 21.99 4.80 2.00 1.64 1.29
Weighted Average Life
(years)
to Optional
Termination(1)(2).......... 21.99 4.80 2.00 1.64 1.29
</TABLE>
-------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such class of Certificates.
(2) Calculated pursuant to footnote (1) but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans on the earliest
possible Distribution Date on which it is permitted to exercise such
option.
S-76
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS AF-3
PREPAYMENT SCENARIO
-------------------------------------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
----------------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
December 2001.............. 100 100 100 100 100
December 2002.............. 100 100 100 100 71
December 2003.............. 100 100 88 59 19
December 2004.............. 100 100 68 49 19
December 2005.............. 100 100 51 34 14
December 2006.............. 100 100 40 26 11
December 2007.............. 100 100 37 25 11
December 2008.............. 100 100 31 22 11
December 2009.............. 100 94 26 19 0
December 2010.............. 100 86 22 16 0
December 2011.............. 100 78 18 13 0
December 2012.............. 100 71 15 4 0
December 2013.............. 100 64 12 0 0
December 2014.............. 100 57 10 0 0
December 2015.............. 100 52 9 0 0
December 2016.............. 100 47 4 0 0
December 2017.............. 100 42 0 0 0
December 2018.............. 100 38 0 0 0
December 2019.............. 100 34 0 0 0
December 2020.............. 100 30 0 0 0
December 2021.............. 100 27 0 0 0
December 2022.............. 100 24 0 0 0
December 2023.............. 100 21 0 0 0
December 2024.............. 100 18 0 0 0
December 2025.............. 97 15 0 0 0
December 2026.............. 81 9 0 0 0
December 2027.............. 63 0 0 0 0
December 2028.............. 42 0 0 0 0
December 2029.............. 19 0 0 0 0
December 2030.............. 0 0 0 0 0
Weighted Average Life
(years)
to maturity (1)............ 27.58 16.62 6.93 5.26 3.21
Weighted Average Life
(years)
to Optional
Termination(1)(2).......... 27.52 12.69 5.37 3.98 2.60
</TABLE>
-------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such class of Certificates.
(2) Calculated pursuant to footnote (1) but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans on the earliest
possible Distribution Date on which it is permitted to exercise such
option.
S-77
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS AF-4
PREPAYMENT SCENARIO
-------------------------------------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
----------------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
December 2001.............. 100 100 100 100 100
December 2002.............. 100 100 100 100 100
December 2003.............. 100 97 93 91 86
December 2004.............. 100 95 90 89 86
December 2005.............. 99 86 73 69 72
December 2006.............. 98 78 56 52 54
December 2007.............. 94 56 26 24 34
December 2008.............. 90 40 13 11 18
December 2009.............. 85 29 6 6 0
December 2010.............. 80 21 3 3 0
December 2011.............. 75 15 2 2 0
December 2012.............. 70 11 1 0 0
December 2013.............. 64 8 1 0 0
December 2014.............. 58 5 0 0 0
December 2015.............. 51 4 0 0 0
December 2016.............. 46 3 0 0 0
December 2017.............. 41 2 0 0 0
December 2018.............. 36 1 0 0 0
December 2019.............. 30 1 0 0 0
December 2020.............. 25 1 0 0 0
December 2021.............. 20 1 0 0 0
December 2022.............. 15 0 0 0 0
December 2023.............. 11 0 0 0 0
December 2024.............. 7 0 0 0 0
December 2025.............. 4 0 0 0 0
December 2026.............. 3 0 0 0 0
December 2027.............. 1 0 0 0 0
December 2028.............. 0 0 0 0 0
December 2029.............. 0 0 0 0 0
December 2030.............. 0 0 0 0 0
Weighted Average Life
(years)
to maturity (1)............ 15.57 8.06 6.16 5.99 6.02
Weighted Average Life
(years)
to Optional
Termination(1)(2).......... 15.57 7.90 5.86 4.95 3.74
</TABLE>
-------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such class of Certificates.
(2) Calculated pursuant to footnote (1) but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans on the earliest
possible Distribution Date on which it is permitted to exercise such
option.
S-78
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS AV-1
PREPAYMENT SCENARIO
-------------------------------------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
----------------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
December 2001.............. 99 83 69 60 49
December 2002.............. 99 68 47 35 21
December 2003.............. 98 56 31 18 6
December 2004.............. 98 45 24 15 6
December 2005.............. 97 38 18 10 4
December 2006.............. 97 32 13 6 2
December 2007.............. 96 27 9 4 1
December 2008.............. 95 23 7 2 0
December 2009.............. 94 19 5 1 0
December 2010.............. 93 16 3 1 0
December 2011.............. 91 13 2 0 0
December 2012.............. 90 11 2 0 0
December 2013.............. 88 9 1 0 0
December 2014.............. 87 8 0 0 0
December 2015.............. 84 6 0 0 0
December 2016.............. 82 5 0 0 0
December 2017.............. 79 4 0 0 0
December 2018.............. 76 3 0 0 0
December 2019.............. 73 3 0 0 0
December 2020.............. 69 2 0 0 0
December 2021.............. 64 2 0 0 0
December 2022.............. 59 1 0 0 0
December 2023.............. 54 1 0 0 0
December 2024.............. 47 0 0 0 0
December 2025.............. 41 0 0 0 0
December 2026.............. 34 0 0 0 0
December 2027.............. 27 0 0 0 0
December 2028.............. 19 0 0 0 0
December 2029.............. 9 0 0 0 0
December 2030.............. 0 0 0 0 0
Weighted Average Life
(years)
to maturity (1)............ 21.97 5.29 2.85 2.05 1.40
Weighted Average Life
(years)
to Optional
Termination(1)(2).......... 21.93 4.96 2.63 1.90 1.30
</TABLE>
-------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such class of Certificates.
(2) Calculated pursuant to footnote (1) but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans on the earliest
possible Distribution Date on which it is permitted to exercise such
option.
S-79
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS M-1
PREPAYMENT SCENARIO
-------------------------------------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
----------------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
December 2001.............. 100 100 100 100 100
December 2002.............. 100 100 100 100 100
December 2003.............. 100 100 100 100 100
December 2004.............. 100 100 57 36 53
December 2005.............. 100 89 41 24 10
December 2006.............. 100 75 30 15 4
December 2007.............. 100 64 22 10 0
December 2008.............. 100 54 16 6 0
December 2009.............. 100 46 12 0 0
December 2010.............. 100 39 8 0 0
December 2011.............. 100 33 4 0 0
December 2012.............. 100 28 0 0 0
December 2013.............. 100 23 0 0 0
December 2014.............. 100 20 0 0 0
December 2015.............. 100 16 0 0 0
December 2016.............. 100 14 0 0 0
December 2017.............. 100 11 0 0 0
December 2018.............. 100 9 0 0 0
December 2019.............. 100 8 0 0 0
December 2020.............. 100 5 0 0 0
December 2021.............. 100 2 0 0 0
December 2022.............. 100 0 0 0 0
December 2023.............. 100 0 0 0 0
December 2024.............. 100 0 0 0 0
December 2025.............. 92 0 0 0 0
December 2026.............. 77 0 0 0 0
December 2027.............. 61 0 0 0 0
December 2028.............. 42 0 0 0 0
December 2029.............. 21 0 0 0 0
December 2030.............. 0 0 0 0 0
Weighted Average Life
(years)
to maturity (1)............ 27.49 9.93 5.39 4.46 4.26
Weighted Average Life
(years)
to Optional
Termination(1)(2).......... 27.42 9.15 4.94 4.12 3.90
</TABLE>
-------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such class of Certificates.
(2) Calculated pursuant to footnote (1) but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans on the earliest
possible Distribution Date on which it is permitted to exercise such
option.
S-80
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS M-2
PREPAYMENT SCENARIO
-------------------------------------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
----------------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
December 2001.............. 100 100 100 100 100
December 2002.............. 100 100 100 100 100
December 2003.............. 100 100 100 100 100
December 2004.............. 100 100 57 36 19
December 2005.............. 100 89 41 24 7
December 2006.............. 100 75 30 15 0
December 2007.............. 100 64 22 6 0
December 2008.............. 100 54 16 0 0
December 2009.............. 100 46 10 0 0
December 2010.............. 100 39 3 0 0
December 2011.............. 100 33 0 0 0
December 2012.............. 100 28 0 0 0
December 2013.............. 100 23 0 0 0
December 2014.............. 100 20 0 0 0
December 2015.............. 100 16 0 0 0
December 2016.............. 100 14 0 0 0
December 2017.............. 100 9 0 0 0
December 2018.............. 100 5 0 0 0
December 2019.............. 100 2 0 0 0
December 2020.............. 100 0 0 0 0
December 2021.............. 100 0 0 0 0
December 2022.............. 100 0 0 0 0
December 2023.............. 100 0 0 0 0
December 2024.............. 100 0 0 0 0
December 2025.............. 92 0 0 0 0
December 2026.............. 77 0 0 0 0
December 2027.............. 61 0 0 0 0
December 2028.............. 42 0 0 0 0
December 2029.............. 21 0 0 0 0
December 2030.............. 0 0 0 0 0
Weighted Average Life
(years)
to maturity (1)............ 27.48 9.74 5.24 4.25 3.80
Weighted Average Life
(years)
to Optional
Termination(1)(2).......... 27.42 9.15 4.91 4.00 3.62
</TABLE>
-------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such class of Certificates.
(2) Calculated pursuant to footnote (1) but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans on the earliest
possible Distribution Date on which it is permitted to exercise such
option.
S-81
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS M-3
PREPAYMENT SCENARIO
-------------------------------------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
----------------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
December 2001.............. 100 100 100 100 100
December 2002.............. 100 100 100 100 100
December 2003.............. 100 100 100 100 100
December 2004.............. 100 100 57 36 12
December 2005.............. 100 89 41 22 0
December 2006.............. 100 75 30 4 0
December 2007.............. 100 64 18 0 0
December 2008.............. 100 54 6 0 0
December 2009.............. 100 46 0 0 0
December 2010.............. 100 39 0 0 0
December 2011.............. 100 33 0 0 0
December 2012.............. 100 28 0 0 0
December 2013.............. 100 21 0 0 0
December 2014.............. 100 13 0 0 0
December 2015.............. 100 7 0 0 0
December 2016.............. 100 1 0 0 0
December 2017.............. 100 0 0 0 0
December 2018.............. 100 0 0 0 0
December 2019.............. 100 0 0 0 0
December 2020.............. 100 0 0 0 0
December 2021.............. 100 0 0 0 0
December 2022.............. 100 0 0 0 0
December 2023.............. 100 0 0 0 0
December 2024.............. 100 0 0 0 0
December 2025.............. 92 0 0 0 0
December 2026.............. 77 0 0 0 0
December 2027.............. 61 0 0 0 0
December 2028.............. 42 0 0 0 0
December 2029.............. 16 0 0 0 0
December 2030.............. 0 0 0 0 0
Weighted Average Life
(years)
to maturity (1)............ 27.43 9.27 4.96 3.99 3.48
Weighted Average Life
(years)
to Optional
Termination(1)(2).......... 27.41 9.11 4.88 3.93 3.43
</TABLE>
-------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such class of Certificates.
(2) Calculated pursuant to footnote (1) but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans on the earliest
possible Distribution Date on which it is permitted to exercise such
option.
S-82
<PAGE>
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the Certificate Principal Balances of the Class C Certificates, the
Class M-3 Certificates and the Class M-2 Certificates have been reduced to zero,
the yield to maturity on the Class M-1 Certificates will become extremely
sensitive to losses on the Mortgage Loans (and the timing thereof) that are
covered by subordination, because the entire amount of any Realized Losses (to
the extent not covered by Net Monthly Excess Cashflow) will be allocated to the
Class M-1 Certificates. If the Certificate Principal Balances of the Class C
Certificates and the Class M-3 Certificates have been reduced to zero, the yield
to maturity on the Class M-2 Certificates will become extremely sensitive to
losses on the Mortgage Loans (and the timing thereof) that are covered by
subordination, because the entire amount of any Realized Losses (to the extent
not covered by Net Monthly Excess Cashflow) will be allocated to the Class M-2
Certificates. If the Certificate Principal Balance of the Class C Certificates
has been reduced to zero, the yield to maturity on the Class M-3 Certificates
will become extremely sensitive to losses on the Mortgage Loans (and the timing
thereof) that are covered by subordination, because the entire amount of any
Realized Losses (to the extent not covered by Net Monthly Excess Cashflow) will
be allocated to the Class M-3 Certificates. The initial undivided interests in
the Trust evidenced by the Class M-1 Certificates, the Class M-2 Certificates,
the Class M-3 Certificates and the Class C Certificates are approximately 3.75%,
approximately 3.50%, approximately 1.75% and approximately 2.00%, respectively.
Investors in the Mezzanine Certificates should fully consider the risk that
Realized Losses on the Mortgage Loans could result in the failure of such
investors to fully recover their investments. In addition, once Realized Losses
have been allocated to the Mezzanine Certificates, such amounts with respect to
such Certificates will no longer accrue interest and will not be reinstated
thereafter and no amounts in respect thereof will be distributable to the
Holders of the Mezzanine Certificates. However, Allocated Realized Loss Amounts
may be paid to the holders of the Mezzanine Certificates from Net Monthly Excess
Cashflow in the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
Unless the Certificate Principal Balance of the Class A Certificates
has been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until the Stepdown Date or during any period in which a
Trigger Event is in effect. As a result, the weighted average lives of the
Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a PRO RATA basis among the Class A
Certificates and Mezzanine Certificates. As a result of the longer weighted
average lives of the Mezzanine Certificates, the holders of such Certificates
have a greater risk of suffering a loss on their investments.
Further, because a Trigger Event is based on delinquencies and not losses, it is
possible for the Mezzanine Certificates to receive no principal distributions
(unless the Certificate Principal Balance of the Class A Certificates has been
reduced to zero) on and after the Stepdown Date even if no losses have occurred
on the Mortgage Pool. For additional considerations relating to the yield on the
Mezzanine Certificates, we refer you to "Yield and Maturity Considerations" in
the prospectus.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase of the Mortgage Loans transferred to the Trust.
FEDERAL INCOME TAX CONSEQUENCES
One or more elections will be made to treat designated portions of the
Trust (exclusive of the Reserve Fund) as a real estate mortgage investment
conduit (a "REMIC") for federal income tax purposes. Upon the issuance of the
Offered Certificates, Thacher Proffitt & Wood, counsel to the Depositor, will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the Pooling Agreement, for federal income tax purposes, each REMIC
elected by the Trust will qualify as a REMIC under Sections 860A through 860G of
the Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, (i) the Residual Certificates will
consist of components, each of which will represent the sole class of "residual
interests" in each REMIC elected by the Trust and (ii) the Offered Certificates
(exclusive of any right, if any, of the holder of such Certificates to receive
payments from the Reserve Fund in respect of the Net WAC Rate Carryover Amount),
the Class C Certificates and the Class P Certificates will represent the
"regular interests" in, and which generally will be treated as debt instruments
of, a REMIC. See "Federal Income Tax Consequences--REMICs--Classification of
REMICs" in the prospectus.
S-83
<PAGE>
Each holder of a Class AV-1 Certificate or Mezzanine Certificate is
deemed to own an undivided beneficial ownership interest in two assets, a REMIC
regular interest and the right to receive payments from the Reserve Fund in
respect of the Net WAC Rate Carryover Amount. The Reserve Fund is not an asset
of any REMIC. The treatment of amounts received by a Class AV-1
Certificateholder or a Mezzanine Certificateholder under such
Certificateholder's right to receive the Net WAC Rate Carryover Amount will
depend on the portion, if any, of such Certificateholder's purchase price
allocable thereto. Under the REMIC Regulations, each holder of a Class AV-1
Certificate or a Mezzanine Certificate must allocate its purchase price for the
Class AV-1 Certificate or Mezzanine Certificate between its undivided interest
in the regular interest of the related REMIC and its undivided interest in the
right to receive payments from the Reserve Fund in respect of the Net WAC Rate
Carryover Amount in accordance with the relative fair market values of each
property right. The Trust Administrator intends to treat payments made to the
holders of the Class AV-1 Certificates and the Mezzanine Certificates with
respect to the Net WAC Rate Carryover Amount as includible in income based on
the regulations relating to notional principal contracts (the "Notional
Principal Contract Regulations"). The OID Regulations provide that the Trust's
allocation of the issue price is binding on all holders unless the holder
explicitly discloses on its tax return that its allocation is different from the
Trust's allocation. For tax reporting purposes, the Trust Administrator intends
to treat the right to receive payments from the Reserve Fund in respect of Net
WAC Rate Carryover Amounts as having a DE MINIMIS value. Under the REMIC
Regulations, the Trust Administrator is required to account for the REMIC
regular interest and the right to receive payments from the Reserve Fund in
respect of the Net WAC Rate Carryover Amount as discrete property rights.
Holders of the Class AV-1 Certificates and the Mezzanine Certificates are
advised to consult their own tax advisors regarding the allocation of issue
price, timing, character and source of income and deductions resulting from the
ownership of such Certificates. Treasury regulations have been promulgated under
Section 1275 of the Code generally providing for the integration of a
"qualifying debt instrument" with a hedge if the combined cash flows of the
components are substantially equivalent to the cash flows on a variable rate
debt instrument. However, such regulations specifically disallow integration of
debt instruments subject to Section 1272(a)(6) of the Code. Therefore, holders
of the Class AV-1 Certificates and the Mezzanine Certificates will be unable to
use the integration method provided for under such regulations with respect to
those Certificates. If the Trust Administrator's treatment of payments of the
Net WAC Rate Carryover Amount is respected, ownership of the right to the Net
WAC Rate Carryover Amount will entitle the owner to amortize the separate price
paid for the right to the Net WAC Rate Carryover Amount under the Notional
Principal Contract Regulations.
Upon the sale of a Class AV-1 Certificate or Mezzanine Certificate the
amount of the sale allocated to the selling Certificateholder's right to receive
payments from the Reserve Fund in respect of the Net WAC Rate Carryover Amount
would be considered a "termination payment" under the Notional Principal
Contract Regulations allocable to the related Class AV-1 Certificate or
Mezzanine Certificate, as the case may be. A Class AV-1 Certificateholder or
Mezzanine Certificateholder will have gain or loss from such a termination of
the right to receive payments from the Reserve Fund in respect of the Net WAC
Rate Carryover Amount equal to (i) any termination payment it received or is
deemed to have received minus (ii) the unamortized portion of any amount paid
(or deemed paid) by the Certificateholder upon entering into or acquiring its
interest in the right to receive payments from the Reserve Fund in respect of
the Net WAC Rate Carryover Amount.
Gain or loss realized upon the termination of the right to receive
payments from the Reserve Fund in respect of the Net WAC Cap Carryover Amount
will generally be treated as capital gain or loss. Moreover, in the case of a
bank or thrift institution, Code Section 582(c) would likely not apply to treat
such gain or loss as ordinary.
For federal income tax reporting purposes, the Class A Certificates
and the Mezzanine Certificates will not be treated as having been issued with
original issue discount. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount, premium and market
discount, if any, for federal income tax purposes will be based on the
assumption that subsequent to the date of any determination the Mortgage Loans
will prepay at 120% of the Prepayment Assumption (in the case of the Group I
Mortgage Loans) and at the Prepayment Assumption (in the case of the Group II
Mortgage Loans). No representation is made that the Mortgage Loans will prepay
at such rate or at any other rate. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID Regulations") under Sections 1271 to 1275 of the Code generally addressing
the treatment of debt instruments issued with original issue discount.
Purchasers of the Offered Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Offered Certificates. In addition, there is
considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that
S-84
<PAGE>
provide for payments based on an adjustable rate such as the Class AV-1
Certificates and the Mezzanine Certificates. Because of the uncertainty
concerning the application of Section 1272(a)(6) of the Code to such
Certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Offered Certificates should be treated as issued with original issue
discount or should be governed by the rules applicable to debt instruments
having contingent payments or by some other method not yet set forth in
regulations. Prospective purchasers of the Offered Certificates are advised to
consult their tax advisors concerning the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the Offered Certificates, if such Certificates are
required to be treated as issued with original issue discount, generally would
be to report all income with respect to such Certificates as original issue
discount for each period, computing such original issue discount (i) by assuming
that the value of the applicable index will remain constant for purposes of
determining the original yield to maturity of, and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "Federal Income Tax Consequences--
REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount" in the prospectus.
Certain of the Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a Certificate
will be treated as holding such Certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of such Certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Federal Income Tax Consequences-- REMICs--Taxation of Owners of
REMIC Regular Certificates--Premium" in the prospectus.
With respect to the Class AV-1 Certificates and the Mezzanine
Certificates, this paragraph is relevant to such Certificates exclusive of the
rights of the holders of such Certificates to receive certain payments in
respect of the Net WAC Rate Carryover Amount. The Offered Certificates will be
treated as assets described in Section 7701(a)(19)(C) of the Code and "real
estate assets" under Section 856(c)(4)(A) of the Code, generally in the same
proportion that the assets in the Trust would be so treated. In addition,
interest on the Offered Certificates will be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the Code,
generally to the extent that the Offered Certificates are treated as "real
estate assets" under Section 856(c)(4)(A) of the Code. The Offered Certificates
will also be treated as "qualified mortgages" under Section 860G(a)(3) of the
Code. See "Federal Income Tax Consequences-- REMICs--Characterization of
Investments in REMIC Certificates" in the prospectus.
The holders of the Class AV-1 Certificates and the Mezzanine
Certificates will be required to include in income interest on such Certificates
in accordance with the accrual method of accounting. As noted above, each holder
of a Class AV-1 Certificate or a Mezzanine Certificate will be required to
allocate a portion of the purchase price paid for the Certificates to the right
to receive payments from the Reserve Fund in respect of the Net WAC Rate
Carryover Amount. The value of the right to receive any such Net WAC Rate
Carryover Amount is a question of fact which could be subject to differing
interpretations. Because the Net WAC Rate Carryover Amount is treated as a
separate right of the Class AV-1 Certificates and the Mezzanine Certificates not
payable by any REMIC elected by the Trust, such right will not be treated as a
qualifying asset for any Certificateholder that is a mutual savings bank,
domestic building and loan association, real estate investment trust, or real
estate mortgage investment conduit and any amounts received from the Reserve
Fund will not be qualifying real estate income for real estate investment
trusts.
It is not anticipated that any REMIC elected by the Trust will engage
in any transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on any REMIC elected by the Trust, such tax will be borne (i) by
the Trustee, if the Trustee has breached its obligations with respect to REMIC
compliance under the Pooling Agreement, (i) by the Trust Administrator, if the
Trust Administrator has breached its obligations with respect to REMIC
compliance under the Pooling Agreement, (iii) by the Master Servicer, if the
Master Servicer has breached its obligations with respect to REMIC compliance
under the Pooling Agreement and (iv)
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<PAGE>
otherwise by the Trust, with a resulting reduction in amounts otherwise
distributable to the holders of the related Offered Certificates. See
"Description of the Securities" and "Federal Income Tax Consequences
--REMICs--Prohibited Transactions and Other Possible REMIC Taxes" in the
prospectus.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trust Administrator or the Master Servicer.
See "Federal Income Tax Consequences--REMICs-- Reporting and Other
Administrative Matters" in the prospectus.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Federal Income Tax
Consequences--REMICs" in the prospectus.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company, whether through its general or separate accounts, or any other person
investing plan assets of a Plan, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Offered Certificates by or on behalf
of, or with Plan assets of, a Plan may qualify for exemptive relief under the
Underwriters' Exemption, as currently in effect and as described, in part, under
"Considerations for Benefit Plan Investors--Possible Exemptive Relief" in the
prospectus and as recently amended. The Underwriters' Exemption relevant to the
Offered Certificates was granted by the Department of Labor on July 27, 1997 as
Prohibited Transaction Exemption ("PTCE") 97-34 at 62 F.R. 39021. On November
13, 2000, the Department of Labor amended the Underwriter's Exemption to permit
subordinated certificates, such as the Mezzanine Certificates, to be purchased
and held by or on behalf of, or with ERISA plan assets of, an ERISA plan if
those Certificates are rated at least "BBB-" (or its equivalent) by Standard &
Poor's, Fitch or Moody's Investors Service, Inc. at the time of purchase. See
DOL Prohibited Transaction Exemption 2000-58, 65 Fed. Reg. 67765 (November 13,
2000). Accordingly, the Mezzanine Certificates may be purchased and held by or
on behalf of, or with ERISA plan assets of, any ERISA plan if the Mezzanine
Certificates are rated at least "BBB-" (or its equivalent) at the time of
purchase. However, the Underwriters' Exemption, as amended, contains a number of
conditions which must be met for the exemption to apply, including the
requirement that the investing Plan must be an "accredited investor" as defined
in Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission
under the Securities Act. A fiduciary of a Plan contemplating purchasing an
Offered Certificate must make its own determination that the conditions set
forth in the Underwriters' Exemption will be satisfied with respect to the those
Certificates.
Each beneficial owner of a Mezzanine Certificates or any interest
therein shall be deemed to have represented, by virtue of its acquisition or
holding of that certificate or interest therein, that either (i) it is not a
plan investor, (ii) it has acquired and is holding such Mezzanine Certificates
in reliance on the exemption, and that it understands that there are certain
conditions to the availability of the exemption, including that the Mezzanine
Certificates must be rated, at the time of purchase, not lower than "BBB-" (or
its equivalent) by Standard & Poor's, Fitch or Moody's Investors Service, Inc.
or (iii) (1) it is an insurance company, (2) the source of funds used to acquire
or hold the certificate or interest therein is an "insurance company general
account," as such term is defined in PTCE 95-60, and (3) the conditions in
Sections I and III of PTCE 95-60 have been satisfied.
If any Mezzanine Certificate or any interest therein is acquired or
held in violation of the conditions described in the preceding paragraph, the
next preceding permitted beneficial owner will be treated as the beneficial
owner of that Mezzanine Certificate, retroactive to the date of transfer to the
purported beneficial owner. Any purported beneficial owner whose acquisition or
holding of any such certificate or interest therein was effected in violation of
the conditions described in the preceding paragraph shall indemnify and hold
harmless the Depositor, the Trust Administrator, the Trustee, the Master
Servicer, any subservicer, and the Trust from and against any and all
liabilities, claims, costs or expenses incurred by those parties as a result of
that acquisition or holding.
Any fiduciary or other investor of Plan assets that proposes to
acquire or hold the Offered Certificates on behalf of or with Plan assets of any
Plan should consult with its counsel with respect to: (i) whether, with respect
to the Offered Certificates, the specific and general conditions and the other
requirements in the Underwriters' Exemption would be satisfied and (ii) the
potential applicability of the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code to the proposed investment. See "Considerations for
Benefit Plan Investors" in the prospectus.
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<PAGE>
The sale of any of the Offered Certificates to a Plan is in no respect
a representation by the Depositor or the related Underwriter that an investment
in the Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Offered Certificates is appropriate for Plans generally or any particular
Plan.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates and the Class M-1 Certificates will
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower
than the second highest rating category by a Rating Agency, and, as such, will
be legal investments for certain entities to the extent provided in SMMEA.
SMMEA, however, provides for state limitation on the authority of such entities
to invest in "mortgage related securities" provided that such restrictive
legislation was enacted prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA. The Class M-2
Certificates and the Class M-3 Certificates will not constitute "mortgage
related securities" for purposes of SMMEA.
The Depositor makes no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated December 12, 2000 (the "Underwriting Agreement"), among the
Underwriters named below, the Seller and the Depositor, the Depositor has agreed
to sell to the Underwriters, and the Underwriters have agreed to purchase from
the Depositor, the principal amount of the Offered Certificates (the
"Underwritten Certificates") set forth opposite their respective names.
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL ORIGINAL ORIGINAL ORIGINAL
UNDERWRITERS CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE
------------ PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
BALANCE OF THE BALANCE OF THE BALANCE OF THE BALANCE OF THE BALANCE OF THE
CLASS AF-1 CLASS AF-2 CLASS AF-3 CLASS AF-4 CLASS AV-1
CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Deutsche Bank Securities Inc.......... $ 3,362,000 $ 3,680,000 $ 4,496,000 $ 1,460,000 $165,006,000
Banc of America Securities LLC. ...... $ 3,362,000 $ 3,677,000 $ 4,494,000 $ 1,460,000 $165,006,000
Chase Securities Inc.................. $ 3,362,000 $ 3,677,000 $ 4,494,000 $ 1,460,000 $165,006,000
Credit Suisse First Boston Corporation $ 3,362,000 $ 3,677,000 $ 4,494,000 $ 1,460,000 $165,006,000
Greenwich Capital Markets, Inc. ...... $ 3,362,000 $ 3,677,000 $ 4,494,000 $ 1,460,000 $165,006,000
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL ORIGINAL
CERTIFICATE CERTIFICATE CERTIFICATE
UNDERWRITERS PRINCIPAL PRINCIPAL PRINCIPAL
------------ BALANCE OF THE BALANCE OF THE BALANCE OF THE
CLASS M-1 CLASS M-2 CLASS M-3
CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------
<S> <C> <C> <C>
Deutsche Bank Securities Inc.......... $ 7,500,000 $ 7,000,000 $ 3,500,000
Banc of America Securities LLC. ...... $ 7,500,000 $ 7,000,000 $ 3,500,000
Chase Securities Inc. ................ $ 7,500,000 $ 7,000,000 $ 3,500,000
Credit Suisse First Boston Corporation $ 7,500,000 $ 7,000,000 $ 3,500,000
Greenwich Capital Markets, Inc. ...... $ 7,500,000 $ 7,000,000 $ 3,500,000
</TABLE>
The Depositor has been advised by the Underwriters that they propose
initially to offer the Underwritten Certificates of each class to the public in
Europe and the United States at the offering price set forth in this prospectus
supplement and to certain dealers at such price less a selling concession, not
in excess of the percentage set forth in the table below of the Certificate
Principal Balance of the related Class of Underwritten Certificates.
The Underwriters may allow and such dealers may reallow a reallowance discount,
not in excess of the percentage set forth in the table below of the Certificate
Principal Balance of the related Class of Underwritten Certificates, to certain
other dealers. After the initial public offering, the public offering price,
such concessions and such discounts may be changed.
<TABLE>
<CAPTION>
CLASS OF CERTIFICATES SELLING CONCESSION REALLOWANCE DISCOUNT
--------------------- ------------------ --------------------
<S> <C> <C>
Class AF-1............................. 0.060% 0.040%
Class AF-2............................. 0.090% 0.075%
Class AF-3............................. 0.160% 0.100%
Class AF-4............................. 0.210% 0.125%
Class AV-1............................. 0.120% 0.090%
Class M-1.............................. 0.220% 0.125%
Class M-2.............................. 0.300% 0.125%
Class M-3.............................. 0.390% 0.125%
</TABLE>
Until the distribution of the Underwritten Certificates is completed,
rules of the SEC may limit the ability of the Underwriters and certain selling
group members to bid for and purchase the Underwritten Certificates. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Underwritten Certificates. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Underwritten Certificates.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Depositor nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the prices of the Underwritten
Certificates. In addition, neither the Depositor nor any of the Underwriters
makes any representation that the Underwriters will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
S-88
<PAGE>
The Depositor has been advised by each Underwriter that it intends to
make a market in the Underwritten Certificates but no Underwriter has any
obligation to do so. There can be no assurance that a secondary market for the
Underwritten Certificates will develop or, if it does develop, that it will
continue.
The Depositor has agreed to indemnify the Underwriters against, or
make contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Seller, the Master Servicer and the Depositor by Thacher
Proffitt & Wood, New York, New York. Certain legal matters will be passed upon
for the Underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A Certificates be rated "AAA" by Fitch, Inc. ("Fitch") and Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), and "Aaa" by
Moody's Investors Service, Inc. ("Moody's" and, together with Fitch and S&P, the
"Rating Agencies"), that the Class M-1 Certificates be rated "AA" by Fitch and
S&P, and "Aa2" by Moody's, that the Class M-2 Certificates be rated "A" by Fitch
and S&P, and "A2" by Moody's, and that the Class M-3 Certificates be rated "BBB"
by Fitch and S&P, and "Baa1" by Moody's.
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans, the payment of the
Net WAC Rate Carryover Amount or the possibility that a holder of an Offered
Certificate might realize a lower than anticipated yield.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Offered Certificates by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to such Offered
Certificates.
S-89
<PAGE>
<TABLE>
<CAPTION>
INDEX OF DEFINED TERMS
Page
----
<S> <C>
Accrual Period.................................................................................................S-61
Adjustment Date................................................................................................S-19
Advance........................................................................................................S-49
Advancing Person...............................................................................................S-49
Allocated Realized Loss Amount.................................................................................S-62
Assumed Final Distribution Date................................................................................S-52
Available Funds................................................................................................S-56
Basic Principal Distribution Amount............................................................................S-62
beneficial owner...............................................................................................S-53
Book-Entry Certificates........................................................................................S-52
Cedelbank Participants.........................................................................................S-54
Certificate Index..............................................................................................S-66
Certificate Margin.............................................................................................S-66
Certificate Owner..............................................................................................S-52
Certificate Principal Balance..................................................................................S-62
Certificateholder..............................................................................................S-53
Certificates...................................................................................................S-52
Class A Certificates......................................................................................S-3, S-52
Class A Principal Distribution Amount..........................................................................S-62
Class M-1 Principal Distribution Amount........................................................................S-62
Class M-2 Principal Distribution Amount........................................................................S-62
Class M-3 Principal Distribution Amount........................................................................S-62
Class P Certificates............................................................................................S-4
Clearstream....................................................................................................S-52
Code......................................................................................................S-9, S-81
Collection Account.............................................................................................S-48
Commission.....................................................................................................S-69
Compensating Interest..........................................................................................S-49
Cooperative....................................................................................................S-54
CPR............................................................................................................S-70
Credit Enhancement Percentage..................................................................................S-63
Cut-off Date Principal Balance.................................................................................S-18
Definitive Certificate.........................................................................................S-53
Delayed First Adjustment Mortgage Loan.........................................................................S-19
Deleted Mortgage Loan..........................................................................................S-48
Delinquent.....................................................................................................S-63
Determination Date.............................................................................................S-49
Distribution Account...........................................................................................S-48
Distribution Date..............................................................................................S-52
DTC............................................................................................................S-52
DTC Participants...............................................................................................S-53
Due Date.......................................................................................................S-20
Due Period.....................................................................................................S-63
Euroclear......................................................................................................S-52
Euroclear Operator.............................................................................................S-54
Euroclear Participants.........................................................................................S-54
European Depositaries..........................................................................................S-53
Extra Principal Distribution Amount............................................................................S-63
Financial Intermediary.........................................................................................S-53
Fitch.....................................................................................................S-9, S-87
Formula Rate...................................................................................................S-66
Full Documentation.............................................................................................S-43
Global Securities...............................................................................................S-1
Gross Margin...................................................................................................S-19
Group I Available Funds........................................................................................S-56
Group I Basic Principal Distribution Amount....................................................................S-63
Group I Class A Principal Distribution Amount..................................................................S-63
Group I Extra Principal Distribution Amount....................................................................S-63
Group I Interest Remittance Amount.............................................................................S-63
Group I Mortgage Loans....................................................................................S-4, S-18
Group I Principal Distribution Amount..........................................................................S-64
Group II Available Funds.......................................................................................S-56
Group II Basic Principal Distribution Amount...................................................................S-63
Group II Class A Principal Distribution Amount.................................................................S-63
Group II Extra Principal Distribution Amount...................................................................S-63
Group II Interest Remittance Amount............................................................................S-64
Group II Mortgage Loans...................................................................................S-4, S-18
Group II Principal Distribution Amount.........................................................................S-64
Index..........................................................................................................S-19
Initial Periodic Rate Cap......................................................................................S-19
IRS............................................................................................................S-82
LBFC...........................................................................................................S-38
LIBOR Business Day.............................................................................................S-67
LIBOR Determination Date.......................................................................................S-67
Limited Doc....................................................................................................S-43
Liquidated Mortgage Loan.......................................................................................S-65
Loan Group......................................................................................................S-4
Lockout Certificate Percentage.................................................................................S-64
Lockout Distribution Percentage................................................................................S-64
Long Beach.....................................................................................................S-42
Maximum Cap....................................................................................................S-66
Maximum Loan Rate..............................................................................................S-19
Mezzanine Certificates.........................................................................................S-52
Minimum Loan Rate..............................................................................................S-19
Monthly Interest Distributable Amount..........................................................................S-64
Moody's...................................................................................................S-9, S-87
Mortgage.......................................................................................................S-18
Mortgage Loan Purchase Agreement...............................................................................S-18
Mortgage Loan Schedule.........................................................................................S-47
Mortgage Loans............................................................................................S-4, S-18
Mortgage Pool..................................................................................................S-18
Mortgage Rate..................................................................................................S-18
Mortgaged Property.............................................................................................S-18
Net Liquidation Proceeds.......................................................................................S-65
Net Monthly Excess Cashflow....................................................................................S-64
Net WAC Rate...................................................................................................S-66
Net WAC Rate Carryover Amount..................................................................................S-67
Notional Principal Contract Regulations........................................................................S-82
Offered Certificates...........................................................................................S-52
OID Regulations................................................................................................S-82
S-90
<PAGE>
Old Long Beach.................................................................................................S-38
Optional Termination Date......................................................................................S-51
Original Certificate Principal Balance.........................................................................S-62
Overcollateralization Deficiency Amount........................................................................S-64
Overcollateralization Release Amount...........................................................................S-64
Overcollateralization Target Amount............................................................................S-65
Overcollateralized Amount......................................................................................S-65
Pass-Through Rate..............................................................................................S-65
Periodic Rate Cap..............................................................................................S-19
Plan...........................................................................................................S-84
PMI Insurer....................................................................................................S-59
PMI Insurer Fee................................................................................................S-65
PMI Insurer Fee Rate...........................................................................................S-65
PMI Mortgage Loans.............................................................................................S-59
PMI Policy.....................................................................................................S-59
Pool Balance...................................................................................................S-18
Pooling and Servicing Agreement................................................................................S-18
Prepayment Assumption..........................................................................................S-70
Prepayment Interest Shortfall..................................................................................S-50
Prepayment Period..............................................................................................S-65
Prepayment Scenarios...........................................................................................S-70
Principal Balance..............................................................................................S-18
Principal Remittance Amount....................................................................................S-65
PTCE...........................................................................................................S-84
Purchase Price.................................................................................................S-47
Qualified Substitute Mortgage Loan.............................................................................S-47
Rating Agencies................................................................................................S-87
Realized Loss..................................................................................................S-65
Record Date....................................................................................................S-52
Reference Banks................................................................................................S-67
Related Documents..............................................................................................S-47
Relevant Depositary............................................................................................S-53
Relief Act.....................................................................................................S-15
REMIC..........................................................................................................S-81
Reorganization.................................................................................................S-38
Reserve Fund...................................................................................................S-66
Reserve Interest Rate..........................................................................................S-67
Residual Certificates..........................................................................................S-52
Rules..........................................................................................................S-53
S&P.......................................................................................................S-9, S-87
Servicing Advance..............................................................................................S-49
Servicing Fee..................................................................................................S-49
Servicing Fee Rate.............................................................................................S-49
Six-Month LIBOR................................................................................................S-19
SMMEA.....................................................................................................S-9, S-85
Stated Income..................................................................................................S-43
Stepdown Date..................................................................................................S-65
Structuring Assumptions........................................................................................S-70
Subordinate Certificates.......................................................................................S-52
Substitution Adjustment........................................................................................S-47
Telerate Page 3750.............................................................................................S-67
Termination Price..............................................................................................S-51
Terms and Conditions...........................................................................................S-54
Trigger Event..................................................................................................S-65
Trust..........................................................................................................S-18
U.S. Person.....................................................................................................S-3
Underwriters...................................................................................................S-17
Underwriting Agreement.........................................................................................S-85
Underwritten Certificates......................................................................................S-85
Unpaid Interest Shortfall Amount...............................................................................S-65
Vector.........................................................................................................S-70
WM.............................................................................................................S-39
</TABLE>
S-91
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Class A Certificates and
the Mezzanine Certificates will be offered globally (the "Global Securities")
and will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of DTC, Clearstream or
Euroclear. The Global Securities will be tradable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and
DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities 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 Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream 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 Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. 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 Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
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<PAGE>
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER.
When Global Securities are to be transferred from the account of a DTC
Participant to the account of a Clearstream Participant or a Euroclear
Participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream Participant or Euroclear Participant at least one business
day prior to settlement. Clearstream or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from and
including the last 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 Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Clearstream or Euroclear cash debt will be valued
instead as of the actual settlement date.
Clearstream 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 Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream 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, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream 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 Securities
to the respective European Depositary for the benefit of Clearstream
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 CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
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
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
I-2
<PAGE>
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
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 Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream 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 Clearstream Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that 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 OR FORM W-8BEN). Beneficial
owners of Global Securities 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) or Form W-8BEN (Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding). If the information shown on Form W-8
or Form W-8BEN changes, a new Form W-8 or Form W-8BEN must be filed within 30
days of such change. After December 31, 2000, only Form W-8BEN will be
acceptable.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224 OR FORM W-8ECI). A non-U.S. Person, including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, 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) or Form W-8ECI (Certificate of Foreign
Person's Claim for Exemption from Withholding on Income Effectively Connected
with the Conduct of a Trade or Business in the United States). After December
31, 2000, only Form W-8ECI will be acceptable.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001 OR FORM W-8BEN). Non-U.S. Persons that are Certificate
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) or Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form 1001 or Form W-8BEN may be filed by the Certificate Owners or
his agent. After December 31, 2000, only Form W-8BEN will be acceptable.
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 Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the books
of the clearing agency). Form W-8, Form 1001 and Form 4224 are effective until
December 31, 2000. Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar year from the date such form is signed.
I-3
<PAGE>
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the Trust and one or more United States persons have authority
to control all substantial decisions of the Trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-4
<PAGE>
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
LONG BEACH SECURITIES CORP.
Depositor
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 OF THIS
PROSPECTUS AND IN THE PROSPECTUS SUPPLEMENT.
THE PROSPECTUS TOGETHER WITH THE ACCOMPANYING PROSPECTUS SUPPLEMENT WILL
CONSTITUTE THE FULL PROSPECTUS.
THE SECURITIES:
Long Beach Securities Corp., as depositor, will sell the securities, which may
be in the form of mortgage pass-through certificates or mortgage-backed notes.
Each issue of securities will have its own series designation and will evidence
either:
o the ownership of trust fund assets, or
o debt obligations secured by trust fund assets.
THE TRUST FUND AND ITS ASSETS
The assets of a trust fund will primarily include any combination of various
types of one- to four-family residential first and junior lien mortgage loans,
multifamily first and junior mortgage loans, commercial first and junior
mortgage loans, mixed-use residential and commercial first and junior mortgage
loans, home equity lines of credit, cooperative apartment loans, manufactured
housing conditional sales contracts and installment loan agreements, home
improvement installment sales contracts and installment loan agreements or home
equity revolving lines of credit, including partial balances of those lines of
credit or beneficial interests in those lines of credit.
CREDIT ENHANCEMENT
The assets of the trust fund for a series of securities may also include a
financial guaranty insurance policy, pool insurance policies, letters of credit,
reserve funds or currency or interest rate exchange agreements or any
combination of credit support. Credit enhancement may also be provided by means
of subordination of one or more classes of securities, cross-collateralization
or by overcollateralization.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the securities may be made through one or more different methods,
including through underwriters as described in "Methods of Distribution" in this
prospectus and in the related prospectus supplement.
The date of this Prospectus is December 12, 2000.
<PAGE>
TABLE OF CONTENTS
Page
RISK FACTORS.................................................................3
DESCRIPTION OF THE TRUST FUNDS..............................................10
Description of the Mortgage Assets to be Included in
a Trust Fund.........................................................11
Description of the Pre-Funding Account for the
Purchase of Additional Mortgage Loans................................21
THE DEPOSITOR...............................................................22
USE OF PROCEEDS.............................................................22
YIELD AND MATURITY CONSIDERATIONS...........................................22
Maturity and Weighted Average Life......................................26
THE DEPOSITOR'S MORTGAGE LOAN PURCHASE PROGRAM..............................30
Underwriting Standards..................................................30
Qualifications of Originators and Mortgage Loan
Sellers..............................................................32
Representations by or on behalf of Mortgage Loan
Sellers; Remedies for Breach of Representation.......................32
DESCRIPTION OF THE SECURITIES...............................................34
Assignment of Trust Fund Assets; Review of Files by
Trustee..............................................................36
Representations and Warranties; Repurchases.............................38
Establishment of Collection Account; Deposits to
Collection Account In Respect of Trust Fund
Assets...............................................................41
Deposits to Distribution Account........................................45
Distributions on the Securities.........................................46
Advances by Master Servicer in Respect of
Delinquencies on the Trust Fund Assets...............................48
Form of Reports to Securityholders......................................49
Collection and Other Servicing Procedures
Employed by the Master Servicer......................................51
Description of Sub-Servicing............................................52
Procedures for Realization Upon Defaulted
Mortgage Assets......................................................54
Retained Interest; Servicing or Administration
Compensation and Payment of Expenses.................................56
Annual Evidence as to the Compliance of the Master
Servicer.............................................................57
Matters Regarding the Master Servicer and the
Depositor............................................................57
Events of Default under the Governing Agreement
and Rights Upon Events of Default....................................58
Amendment of the Governing Agreements...................................62
Termination of the Trust Fund and Disposition of
Trust Fund Assets....................................................64
Optional Purchase by the Master Servicer of
Defaulted Mortgage Loans.............................................65
Duties of the Trustee...................................................65
Description of the Trustee..............................................65
DESCRIPTION OF CREDIT SUPPORT...............................................66
Subordination...........................................................67
Letter of Credit........................................................68
Mortgage Pool Insurance Policy..........................................70
Special Hazard Insurance Policy.........................................72
Bankruptcy Bond.........................................................74
Financial Guarantee Insurance...........................................74
Reserve Fund............................................................74
Overcollateralization...................................................75
Cross-Support Features..................................................75
OTHER FINANCIAL OBLIGATIONS RELATED TO THE
SECURITIES..............................................................75
Swaps and Yield Supplement Agreements...................................75
Purchase Obligations....................................................76
DESCRIPTION OF PRIMARY INSURANCE POLICIES...................................77
Primary Mortgage Insurance Policies.....................................77
Primary Hazard Insurance Policies.......................................77
FHA Insurance...........................................................79
VA Guarantees...........................................................83
LEGAL ASPECTS OF MORTGAGE ASSETS............................................83
Mortgage Loans..........................................................83
Cooperative Loans.......................................................84
Manufactured Housing Contracts..........................................85
Home Improvement Contracts..............................................87
Foreclosure on Mortgages................................................88
Foreclosure on Mortgaged Properties Located in the
Commonwealth of Puerto Rico..........................................90
Foreclosure on Cooperative Shares.......................................91
Repossession with respect to Manufactured Housing
Contracts............................................................92
Rights of Redemption with respect to Mortgage Loans.....................93
Notice of Sale; Redemption Rights with respect to
Manufactured Housing Contracts.......................................94
Anti-Deficiency Legislation and Other Limitations on
Lenders..............................................................94
Junior Mortgages........................................................96
Home Equity Line of Credit Loans........................................97
Consumer Protection Laws with respect to
Manufactured Housing Contracts and Home
Improvement Contracts................................................97
Other Limitations.......................................................98
Enforceability of Provisions............................................99
Leases and Rents.......................................................100
Subordinate Financing..................................................100
Applicability of Usury Laws............................................100
Alternative Mortgage Instruments.......................................101
Formaldehyde Litigation with respect to Manufactured
Homes...............................................................102
Soldiers' and Sailors' Civil Relief Act of 1940........................103
Environmental Legislation..............................................103
Forfeitures in Drug and RICO Proceedings...............................104
Negative Amortization Loans............................................105
Installment Contracts..................................................105
FEDERAL INCOME TAX CONSEQUENCES............................................106
General................................................................106
REMICs.................................................................107
Notes..................................................................127
Grantor Trust Funds....................................................127
Partnership Trust Funds................................................138
FASIT securities.......................................................144
STATE AND OTHER TAX CONSEQUENCES...........................................144
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS..................................145
Investors Affected.....................................................145
Fiduciary Standards for ERISA Plans and Related
Investment Vehicles.................................................145
Prohibited Transaction Issues for ERISA Plans, Keogh
Plans, IRAs and Related Investment Vehicles.........................145
Possible Exemptive Relief..............................................146
Consultation with Counsel..............................................152
Government Plans.......................................................152
Required Deemed Representations of Investors...........................152
LEGAL INVESTMENT...........................................................153
METHODS OF DISTRIBUTION....................................................154
LEGAL MATTERS..............................................................155
FINANCIAL INFORMATION......................................................156
RATING.....................................................................156
AVAILABLE INFORMATION......................................................156
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..........................156
2
<PAGE>
RISK FACTORS
The offered securities are not suitable investments for all investors. In
particular, you should not purchase the offered securities unless you understand
and are able to bear the prepayment, credit, liquidity and market risks
associated with the securities.
You should carefully consider the following factors in connection with the
purchase of the securities offered hereby as well as any additional risk factors
that are set forth in the prospectus supplement related to your security:
THE SECURITIES WILL HAVE LIMITED LIQUIDITY SO INVESTORS MAY BE UNABLE TO SELL
THEIR SECURITIES OR MAY BE FORCED TO SELL THEM AT A DISCOUNT FROM THEIR INITIAL
OFFERING PRICE
There can be no assurance that a resale market for the securities of any
series will develop following the issuance and sale of any series of securities.
Even if a resale market does develop, it may not provide securityholders with
liquidity of investment or continue for the life of the securities of any
series. The prospectus supplement for any series of securities may indicate that
an underwriter specified in the prospectus supplement intends to establish a
secondary market in the securities, however no underwriter will be obligated to
do so. As a result, any resale prices that may be available for any offered
security in any market that may develop may be at a discount from the initial
offering price. The securities offered hereby will not be listed on any
securities exchange.
CREDIT SUPPORT MAY BE LIMITED; THE FAILURE OF CREDIT SUPPORT TO COVER LOSSES ON
THE TRUST FUND ASSETS WILL RESULT IN LOSSES ALLOCATED TO THE RELATED SECURITIES
Credit support is intended to reduce the effect of delinquent payments or
losses on the underlying trust fund assets on those classes of securities that
have the benefit of the credit support. With respect to each series of
securities, credit support will be provided in one or more of the forms referred
to in this prospectus and the related prospectus supplement. Regardless of the
form of credit support provided, the amount of coverage will usually be limited
in amount and in most cases will be subject to periodic reduction in accordance
with a schedule or formula. Furthermore, credit support may provide only very
limited coverage as to particular types of losses or risks, and may provide no
coverage as to other types of losses or risks. If losses on the trust fund
assets exceed the amount of coverage provided by any credit support or the
losses are of a type not covered by any credit support, these losses will be
borne by the holders of the related securities or specific classes of the
related securities. SEE "DESCRIPTION OF CREDIT SUPPORT".
THE TYPES OF MORTGAGE LOANS INCLUDED IN THE TRUST FUND RELATED TO YOUR
SECURITIES MAY BE ESPECIALLY PRONE TO DEFAULTS WHICH MAY EXPOSE YOUR SECURITIES
TO GREATER LOSSES
The securities will be directly or indirectly backed by mortgage loans,
manufactured housing conditional sales contracts and installment loan
agreements. The types of mortgage loans included in the trust fund may have a
greater likelihood of delinquency and foreclosure, and a greater likelihood of
loss in the event of delinquency and foreclosure. You should be aware that if
the mortgaged properties fail to provide adequate security for the mortgage
loans included in a trust
3
<PAGE>
fund, any resulting losses, to the extent not covered by credit support, will be
allocated to the related securities in the manner described in the related
prospectus supplement and consequently would adversely affect the yield to
maturity on those securities. The depositor cannot assure you that the values of
the mortgaged properties have remained or will remain at the appraised values on
the dates of origination of the related mortgage loans. The prospectus
supplement for each series of securities will describe the mortgage loans which
are to be included in the trust fund related to your security and risks
associated with those mortgage loans which you should carefully consider in
connection with the purchase of your security.
NONPERFECTION OF SECURITY INTERESTS IN MANUFACTURED HOMES MAY RESULT IN LOSSES
ON THE RELATED MANUFACTURED HOUSING CONTRACTS AND THE SECURITIES BACKED BY THE
MANUFACTURED HOUSING CONTRACTS
Any conditional sales contracts and installment loan agreements with
respect to manufactured homes included in a trust fund will be secured by a
security interest in a manufactured home. Perfection of security interests in
manufactured homes and enforcement of rights to realize upon the value of the
manufactured homes as collateral for the manufactured housing contracts are
subject to a number of federal and state laws, including the Uniform Commercial
Code as adopted in each state and each state's certificate of title statutes.
The steps necessary to perfect the security interest in a manufactured home will
vary from state to state. If the master servicer fails, due to clerical errors
or otherwise, to take the appropriate steps to perfect the security interest,
the trustee may not have a first priority security interest in the manufactured
home securing a manufactured housing contract. Additionally, courts in many
states have held that manufactured homes may become subject to real estate title
and recording laws. As a result, a security interest in a manufactured home
could be rendered subordinate to the interests of other parties claiming an
interest in the home under applicable state real estate law. The failure to
properly perfect a valid, first priority security interest in a manufactured
home securing a manufactured housing contract could lead to losses that, to the
extent not covered by credit support, may adversely affect the yield to maturity
of the related securities.
FORECLOSURE OF MORTGAGE LOANS MAY RESULT IN LIMITATIONS OR DELAYS IN RECOVERY
AND LOSSES ALLOCATED TO THE RELATED SECURITIES
Even assuming that the mortgaged properties provide adequate security for
the mortgage loans, substantial delays can be encountered in connection with the
liquidation of defaulted mortgage loans and corresponding delays in the receipt
of related proceeds by the securityholders could occur. An action to foreclose
on a mortgaged property securing a mortgage loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. In several states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a mortgaged
property. In the event of a default by a mortgagor, 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 mortgage loan. The master servicer will be entitled to deduct
from liquidation proceeds all expenses incurred in attempting to recover amounts
due on the related liquidated mortgage loan and not yet repaid, including
payments to prior
4
<PAGE>
lienholders, accrued servicing fees, ancillary fees, legal fees and costs of
legal action, real estate taxes, maintenance and preservation expenses, monthly
advances and servicing advances. If any mortgaged properties fail to provide
adequate security for the mortgage loans in the trust fund related to your
security and insufficient funds are available from any applicable credit
support, you could experience a loss on your investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
MORTGAGED PROPERTIES ARE SUBJECT TO ENVIRONMENTAL RISKS AND THE COST OF
ENVIRONMENTAL CLEAN-UP MAY INCREASE LOSSES ON THE RELATED MORTGAGE LOANS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
the property. These laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of the hazardous or toxic
substances. A lender also risks liability on foreclosure of the mortgage on the
property. In addition, the presence of hazardous or toxic substances, or the
failure to properly remediate the property, may adversely affect the owner's or
operator's ability to sell the property. Although the incidence of environmental
contamination of residential properties is less common than that for commercial
properties, mortgage loans contained in a trust fund may be secured by mortgaged
properties in violation of environmental laws, ordinances or regulations. The
master servicer is generally prohibited from foreclosing on a mortgaged property
unless it has taken adequate steps to ensure environmental compliance with
respect to the mortgaged property. However, to the extent the master servicer
errs and forecloses on mortgaged property that is subject to environmental law
violations, and to the extent a mortgage loan seller does not provide adequate
representations and warranties against environmental law violations, or is
unable to honor its obligations, including the obligation to repurchase a
mortgage loan upon the breach of a representation or warranty, a trust fund
could experience losses which, to the extent not covered by credit support,
could adversely affect the yield to maturity on the related securities.
THE RATINGS OF YOUR SECURITIES MAY BE LOWERED OR WITHDRAWN WHICH MAY ADVERSELY
AFFECT THE LIQUIDITY OR MARKET VALUE OF YOUR SECURITY
It is a condition to the issuance of the securities that each series of
securities be rated in one of the four highest rating categories by a nationally
recognized statistical rating agency. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time. No person is obligated to maintain the rating on any security, and
accordingly, there can be no assurance to you that the ratings assigned to any
security on the date on which the security is originally issued will not be
lowered or withdrawn by a rating agency at any
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time thereafter. The rating(s) of any series of securities by any applicable
rating agency may be lowered following the initial issuance of the securities as
a result of the downgrading of the obligations of any applicable credit support
provider, or as a result of losses on the related mortgage loans in excess of
the levels contemplated by the rating agency at the time of its initial rating
analysis. Neither the depositor, the master servicer nor any of their respective
affiliates will have any obligation to replace or supplement any credit support,
or to take any other action to maintain any rating(s) of any series of
securities. If any rating is revised or withdrawn, the liquidity or the market
value of your security may be adversely affected.
FAILURE OF THE MORTGAGE LOAN SELLER TO REPURCHASE OR REPLACE A MORTGAGE LOAN MAY
RESULT IN LOSSES ALLOCATED TO THE RELATED SECURITIES
Each mortgage loan seller will have made representations and warranties in
respect of the mortgage loans sold by the mortgage loan seller and evidenced by
a series of securities. In the event of a breach of a mortgage loan seller's
representation or warranty that materially adversely affects the interests of
the securityholders in a mortgage loan, the related mortgage loan seller will be
obligated to cure the breach or repurchase or, if permitted, replace the
mortgage loan as described under "Mortgage Loan Program-Representations as to
Mortgage Loans to be made by or on Behalf of Mortgage Loan Sellers; Remedies for
Breach of Representation". However, there can be no assurance that a mortgage
loan seller will honor its obligation to cure, repurchase or, if permitted,
replace any mortgage loan as to which a breach of a representation or warranty
arises. A mortgage loan seller's failure or refusal to honor its repurchase
obligation could lead to losses that, to the extent not covered by credit
support, may adversely affect the yield to maturity of the related securities.
In instances where a mortgage loan seller is unable, or disputes its
obligation, to repurchase affected mortgage loans, the master servicer may
negotiate and enter into one or more settlement agreements with the mortgage
loan seller that could provide for the purchase of only a portion of the
affected mortgage loans. Any settlement could lead to losses on the mortgage
loans which would be borne by the related securities. Neither the depositor nor
the master servicer will be obligated to purchase a mortgage loan if a mortgage
loan seller defaults on its obligation to do so, and no assurance can be given
that the mortgage loan sellers will carry out their repurchase obligations. A
default by a mortgage loan seller is not a default by the depositor or by the
master servicer. Any mortgage loan not so repurchased or substituted for shall
remain in the related trust fund and any related losses shall be allocated to
the related credit support, to the extent available, and otherwise to one or
more classes of the related series of securities.
All of the representations and warranties of a mortgage loan seller in
respect of a mortgage loan will have been made as of the date on which the
mortgage loan was purchased from the mortgage loan seller by or on behalf of the
depositor which will be a date prior to the date of initial issuance of the
related series of securities. A substantial period of time may have elapsed
between the date as of which the representations and warranties were made and
the later date of initial issuance of the related series of securities.
Accordingly, the mortgage loan seller's repurchase obligation, or, if specified
in the related prospectus supplement, limited replacement option, will not arise
if, during the period after the date of sale by the mortgage loan seller, an
event occurs that would have given
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rise to a repurchase obligation had the event occurred prior to sale of the
affected mortgage loan. The occurrence of events during this period that are not
covered by a mortgage loan seller's repurchase obligation could lead to losses
that, to the extent not covered by credit support, may adversely affect the
yield to maturity of the related securities.
THE YIELD TO MATURITY ON YOUR SECURITIES WILL DEPEND ON A VARIETY OF FACTORS
INCLUDING PREPAYMENTS
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o the extent of prepayments on the underlying assets in the trust fund
or;
o how payments of principal are allocated among the classes of
securities of that series as specified in the related prospectus
supplement;
o if any party has an option to terminate the related trust fund early,
the effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in the
related trust fund;
o repurchases of assets in the related trust fund as a result of
material breaches of representations and warranties made by the
depositor, master servicer or mortgage loan seller; and;
o with respect to a trust fund containing home equity revolving credit
loans, additional draws on under the related credit line agreements.
Prepayments on mortgage loans are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. The rate of prepayment of the mortgage loans
included in or underlying the assets in each trust fund may affect the yield to
maturity of the securities. In general, if you purchase a class of offered
securities at a price higher than its outstanding principal balance and
principal distributions on your class occur faster than you anticipate at the
time of purchase, the yield will be lower than you anticipate. Conversely, if
you purchase a class of offered securities at a price lower than its outstanding
principal balance and principal distributions on that class occur more slowly
than you anticipate at the time of purchase, the yield will be lower than you
anticipate.
To the extent amounts in any pre-funding account have not been used to
purchase additional mortgage loans, holders of the related securities may
receive an additional prepayment.
The yield to maturity on the types of classes of securities, including
securities that are entitled to principal distributions only or interest
distributions only, securities as to which accrued interest or a portion thereof
will not be distributed but rather added to the principal balance of the
security, and securities with an interest rate which fluctuates inversely with
an index, may be relatively more
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sensitive to the rate of prepayment on the related mortgage loans than other
classes of securities and, if applicable, to the occurrence of an early
retirement of the securities. The prospectus supplement for a series will set
forth the related classes of securities that may be more sensitive to prepayment
rates.
SEE "YIELD AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS.
THE EXERCISE OF AN OPTIONAL TERMINATION RIGHT WILL AFFECT THE YIELD TO MATURITY
ON THE RELATED SECURITIES
The prospectus supplement for each series of securities will set forth the
party or parties that may, at its option, purchase the assets of the related
trust fund if the aggregate principal balance of the mortgage loans and other
trust fund assets in the trust fund for that series is less than the percentage
specified in the related prospectus supplement of the aggregate principal
balance of the outstanding mortgage loans and other trust fund assets at the
cut-off date for that series. The percentage will be between 25% and 0%. The
exercise of the termination right will effect the early retirement of the
securities of that series. The prospectus supplement for each series of
securities will set forth the price to be paid by the terminating party and the
amounts that the holders of the securities will be entitled to receive upon
early retirement.
In addition to the repurchase of the assets in the related trust fund as
described in the paragraph above, the related prospectus supplement may permit
that, a holder of a non-offered class of securities will have the right, solely
at its discretion, to terminate the related trust fund on any distribution date
after the 12th distribution date following the date of initial issuance of the
related series of securities and until the date as the option to terminate as
described in the paragraph above becomes exercisable and thereby effect early
retirement of the securities of the series. Any call of this type will be of the
entire trust fund at one time; multiple calls with respect to any series of
securities will not be permitted. In this case, the call class must remit to the
trustee for distribution to the holders of the related securities offered hereby
a price equal to 100% of the principal balance of their securities offered
hereby as of the day of the purchase plus accrued interest thereon at the
applicable interest rate during the related period on which interest accrues on
their securities. If funds equal to the call price are not deposited with the
related trustee, the securities will remain outstanding. There will not be any
additional remedies available to securityholders. In addition, in the case of a
trust fund for which a REMIC election or elections have been made, the
termination will constitute a "qualified liquidation" under Section 860F of the
Internal Revenue Code. In connection with a call by the call class, the final
payment to the securityholders will be made upon surrender of the related
securities to the trustee. Once the securities have been surrendered and paid in
full, there will not be any continuing liability from the securityholders or
from the trust fund to securityholders.
A trust fund may also be terminated and the certificates retired upon the
master servicer's determination, if applicable and based upon an opinion of
counsel, that the REMIC status of the trust fund has been lost or that a
substantial risk exists that the REMIC status will be lost for the then current
taxable year.
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The termination of a trust fund and the early retirement of securities by
any party would decrease the average life of the securities and may adversely
affect the yield to holders of some or all classes of the related securities.
VIOLATIONS OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS AND THE SECURITIES BACKED BY THOSE MORTGAGE LOANS
Federal and state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices:
o regulate interest rates and other charges on mortgage loans;
o require specific disclosures to borrowers;
o require licensing of originators; and
o regulate generally the origination, servicing and collection process
for the mortgage loans.
Depending on the specific facts and circumstances involved, violations may
limit the ability of a trust fund to collect all or a part of the principal of
or interest on the mortgage loans, may entitle the borrower to a refund of
amounts previously paid and could result in liability for damages and
administrative enforcement against the originator or an assignee of the
originator, like a trust fund, or the initial servicer or a subsequent servicer,
as the case may be. In particular, it is possible that mortgage loans included
in a trust fund will be subject to the Home Ownership and Equity Protection Act
of 1994. The Homeownership Act adds additional provisions to Regulation Z, the
implementing regulation of the Federal Truth-In-Lending Act. These provisions
impose additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with interest rates or origination costs in
excess of prescribed levels. The provisions of the Homeownership Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of the creditor, like a trust fund,
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including the right to rescind the mortgage loan.
Recently, class action lawsuits under the Homeownership Act have been brought
naming as a defendant securitization trusts like the trust funds described in
this prospectus with respect to the mortgage loans.
In addition, amendments to the federal bankruptcy laws have been proposed
that could result in (1) the treatment of a claim secured by a junior lien in a
borrower's principal residence as protected only to the extent that the claim
was secured when the security interest was made and (2) the disallowance of
claims based on secured debt if the creditor failed to comply with specific
provisions of the Truth in Lending Act (15 U.S.C. ss.1639). These amendments
could apply retroactively to secured debt incurred by the debtor prior to the
date of effectiveness of the amendments.
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The mortgage loan seller will represent that all applicable federal and
state laws were complied with in connection with the origination of the mortgage
loans. If there is a material and adverse breach of a representation, the
depositor will be obligated to repurchase any affected mortgage loan or to
substitute a new mortgage loan into the related trust fund. If the mortgage loan
seller fails to repurchase or substitute, a trust fund could experience losses
which, to the extent not covered by credit support, could adversely affect the
yield to maturity on the related securities. SEE "LEGAL ASPECTS OF MORTGAGE
ASSETS".
Several capitalized terms are used in this prospectus to assist you in
understanding the terms of the securities. All of the capitalized terms used in
this prospectus are defined in the glossary beginning on page 156 in this
prospectus.
DESCRIPTION OF THE TRUST FUNDS
The trust fund for each series will be held by the trustee for the benefit
of the related securityholders. Each trust fund will consist of:
o a segregated pool of various types of first and junior lien mortgage
loans, cooperative apartment loans, manufactured housing conditional
sales contracts and installment loan agreements, home improvement
installment sales contracts and installment loan agreements or home
equity revolving lines of credit, including partial balances of those
lines of credit or beneficial interests in those lines of credit as
are subject to the related agreement governing the trust fund;
o amounts on deposit in the distribution account, pre-funding account,
if applicable, or any other account maintained for the benefit of the
securityholders;
o property acquired on behalf of securityholders by foreclosure, deed in
lieu of foreclosure or repossession and any revenues received on the
property;
o the rights of the depositor under any hazard insurance policies, FHA
insurance policies, VA guarantees and primary mortgage insurance
policies to be included in the trust fund, each as described under
"Description of Primary Insurance Policies";
o the rights of the depositor under the agreement or agreements under
which it acquired the mortgage loans to be included in the trust fund;
o the rights of the trustee in any cash advance reserve fund or surety
bond to be included in the trust fund, each as described under
"Advances by Master Servicer in Respect of Delinquencies on the Trust
Fund Assets"; and
o any letter of credit, mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond, financial guarantee insurance
policy, reserve fund, currency or interest rate exchange agreement or
guarantee, each as described under "Description of Credit Support".
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To the extent specified in the related prospectus supplement, a portion of
the interest received on a mortgage loan may not be included in the trust for
that series. Instead, the retained interest will be retained by or payable to
the originator, servicer or seller (or a designee of one of the foregoing) of
the loan, free and clear of the interest of securityholders under the related
agreement.
DESCRIPTION OF THE MORTGAGE ASSETS TO BE INCLUDED IN A TRUST FUND
Each mortgage asset will be originated by a person other than the
depositor. Each mortgage asset will be selected by the depositor for inclusion
in a trust fund from among those purchased by the depositor, either directly or
through its affiliates, from Long Beach Mortgage Company, the parent of the
depositor, and its affiliates or from banks, savings and loan associations,
mortgage bankers, mortgage brokers, investment banking firms, the Federal
Deposit Insurance Corporation and other mortgage loan originators or sellers not
affiliated with the depositor. Each seller of mortgage assets will be referred
to in this prospectus and the related prospectus supplement as a mortgage loan
seller. The mortgage assets acquired by the depositor will have been originated
in accordance with the underlying criteria described in this prospectus under
"The Depositor's Mortgage Loan Purchase Program-Underwriting Standards" and in
the prospectus supplement. All mortgage assets to be included in a trust fund as
of the closing date will have been purchased by the depositor on or before the
date of initial issuance of the related securities.
The mortgage assets included in a trust fund will be evidenced by a
promissory note or contract, referred to in this prospectus as a mortgage note,
and may be secured by any of the following:
o first or junior liens on one- to four-family residential properties
including detached and attached dwellings, townhouses, rowhouses,
individual condominium units, individual units in planned-unit
developments and individual units in de minimis planned-unit
developments. Loans secured by this type of property are referred to
in this prospectus as single-family loans and may be conventional
loans, FHA-insured loans or VA-guaranteed loans as specified in the
related prospectus supplement;
o first or junior liens secured by shares in a private cooperative
housing corporation that give the owner of the shares the right to
occupy a particular dwelling unit in the cooperative;
o rental apartments or projects, including apartment buildings owned by
cooperative housing corporations, containing five or more dwelling
units. The multifamily properties may include high-rise, mid-rise or
garden apartments. Loans secured by this type of property may be
conventional loans or FHA-insured loans as specified in the related
prospectus supplement;
o commercial properties including office buildings, retail buildings and
a variety of other commercial properties as may be described in the
related prospectus supplement;
o properties consisting of mixed residential and commercial structures;
o leasehold interests in residential properties, the title of which is
held by third party lessors;
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o manufactured homes that, in the case of mortgage loans, are
permanently affixed to their site or, in the case of manufactured home
conditional sales contracts and installment loan agreements, may be
relocated; or
o real property acquired upon foreclosure or comparable conversion of
the mortgage loans included in a trust fund.
No more than 10% of the assets of a trust fund, by original principal
balance of the pool, will be secured by commercial properties, by multifamily
properties containing five or more dwelling units, by properties consisting of
mixed residential and commercial structures or by any combination of these
property types. Mortgage loans made with respect to multifamily or commercial
property may entail risks of delinquency and foreclosure, and risks of loss in
the event of a delinquency and foreclosure, that are greater than similar risks
associated with single-family property. The ability of a mortgagor to repay a
loan secured by an income-producing property typically is dependent primarily
upon the successful operation of such property rather than any independent
income or assets of the mortgagor. Thus, the value of an income-producing
property is directly related to the net operating income derived from such
property. In contrast, the ability of a mortgagor to repay a single-family loan
typically is dependent primarily upon the mortgagor's household income, rather
than the capacity of the related property to produce income. Thus, other than in
geographical areas where employment is dependent upon a particular employer or
an industry, the mortgagor's income tends not to reflect directly the value of a
single-family property. A decline in the net operating income of an
income-producing property will likely affect both the performance of the related
loan as well as the liquidation value of such property, whereas a decline in the
income of a mortgagor on a single-family property will likely affect the
performance of the related loan but may not affect the liquidation value of such
property.
The performance of a mortgage loan secured by an income-producing property
leased by the mortgagor to tenants, as well as the liquidation value of such
property, may be dependent upon the business operated by such tenants in
connection with such property, the creditworthiness of such tenants or both. The
risks associated with such loans may be offset by the number of tenants or, if
applicable, a diversity of types of business operated by such tenants.
Commercial mortgage loans included in a trust fund may be secured by liens on
owner-occupied mortgaged properties or on mortgaged properties leased to a
single tenant. Accordingly, a decline in the financial condition of the borrower
or single tenant, as applicable, may have a disproportionately greater effect on
the net operating income from such mortgaged properties than would be the case
with respect to mortgaged properties with multiple tenants. Furthermore, the
value of any commercial or multifamily mortgaged property may be adversely
affected by risks generally incident to interests in real property, including:
o changes in general or local economic conditions and/or specific
industry segments;
o declines in real estate values;
o declines in rental or occupancy rates;
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o increases in interest rates, real estate tax rates and other operating
expenses;
o changes in governmental rules, regulations and fiscal policies,
including environmental legislation;
o acts of God; and
o other factors beyond the control of the master servicer.
Commercial and multifamily mortgage loans that are included in any trust
fund may be nonrecourse loans or loans for which recourse may be restricted or
unenforceable, as to which, in the event of mortgagor default, recourse may be
had only against the specific multifamily or commercial property and such other
assets, if any, as have been pledged to secure the mortgage loan. With respect
to those mortgage loans that provide for recourse against the mortgagor and its
assets generally, there can be no assurance that such recourse will ensure a
recovery in respect of a defaulted mortgage loan greater than the liquidation
value of the related mortgaged property.
The term of any leasehold interest that secures a mortgage loan will exceed
the term of the related mortgage note by at least five years.
The manufactured homes securing the mortgage loans or manufactured housing
contracts will consist of manufactured homes within the meaning of 42 United
States Code, Section 5402(6), which defines a manufactured home as "a structure,
transportable in one or more sections, which in the traveling mode, is eight
body feet or more in width or forty body feet or more in length, or, when
erected on site, is three hundred twenty or more square feet, and which is built
on a permanent chassis and designed to be used as a dwelling with or without a
permanent foundation when connected to the required utilities, and includes the
plumbing, heating, air conditioning, and electrical systems contained therein;
except that such term shall include any structure which meets all the
requirements of this paragraph except the size requirements and with respect to
which the manufacturer voluntarily files a certification required by the
Secretary of Housing and Urban Development and complies with the standards
established under this chapter."
The home improvement contracts will be secured primarily by mortgages on
single family properties that are generally subordinate to other mortgages on
the same mortgaged property or by purchase money security interests in the home
improvements financed thereby.
The mortgaged properties may be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States. The mortgaged properties may include vacation, second and non-owner
occupied homes.
The mortgage assets to be included in a trust fund will be any one of the
following types of mortgage assets:
o Fully amortizing mortgage assets with a fixed rate of interest and
level monthly payments to maturity;
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o Fully amortizing mortgage assets with an interest rate that adjusts
periodically, with corresponding adjustments in the amount of monthly
payments, to equal the sum, which may be rounded, of a fixed
percentage amount and an index;
o ARM Loans that provide for an election, at the borrower's option, to
convert the adjustable interest rate to a fixed interest rate, which
will be described in the related prospectus supplement;
o ARM Loans that provide for negative amortization or accelerated
amortization resulting from delays in or limitations on the payment
adjustments necessary to amortize fully the outstanding principal
balance of the loan at its then applicable interest rate over its
remaining term;
o Fully amortizing mortgage assets with a fixed interest rate and level
monthly payments, or payments of interest only, during the early years
of the term, followed by periodically increasing monthly payments of
principal and interest for the duration of the term or for a specified
number of years, which will be described in the related prospectus
supplement;
o Fixed interest rate mortgage assets providing for level payment of
principal and interest on the basis of an assumed amortization
schedule and a balloon payment at the end of a specified term;
o Mortgage assets that provide for a line of credit under which amounts
may be advanced to the borrower from time to time including home
equity revolving credit loans;
o Fixed interest rate mortgage assets that provide that the interest may
increase upon default, which increased rate may be subject to
adjustment and may or may not convert back to the original fixed
interest rate upon cure of the default;
o Fixed interest rate mortgage assets that provide for reductions in the
interest rate, and corresponding monthly payment due thereon during
the first 36 months of the term thereof; and
o Another type of mortgage loan described in the related prospectus
supplement.
Each single-family loan having a loan-to-value ratio at origination in
excess of 80% may be required to be covered by a primary mortgage guaranty
insurance policy insuring against default on the mortgage loan as to at least
the principal amount thereof exceeding 75% of the value of the mortgaged
property at origination of the mortgage loan. This type of insurance will remain
in force at least until the mortgage loan amortizes to a level that would
produce a loan-to-value ratio lower than 80%. SEE "DESCRIPTION OF PRIMARY
INSURANCE POLICIES--PRIMARY MORTGAGE INSURANCE POLICIES".
A mortgaged property may have been subject to secondary financing at
origination of the mortgage loan, but, unless otherwise specified in the related
prospectus supplement, the total amount of primary and secondary financing at
the time of origination of the mortgage loan did not, to the mortgage loan
seller's knowledge, produce a combined loan-to-value ratio in excess of 150%.
The
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trust fund may contain mortgage loans secured by junior liens, and the related
senior lien may not be included in the trust fund. The primary risk to holders
of mortgage loans secured by junior liens is the possibility 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 junior mortgage loan. In
addition, some or all of the single family loans secured by junior liens may be
High LTV Loans. SEE "LEGAL ASPECTS OF MORTGAGE ASSETS--FORECLOSURE ON
MORTGAGES".
The loan-to-value ratio of a mortgage loan at any given time is the ratio,
expressed as a percentage, of the then outstanding principal balance of the
mortgage loan, or, in the case of a home equity line of credit loan, the maximum
principal amount which may be advanced over the term of the loan, plus, in the
case of a mortgage loan secured by a junior lien, the outstanding principal
balance of the related senior liens, to the value of the related mortgaged
property. The value of a single-family property or cooperative unit, is the
lesser of (a) the appraised value determined in an appraisal obtained by the
originator at origination of the loan and (b) if the mortgaged property is being
purchased in conjunction with the origination of the mortgage loan the sales
price for the property. For purposes of calculating the loan-to-value ratio of a
manufactured housing contract relating to a new manufactured home, the value is
no greater than the sum of a fixed percentage of the list price of the unit
actually billed by the manufacturer to the dealer, exclusive of freight to the
dealer site, including accessories identified in the invoice, plus the actual
cost of any accessories purchased from the dealer, a delivery and set-up
allowance, depending on the size of the unit, and the cost of state and local
taxes, filing fees and up to three years prepaid hazard insurance premiums. With
respect to a used manufactured home, the value is generally the least of the
sale price, the appraised value, and the National Automobile Dealer's
Association book value plus prepaid taxes and hazard insurance premiums. The
appraised value of a manufactured home is based upon the age and condition of
the manufactured housing unit and the quality and condition of the mobile home
park in which it is situated, if applicable. Manufactured homes are less likely
than other types of housing to experience appreciation in value and are more
likely to experience depreciation in value.
The underwriting standards of the mortgage loan originator or mortgage loan
seller may require an internal review of the appraisal (a "review appraisal")
used to determine the loan-to-value of a mortgage loan which may be performed by
underwriters rather than a licensed appraiser. Where the review appraisal
results in a valuation of the mortgaged property that is less than a specified
percentage of the original appraisal, the loan-to-value ratio of the related
mortgage loan will be based on the review appraisal. The prospectus supplement
of each series will describe the percentage variance used by the related
mortgage loan originator or mortgage loan seller in determining whether the
review appraisal will apply.
A mortgage loan secured by a condominium unit will not be included in a
mortgage pool unless, at the time of sale of the mortgage loan by the mortgage
loan seller, representations and warranties as to the condominium project are
made by the mortgage loan seller or an affiliate of the mortgage loan seller or
by another person acceptable to the depositor having knowledge regarding the
subject matter of those representations and warranties. The mortgage loan
seller, or another party on its behalf, will have made the following
representations and warranties:
o If a condominium project is subject to developer control or to
incomplete phasing or add-ons, at least 50% of the units have been
sold to bona fide purchasers to be occupied as primary residences or
vacation or second homes.
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o If a condominium project has been controlled by the unit owners, other
than the developer, and is not subject to incomplete phasing or
add-ons, at least 50% of the units been are occupied as primary
residences or vacation or second homes.
SEE "THE DEPOSITOR'S MORTGAGE LOAN PURCHASE PROGRAM--REPRESENTATIONS BY OR
ON BEHALF OF MORTGAGE LOAN SELLERS; REMEDIES FOR BREACH OF REPRESENTATION" IN
THIS PROSPECTUS FOR A DESCRIPTION OF OTHER REPRESENTATIONS MADE BY OR ON BEHALF
OF MORTGAGE LOAN SELLERS AT THE TIME MORTGAGE LOANS ARE SOLD.
The trust fund may include mortgage loans subject to temporary buydown
plans which provide that the monthly payments made by the borrower in the early
years of the mortgage loan will be less than the scheduled monthly payments on
the mortgage loan, the resulting difference to be made up from (a) an amount
contributed by the borrower, the seller of the mortgaged property, or another
source and placed in a custodial account and (b) unless otherwise specified in
the prospectus supplement, investment earnings on the buydown funds. The
borrower under a buydown mortgage loan is usually qualified at the lower monthly
payment taking into account the funds on deposit in the custodial account.
Accordingly, the repayment of a buydown mortgage loan is dependent on the
ability of the borrower to make larger level monthly payments after the funds in
the custodial account have been depleted. SEE "THE DEPOSITOR'S MORTGAGE LOAN
PURCHASE PROGRAM--UNDERWRITING STANDARDS" FOR A DISCUSSION OF LOSS AND
DELINQUENCY CONSIDERATIONS RELATING TO BUYDOWN MORTGAGE LOANS.
The trust fund may include mortgage loans with respect to which a portion
of the loan proceeds are held back from the mortgagor until required repairs or
improvements on the mortgaged property are completed, in accordance with the
mortgage loan seller's underwriting standards.
The trust fund may include mortgage loans that are delinquent as of the
date the related series of securities is issued. In that case, the related
prospectus supplement will set forth, as to each mortgage loan, available
information as to the period of delinquency and any other information relevant
for a prospective purchaser to make an investment decision. No mortgage loan in
a trust fund will be 90 or more days delinquent and no trust fund will include a
concentration of mortgage loans which are more than 30 and less than 90 days
delinquent of greater than 20%.
If so specified in the related prospectus supplement, a mortgage loan may
contain a prohibition on prepayment or a Lockout Period or require payment of a
prepayment penalty. A multifamily, commercial or mixed-use loan may also contain
a provision that entitles the lender to a share of profits realized from the
operation or disposition of the related mortgaged property. If the holders of
any class or classes of offered securities of a series will be entitled to all
or a portion of this type of equity participation, the related prospectus
supplement will describe the equity participation and the method or methods by
which distributions in respect thereof will be made to such holders.
HOME EQUITY REVOLVING CREDIT LOANS
GENERAL. The home equity revolving credit loans will be originated under
credit line agreements subject to a maximum amount or credit limit. In most
instances, interest on each home equity revolving credit loan will be calculated
based on the average daily balance outstanding during the billing cycle. The
billing cycle in most cases will be the calendar month preceding a due date.
Each
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home equity revolving credit loan will have a loan rate that is subject to
adjustment on the day specified in the related mortgage note, which may be daily
or monthly, equal to the sum of the index on the day specified in the
accompanying prospectus supplement, and the gross margin specified in the
related mortgage note, which may vary under circumstances if stated in the
accompanying prospectus supplement, subject to the maximum rate specified in the
mortgage note and the maximum rate permitted by applicable law. If specified in
the prospectus supplement, some home equity revolving credit loans may be teaser
loans with an introductory rate that is lower than the rate that would be in
effect if the applicable index and gross margin were used to determine the loan
rate. As a result of the introductory rate, interest collections on the loans
may initially be lower than expected. Commencing on their first adjustment date,
the loan rates on the teaser loans will be based on the applicable index and
gross margin.
The borrower for each home equity revolving credit loan may draw money, in
most cases with either checks or credit cards, subject to applicable law, on
such home equity revolving credit loan at any time during the period in which a
draw may be made under the related credit line agreement, which period we refer
to in this prospectus as the draw period. Unless specified in the accompanying
prospectus supplement, the draw period will not be more than 15 years. Unless
specified in the accompanying prospectus supplement, for each home equity
revolving credit loan, if the draw period is less than the full term of the home
equity revolving credit loan, the related borrower will not be permitted to make
any draw during the repayment period. Prior to the repayment period, or prior to
the date of maturity for loans without repayment periods, the borrower for each
home equity revolving credit loan will be obligated to make monthly payments on
the home equity revolving credit loan in a minimum amount as specified in the
related mortgage note, which usually will be the finance charge for each billing
cycle as described in the second following paragraph. In addition, if a home
equity revolving credit loan has a repayment period, during this period, the
borrower is required to make monthly payments consisting of principal
installments that would substantially amortize the principal balance by the
maturity date, and to pay any current finance charges and additional charges.
The borrower for each home equity revolving credit loan will be obligated
to pay off the remaining account balance on the related maturity date, which may
be a substantial principal amount. The maximum amount of any draw for any home
equity revolving credit loan is equal to the excess, if any, of the credit limit
over the principal balance outstanding under the mortgage note at the time of
the draw. Draws will be funded by the master servicer or servicer or other
entity specified in the accompanying Prospectus Supplement.
Unless specified in the accompanying prospectus supplement, for each home
equity revolving credit loan:
o the finance charge for any billing cycle, in most cases, will be an
amount equal to the aggregate of, as calculated for each day in the billing
cycle, the then-applicable loan rate divided by 365 multiplied by that day's
principal balance,
o the account balance on any day in most cases will be the aggregate of the
unpaid principal of the home equity revolving credit loan outstanding at the
beginning of the day, plus all related draws funded on that day and outstanding
at the beginning of that day, plus the sum of any unpaid finance charges and any
unpaid fees, insurance premiums and other charges, collectively known as
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additional charges, that are due on the home equity revolving credit loan minus
the aggregate of all payments and credits that are applied to the repayment of
any draws on that day, and
o the principal balance on any day usually will be the related account
balance minus the sum of any unpaid finance charges and additional charges that
are due on the home equity revolving credit loan.
Payments made by or on behalf of the borrower for each home equity
revolving credit loan, in most cases, will be applied, first, to any unpaid
finance charges that are due on the home equity revolving credit loan, second,
to any unpaid additional charges that are due thereon, and third, to any related
draws outstanding.
The mortgaged property securing each home equity revolving credit loan will
be subject to the lien created by the related loan in the amount of the
outstanding principal balance of each related draw or portion thereof, if any,
that is not included in the related pool, whether made on or prior to the
related cut-off date or thereafter. The lien will be the same rank as the lien
created by the mortgage relating to the home equity revolving credit loan, and
monthly payments, collections and other recoveries under the credit line
agreement related to the home equity revolving credit loan will be allocated as
described in the related prospectus supplement among the home equity revolving
credit loan and the outstanding principal balance of each draw or portion of
draw excluded from the pool. The depositor, an affiliate of the depositor or an
unaffiliated seller may have an interest in any draw or portion thereof excluded
from the pool. If any entity with an interest in a draw or portion thereof
excluded from the pool or any other excluded balance were to become a debtor
under the Bankruptcy Code and regardless of whether the transfer of the related
home equity revolving credit loan constitutes an absolute assignment, a
bankruptcy trustee or creditor of such entity or such entity as a
debtor-in-possession could assert that such entity retains rights in the related
home equity revolving credit loan and therefore compel the sale of such home
equity revolving credit loan over the objection of the trust fund and the
securityholders. If that occurs, delays and reductions in payments to the trust
fund and the securityholders could result.
In most cases, each home equity revolving credit loan may be prepaid in
full or in part at any time and without penalty, and the related borrower will
have the right during the related draw period to make a draw in the amount of
any prepayment made for the home equity revolving credit loan. The mortgage note
or mortgage related to each home equity revolving credit loan will usually
contain a customary "due-on-sale" clause.
As to each home equity revolving credit loan, the borrower's rights to
receive draws during the draw period may be suspended, or the credit limit may
be reduced, for cause under a limited number of circumstances, including, but
not limited to:
o a materially adverse change in the borrower's financial circumstances;
o a decline in the value of the mortgaged property significantly below
its appraised value at origination; or
o a payment default by the borrower.
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However, as to each home equity revolving credit loan, a suspension or reduction
usually will not affect the payment terms for previously drawn balances. The
master servicer or the servicer, as applicable, will have no obligation to
investigate as to whether any of those circumstances have occurred or may have
no knowledge of their occurrence. Therefore, there can be no assurance that any
borrower's ability to receive draws will be suspended or reduced if the
foregoing circumstances occur. In the event of default under a home equity
revolving credit loan, at the discretion of the master servicer or servicer, the
home equity revolving credit loan may be terminated and declared immediately due
and payable in full. For this purpose, a default includes but is not limited to:
o the borrower's failure to make any payment as required;
o any action or inaction by the borrower that materially and adversely
affects the mortgaged property or the rights in the mortgaged
property; or
o any fraud or material misrepresentation by a borrower in connection
with the loan.
The master servicer or servicer will have the option to allow an increase
in the credit limit applicable to any home equity revolving credit loan in
certain limited circumstances. In most cases, the master servicer or servicer
will have an unlimited ability to allow increases provided that the specified
conditions are met including:
o a new appraisal or other indication of value is obtained; and
o the new combined LTV ratio is less than or equal to the original
combined LTV ratio.
If a new appraisal is not obtained and the other conditions in the
preceding sentence are met, the master servicer or servicer will have the option
to allow a credit limit increase for any home equity revolving credit loan
subject to the limitations described in the related agreement
The proceeds of the home equity revolving credit loans may be used by the
borrower to improve the related mortgaged properties, may be retained by the
related borrowers or may be used for purposes unrelated to the mortgaged
properties.
ALLOCATION OF HOME EQUITY REVOLVING CREDIT LOAN BALANCES. For any series of
securities backed by home equity revolving credit loans, the related trust fund
may include either (i) the entire principal balance of each home equity
revolving credit loan outstanding at any time, including balances attributable
to draws made after the related cut-off date, or (ii) a specified portion of the
total principal balance of each home equity revolving credit loan outstanding at
any time, which will consist of all or a portion of the principal balance
thereof as of the cut-off date minus the portion of all payments and losses
thereafter that are allocated to such balance, and may not include some portion
of the principal balance attributable to draws made after the cut-off date. In
this prospectus, we refer to the principal balance or portion of the principal
balance of each home equity revolving credit loan outstanding at any time and
included in the trust fund as the trust balance.
The accompanying prospectus supplement will describe the specific
provisions by which payments and losses on any home equity revolving credit loan
will be allocated as between the trust balance and any portion of the principal
balance of a home equity revolving credit loan, if any, not
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included in the trust balance at any time, which may include balances
attributable to draws after the cut-off date and may include a portion of the
principal balance outstanding as of the cut-off date. In this prospectus, we
refer to the portion of the principal balance of each home equity revolving
credit loan outstanding at any time and not included in the trust fund as the
excluded balance. Typically, the provisions (i) may provide that principal
payments made by the borrower will be allocated as between the trust balance and
any excluded balance either on a pro rata basis, or first to the trust balance
until reduced to zero, then to the excluded balance, or according to other
priorities specified in the accompanying prospectus supplement, and (ii) may
provide that interest payments, as well as liquidation proceeds or similar
proceeds following a default and any realized losses, will be allocated between
the trust balance and any excluded balance on a pro rata basis or according to
other priorities specified in the accompanying prospectus supplement.
Even if a trust fund initially includes the entire principal balance of the
home equity revolving credit loans, the related agreement may provide that after
a specified date or on the occurrence of specified events, the trust fund may
not include balances attributable to additional draws made thereafter. The
accompanying prospectus supplement will describe these provisions as well as the
related allocation provisions that would be applicable.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENT. Each prospectus
supplement will contain specific information with respect to the mortgage assets
contained in the related trust fund, as of the cut-off date specified in the
prospectus supplement, which will usually be close of business on the first day
of the month of formation of the related trust fund, to the extent specifically
known to the depositor as of the date of the prospectus supplement, including,
in summary form, the following:
o the aggregate outstanding principal balance, the largest, smallest and
average outstanding principal balance of the mortgage assets,
o the type of property securing the mortgage assets and the percentage
of mortgage assets in the related mortgage pool which are secured by
that type of property,
o the range of original terms to maturity of the mortgage assets,
o the earliest origination date and latest maturity date,
o the aggregate principal balance of mortgage loans having loan-to-value
ratios at origination exceeding 80%, or, with respect to mortgage
loans secured by a junior lien, the aggregate principal balance of
mortgage loans having combined loan-to-value ratios exceeding 80%,
o the interest rates or range of interest rates borne by the mortgage
loans,
o the geographical distribution of the mortgaged properties on a
state-by-state basis,
o the number and aggregate principal balance of buydown mortgage loans,
if any,
o a description of the retained interest, if any,
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o with respect to ARM Loans, the index, the adjustment dates, the
highest, lowest and weighted average gross margin, and the maximum
interest rate variation at the time of any adjustment and over the
life of the ARM Loan,
o the range of debt service coverage ratios for mortgage loans secured
by multifamily properties or commercial properties, and
o whether the mortgage loans provide for payments of interest only for
any period and the frequency and amount by which, and the term during
which, monthly payments adjust.
If specific information respecting the trust fund assets is not known to
the depositor at the time securities are initially offered, more general
information of the nature described in the bullet points above will be provided
in the prospectus supplement, and specific information as to the trust fund
assets to be included in the trust fund on the date of issuance of the
securities will be set forth in a report which will be available to purchasers
of the related securities at or before the initial issuance of the securities
and will be filed, together with the related pooling and servicing agreement,
with respect to each series of certificates, or the related servicing agreement,
trust agreement and indenture, with respect to each series of notes, as part of
a report on Form 8-K with the Securities and Exchange Commission within fifteen
days after the initial issuance. The composition and characteristics of a
mortgage pool containing revolving credit loans may change from time to time as
a result of any draws made after the related cut-off date under the related
credit line agreements. If mortgage assets are added to or deleted from the
trust fund after the date of the related prospectus supplement other than as a
result of any draws under credit line agreements relating to revolving credit
loans, the addition or deletion will be noted on the report on Form 8-K. In no
event, however, will more than 5%, by principal balance at the cut-off date, of
the mortgage assets deviate from the characteristics of the mortgage assets set
forth in the related prospectus supplement other than as a result of any draws
under credit line agreements relating to revolving credit loans. In addition, a
report on Form 8-K will be filed within 15 days after the end of any pre-funding
period containing information respecting the trust fund assets transferred to a
trust fund after the date of issuance of the related securities as described in
the following paragraph.
DESCRIPTION OF THE PRE-FUNDING ACCOUNT FOR THE PURCHASE OF ADDITIONAL MORTGAGE
LOANS
The agreement governing the trust fund may provide for the transfer by the
mortgage loan seller of additional mortgage assets to the related trust fund
after the date of initial issuance of the securities. In that case, the trust
fund will include a pre-funding account, into which all or a portion of the
proceeds of the sale of one or more classes of securities of the related series
will be deposited to be released as additional mortgage assets are transferred.
Additional mortgage assets will be required to conform to the requirements set
forth in the related agreement or other agreement providing for the transfer,
and will be underwritten to the same standards as the mortgage assets initially
included in the trust fund. A pre-funding account will be required to be
maintained as an eligible account under the related agreement and the amount
held in the pre-funding account shall at no time exceed 50% of the aggregate
outstanding principal balance of the securities. The related agreement providing
for the transfer of additional mortgage assets will provide that all transfers
must be made within 3 months, if a REMIC election has been made with respect to
the trust, or within 6 months after the date on which the related securities
were issued, and that amounts set aside to fund the transfers, whether in a
pre-funding account or otherwise, and not so applied within the required
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period of time will be deemed to be principal prepayments and applied in the
manner set forth in the related prospectus supplement.
The depositor will be required to provide data regarding the additional
mortgage assets to the rating agencies and the security insurer, if any,
sufficiently in advance of the scheduled transfer to permit review by the rating
agencies and the security insurer. Transfer of the additional mortgage assets
will be further conditioned upon confirmation by the rating agencies that the
addition of mortgage assets to the trust fund will not result in the downgrading
of the securities or, in the case of a series guaranteed or supported by a
security insurer, will not adversely affect the capital requirements of the
security insurer. Finally, a legal opinion to the effect that the conditions to
the transfer of the additional mortgage assets have been satisfied will be
required.
THE DEPOSITOR
Long Beach Securities Corp., the depositor, is a Delaware corporation
incorporated on July 13, 2000 as a wholly-owned subsidiary of Long Beach
Mortgage Company. The depositor was organized for the purpose of serving as a
private secondary mortgage market conduit. The depositor maintains its principal
office at 1100 Town & Country Road, Orange, California 92868. Its telephone
number is (714) 541-5378.
The depositor does not have, nor is it expected in the future to have, any
significant assets. The prospectus supplement for each series of securities will
disclose if the depositor is a party to any legal proceedings that could have a
material impact on the related trust fund and the interests of the potential
investors.
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities will be
applied by the depositor to the purchase of trust fund assets or will be used by
the depositor for general corporate purposes. The depositor expects that it will
make additional sales of securities similar to the securities from time to time,
but the timing and amount of offerings of securities will depend on a number of
factors, including the volume of mortgage assets acquired by the depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD AND MATURITY CONSIDERATIONS
The yield on any offered security will depend on the following:
o the price paid by the securityholder,
o the rate at which interest accrued on the security,
o the receipt and timing of receipt of distributions on the security,
o the weighted average life of the mortgage assets in the related trust
fund,
o liquidations of mortgage assets following mortgagor defaults,
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o purchases of mortgage assets in the event of optional termination of
the trust fund or breaches of representations made in respect of such
mortgage assets by the depositor, the master servicer and others, and
o in the case of securities evidencing interests in ARM Loans, by
changes in the interest rates or the conversions of ARM Loans to a
fixed interest rate.
SECURITY INTEREST RATE. Securities of any class within a series may have
fixed, variable or adjustable security interest rates, which may or may not be
based upon the interest rates borne by the mortgage assets in the related trust
fund. The prospectus supplement with respect to any series of securities will
specify the security interest rate for each class of securities or, in the case
of a variable or adjustable security interest rate, the method of determining
the security interest rate. Holders of Stripped Interest Securities or a class
of securities having a security interest rate that varies based on the weighted
average interest rate of the underlying mortgage assets will be affected by
disproportionate prepayments and repurchases of mortgage assets having higher
interest rates than the average interest rate.
TIMING OF PAYMENT OF INTEREST AND PRINCIPAL. The effective yield to
securityholders entitled to payments of interest will be slightly lower than the
yield otherwise produced by the applicable security interest rate because, while
interest on the mortgage assets may accrue from the first day of each month, the
distributions of such interest will not be made until the distribution date
which may be as late as the 25th day of the month following the month in which
interest accrues on the mortgage assets. On each distribution date, a payment of
interest on the securities, or addition to the principal balance of a class of
Accrual Securities, will include interest accrued during the interest accrual
period described in the related prospectus supplement for that remittance date.
If the interest accrual period ends on a date other than a remittance date for
the related series, the yield realized by the holders of the securities may be
lower than the yield that would result if the interest accrual period ended on
the remittance date. In addition, if so specified in the related prospectus
supplement, interest accrued for an interest accrual period for one or more
classes of securities may be calculated on the assumption that distributions of
principal, and additions to the principal balance of Accrual Securities, and
allocations of losses on the mortgage assets may be made on the first day of the
interest accrual period for a remittance date and not on the remittance date.
This method would produce a lower effective yield than if interest were
calculated on the basis of the actual principal amount outstanding during an
interest accrual period.
When a principal prepayment in full is made on a mortgage loan, the
borrower is charged interest only for the period from the due date of the
preceding monthly payment up to the date of the prepayment, instead of for a
full month. When a partial prepayment is made on a mortgage loan other than a
home equity revolving credit loan, the mortgagor is not charged interest on the
amount of the prepayment for the month in which the prepayment is made.
Accordingly, the effect of principal prepayments in full during any month will
be to reduce the aggregate amount of interest collected that is available for
distribution to securityholders. The mortgage loans in a trust fund may contain
provisions limiting prepayments or requiring the payment of a prepayment penalty
upon prepayment in full or in part. If so specified in the related prospectus
supplement, a prepayment penalty collected may be applied to offset the
above-described shortfalls in interest collections on the related distribution
date. Otherwise, prepayment penalties collected may be available for
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distribution only to a specific class of securities or may not be a part of the
related trust at all, and, therefore not available for distribution to any class
of securities. Full and partial principal prepayments collected during the
prepayment period set forth in a prospectus supplement will be available for
distribution to securityholders on the related distribution date. Neither the
trustee nor the depositor will be obligated to fund shortfalls in interest
collections resulting from prepayments. The prospectus supplement for a series
of securities may specify that the master servicer will be obligated to pay from
its own funds, without reimbursement, those interest shortfalls attributable to
full and partial prepayments by mortgagors but only up to an amount equal to its
servicing fee for the related due period. SEE "DESCRIPTION OF THE SECURITIES".
In addition, if so specified in the related prospectus supplement, a holder
of a non-offered class of securities will have the right, solely at its
discretion, to terminate the related trust fund on any distribution date after
the 12th distribution date following the date of initial issuance of the related
series of securities and until the date as the Clean-up Call becomes exercisable
and thereby effect early retirement of the securities of the series. Any call of
this type will be of the entire trust fund at one time; multiple calls with
respect to any series of securities will not be permitted. Early termination
would result in the concurrent retirement of all outstanding securities of the
related series and would decrease the average lives of the terminated
securities, perhaps significantly. The earlier after the date of the initial
issuance of the securities that the termination occurs, the greater would be the
effect.
The outstanding principal balances of home equity revolving credit loans
are, in most cases, much smaller than traditional first lien mortgage loan
balances, and the original terms to maturity of those loans are often shorter
than those of traditional first lien mortgage loans. As a result, changes in
interest rates will not affect the monthly payments on those loans or contracts
to the same degree that changes in mortgage interest rates will affect the
monthly payments on traditional first lien mortgage loans. Consequently, the
effect of changes in prevailing interest rates on the prepayment rates on
shorter-term, smaller balance loans and contracts may not be similar to the
effects of those changes on traditional first lien mortgage loan prepayment
rates, or those effects may be similar to the effects of those changes on
mortgage loan prepayment rates, but to a smaller degree.
For some loans, including home equity revolving credit loans and ARM loans,
the loan rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the borrower under each of the loans, other
than a home equity revolving credit loan, usually will be qualified on the basis
of the loan rate in effect at origination, and borrowers under home equity
revolving credit loans are usually qualified based on an assumed payment which
reflects a rate significantly lower than the maximum rate. The repayment of any
such loan may thus be dependent on the ability of the borrower to make larger
monthly payments following the adjustment of the loan rate. In addition,
depending upon the use of the revolving credit line and the payment patterns,
during the repayment period, a borrower may be obligated to make payments that
are higher than the borrower originally qualified for. Some of the home equity
revolving credit loans are not expected to significantly amortize prior to
maturity. As a result, a borrower will, in these cases, be required to pay a
substantial principal amount at the maturity of a home equity revolving credit
loan.
The Prospectus Supplement for each series of Securities may set forth
additional information regarding yield considerations.
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PRINCIPAL PREPAYMENTS. The yield to maturity on the securities will be
affected by the rate of principal payments on the mortgage assets, including
principal prepayments, curtailments, defaults and liquidations. The rate at
which principal prepayments occur on the mortgage assets will be affected by a
variety of factors, including, without limitation, the following:
o the terms of the mortgage assets,
o the level of prevailing interest rates,
o the availability of mortgage credit,
o in the case of multifamily loans and commercial loans, the quality of
management of the mortgaged properties, and
o economic, demographic, geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly below
the interest rates on the mortgage assets included in a particular trust fund,
those mortgage assets are likely to be the subject of higher principal
prepayments than if prevailing rates remain at the rates borne by those mortgage
assets. Conversely, if prevailing interest rates rise significantly above the
interest rates on the mortgage assets included in a particular trust fund, those
mortgage assets are likely to be the subject of lower principal prepayments than
if prevailing rates remain at the rates borne by those mortgage assets. The rate
of principal payments on some or all of the classes of securities of a series
will correspond to the rate of principal payments on the mortgage assets
included in the related trust fund and is likely to be affected by the existence
of prepayment premium provisions of the mortgage assets in a mortgage pool, and
by the extent to which the servicer of any such mortgage asset is able to
enforce such provisions. There can be no certainty as to the rate of prepayments
on the mortgage assets during any period or over the life of the related
securities.
If the purchaser of a security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the mortgage assets,
the actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the mortgage assets, the actual yield
to maturity will be lower than that so calculated. In either case, the effect on
yield of prepayments on one or more classes of securities of a series may be
mitigated or exacerbated by the priority of distributions of principal to those
classes as provided in the related prospectus supplement.
The timing of changes in the rate of principal payments on the mortgage
assets may significantly affect an investor's actual yield to maturity, even if
the average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
mortgage assets and distributed in respect of a security, the greater the effect
on such investor's yield to maturity. The effect on an investor's yield of
principal payments occurring at a rate higher or lower than the rate anticipated
by the investor during a given period may not be offset by a subsequent like
decrease or increase in the rate of principal payments.
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DEFAULTS. The rate of defaults on the mortgage assets will also affect the
rate and timing of principal payments on the mortgage assets and thus the yield
on the securities. In general, defaults on single family loans are expected to
occur with greater frequency in their early years. However, mortgage assets that
require balloon payments, including multifamily loans, risk default at maturity,
or that the maturity of the balloon loan may be extended in connection with a
workout. The rate of default on mortgage loans which are refinance or limited
documentation mortgage loans, mortgage assets with high loan-to-value ratios,
and ARM Loans may be higher than for other types of mortgage assets.
Furthermore, the rate and timing of defaults and liquidations on the mortgage
assets will be affected by the general economic condition of the region of the
country in which the related mortgaged properties are located. The risk of
delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values.
MATURITY AND WEIGHTED AVERAGE LIFE
PREPAYMENTS. The rates at which principal payments are received on the
mortgage assets included in a trust fund and the rate at which payments are made
from any credit support for the related series of securities may affect the
ultimate maturity and the weighted average life of each class of the series.
Weighted average life refers to the average amount of time that will elapse from
the date of issue of a security until each dollar of principal of that security
will be repaid to the investor. The weighted average life of a class of
securities of a series will be influenced by, among other factors, the rate at
which principal on the related mortgage assets is paid to that class, which may
be in the form of scheduled amortization or prepayments. For this purpose, the
term prepayment includes prepayments, in whole or in part, and liquidations due
to default. Prepayments on the mortgage assets in a trust fund will generally
accelerate the rate at which principal is paid on some or all of the classes of
the securities of the related series.
If so provided in the prospectus supplement for a series of securities, one
or more classes of securities may have a final scheduled remittance date, which
is the date on or prior to which the principal balance thereof is scheduled to
be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein.
In addition, the weighted average life of the securities may be affected by
the varying maturities of the related mortgage assets. If any mortgage assets in
a trust fund have actual terms to maturity of less than those assumed in
calculating the final scheduled remittance dates for the classes of securities
of the related series, one or more classes of the securities may be fully paid
prior to their respective final scheduled remittance dates, even in the absence
of prepayments. Accordingly, the prepayment experience of the mortgage pool
will, to some extent, be a function of the mix of interest rates and maturities
of the mortgage assets in that mortgage pool. SEE "DESCRIPTION OF THE TRUST
FUNDS".
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate prepayment model or the
Standard Prepayment Assumption prepayment model, each as described below. CPR
represents a constant assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of loans for the life of those loans.
SPA represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of loans. A prepayment assumption of
100% of SPA assumes prepayment
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rates of 0.2% per annum of the then outstanding principal balance of the loans
in the first month of the life of the loans and an additional 0.2% per annum in
each month thereafter until the thirtieth month. Beginning in the thirtieth
month and in each month thereafter during the life of the loans, 100% of SPA
assumes a constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans. Moreover, CPR and SPA were
developed based upon historical prepayment experience for single family loans.
Thus, it is likely that prepayment of any mortgage assets will not conform to
any particular level of CPR or SPA.
The prospectus supplement with respect to each series of securities may
contain tables, if applicable, setting forth the projected weighted average life
of one or more classes of offered securities of the series and the percentage of
the initial principal balance of each class that would be outstanding on
specified remittance dates based on the assumptions stated in that prospectus
supplement, including assumptions that prepayments on the related mortgage
assets are made at rates corresponding to various percentages of CPR, SPA or at
other rates specified in the prospectus supplement. Tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of the
securities to various prepayment rates and are not intended to predict or to
provide information that will enable investors to predict the actual weighted
average life of the securities. It is unlikely that prepayment of any mortgage
assets for any series will conform to any particular level of CPR, SPA or any
other rate specified in the related prospectus supplement.
There can be no assurance as to the rate of prepayment of the mortgage
loans underlying or comprising the trust fund assets in any trust fund. The
depositor is not aware of any publicly available statistics relating to the
principal prepayment experience of diverse portfolios of mortgage loans over an
extended period of time. All statistics known to the depositor that have been
compiled with respect to prepayment experience on mortgage loans indicates that
while some mortgage loans may remain outstanding until their stated maturities,
a substantial number will be paid prior to their respective stated maturities.
The depositor is not aware of any historical prepayment experience with respect
to mortgage loans secured by properties located in Puerto Rico or Guam and,
accordingly, prepayments on loans secured by properties in Puerto Rico or Guam
may not occur at the same rate or be affected by the same factors as other
mortgage loans.
TYPE OF MORTGAGE ASSET. The type of mortgage assets included in a trust
fund may affect the weighted average life of the related securities. A number of
mortgage assets may have balloon payments due at maturity, and because the
ability of a mortgagor to make a balloon payment typically will depend upon its
ability either to refinance the loan or to sell the related mortgaged property,
there is a risk that mortgage assets having balloon payments may default at
maturity, or that the servicer may extend the maturity of the mortgage asset in
connection with a workout. In addition, a number of mortgage assets may be
junior mortgage loans. The rate of default on junior mortgage loans may be
greater than that of mortgage loans secured by first liens on comparable
properties. In the case of defaults, recovery of proceeds may be delayed by,
among other things, bankruptcy of the mortgagor or adverse conditions in the
market where the property is located. In order to minimize losses on defaulted
mortgage assets, the servicer may, to the extent and under the circumstances set
forth in this prospectus and in the related servicing agreement, be permitted to
modify mortgage assets that are in default or as to which a payment default
appears imminent. Any defaulted balloon
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payment or modification that extends the maturity of a mortgage asset will tend
to extend the weighted average life of the securities, thereby lengthening the
period of time elapsed from the date of issuance of a security until it is
retired.
Although the interest rates on ARM Loans will be subject to periodic
adjustments, adjustments generally will, unless otherwise specified in the
related prospectus supplement, (1) not increase or decrease the interest rate by
more than a fixed percentage amount on each adjustment date, (2) not increase
the interest rate over a fixed percentage amount during the life of any ARM Loan
and (3) be based on an index, which may not rise and fall consistently with the
mortgage interest rate, plus the related fixed percentage set forth in the
related mortgage note, which may be different from margins being used at the
time for newly originated adjustable rate mortgage loans. As a result, the
interest rates on the ARM Loans in a mortgage pool at any time may not equal the
prevailing rates for similar, newly originated adjustable rate mortgage loans.
In certain rate environments, the prevailing rates on fixed rate mortgage loans
may be sufficiently low in relation to the then-current mortgage rates on ARM
Loans with the result that the rate of prepayments may increase as a result of
refinancings. There can be no certainty as to the rate of prepayments on the
mortgage assets during any period or over the life of any series of securities.
The interest rates on ARM Loans subject to negative amortization generally
adjust monthly and their amortization schedules adjust less frequently. During a
period of rising interest rates, as well as immediately after origination when
initial interest rates are generally lower than the sum of the indices
applicable at origination and the related margins, the amount of interest
accruing on the principal balance of these types of mortgage assets may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing mortgage assets may
become deferred interest which will be added to the principal balance thereof
and will bear interest at the applicable interest rate. The addition of any
deferred interest to the principal balance of any related class or classes of
securities of a series will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which the
securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on the ARM Loan
would exceed the amount of scheduled principal and accrued interest on the
principal balance thereof, and since such excess will be applied to reduce the
principal balance of the related class or classes of securities, the weighted
average life of the securities will be reduced which may adversely affect yield
to holders thereof, depending upon the price at which such securities were
purchased.
There can be no assurance as to the rate of principal payments or draws on
the home equity revolving credit loans. In most cases, the home equity revolving
credit loans may be prepaid in full or in part without penalty. The prospectus
supplement will specify whether loans may not be prepaid in full or in part
without penalty. The rate of principal payments and the rate of draws, if
applicable, may fluctuate substantially from time to time. Such loans may
experience a higher rate of prepayment than typical first lien mortgage loans.
Due to the unpredictable nature of both principal payments and draws, the rates
of principal payments net of draws for those loans may be much more volatile
than for typical first lien mortgage loans.
For any series of securities backed by home equity revolving credit
loans, provisions governing whether future draws on the home equity revolving
credit loans will be included in the
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trust fune will have a significant effect on the rate and timing of principal
payments on the securities. The rate at which additional balances are generated
may be affected by a variety of factors. The yield to maturity of the securities
of any series, or the rate and timing of principal payments on the loans may
also be affected by the risks associated with other loans.
As a result of the payment terms of the home equity revolving credit
loans or of the mortgage provisions relating to future draws, there may be no
principal payments on those securities in any given month. In addition, it is
possible that the aggregate draws on home equity revolving credit loans included
in a trust fund may exceed the aggregate payments of principal on those home
equity revolving credit loans for the related period. If specified in the
accompanying prospectus supplement, a series of securities may provide for a
period during which all or a portion of the principal collections on the home
equity revolving credit loans are reinvested in additional balances or are
accumulated in a trust account pending commencement of an amortization period
relating to the securities.
FORECLOSURES AND PAYMENT PLANS. The number of foreclosures and the
principal amount of the mortgage assets that are foreclosed in relation to the
number of mortgage assets that are repaid in accordance with their terms will
affect the weighted average life of those mortgage assets and that of the
related series of securities. Servicing decisions made with respect to the
mortgage assets, including the use of payment plans prior to a demand for
acceleration and the restructuring of mortgage assets in bankruptcy proceedings,
may also have an effect upon the payment patterns of particular mortgage assets
and thus the weighted average life of the securities.
DUE-ON-SALE CLAUSES. Acceleration of mortgage payments as a result of
certain transfers of or the creation of encumbrances upon underlying mortgaged
property is another factor affecting prepayment rates that may not be reflected
in the prepayment standards or models used in the relevant prospectus
supplement. In most cases the mortgage assets will include "due-on-sale" clauses
that permit the lender in certain instances to accelerate the maturity of the
loan if the borrower sells, transfers or conveys the property. The master
servicer, on behalf of the trust fund, will employ its usual practices in
determining whether to exercise any right that the trustee may have as mortgagee
to accelerate payment of the mortgage asset. An ARM Loan may be assumable under
some conditions if the proposed transferee of the related mortgaged property
establishes its ability to repay the mortgage asset and, in the reasonable
judgment of the servicer or the related sub-servicer, the security for the ARM
Loan would not be impaired by the assumption. The extent to which ARM Loans are
assumed by purchasers of the mortgaged properties rather than prepaid by the
related mortgagors in connection with the sales of the mortgaged properties will
affect the weighted average life of the related series of securities. SEE "LEGAL
ASPECTS OF MORTGAGE ASSETS--ENFORCEABILITY OF CERTAIN PROVISIONS".
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THE DEPOSITOR'S MORTGAGE LOAN PURCHASE PROGRAM
The mortgage loans to be included in a trust fund will be purchased by the
depositor, either directly or indirectly, from the mortgage loan sellers.
UNDERWRITING STANDARDS
All mortgage loans to be included in a trust fund will have been subject to
underwriting standards acceptable to the depositor and applied as described in
the following paragraph. Each mortgage loan seller, or another party on its
behalf, will represent and warrant that mortgage loans purchased by or on behalf
of the depositor from it have been originated by the related originators in
accordance with these underwriting guidelines.
The underwriting standards are applied by the originators to evaluate the
value of the mortgaged property and to evaluate the adequacy of the mortgaged
property as collateral for the mortgage loan. While the originator's primary
consideration in underwriting a mortgage loan is the value of the mortgaged
property, the originator also considers the borrower's credit history and
repayment ability as well as the type and use of the mortgaged property. As a
result of this underwriting criteria, changes in the values of mortgage
properties may have a greater effect on the delinquency, foreclosure and loss
experience on the mortgage loans in a trust fund than these changes would be
expected to have on mortgage loans that are originated in a more traditional
manner. No assurance can be given by the depositor that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans.
High LTV Loans are underwritten with an emphasis on the creditworthiness of
the related mortgagor. High LTV Loans are underwritten with a limited
expectation of recovering any amounts from the foreclosure of the related
property.
In the case of the multifamily loans, commercial loans or mixed-use loans,
lenders typically look to the debt service coverage ratio of a loan as an
important measure of the risk of default on that loan. Unless otherwise defined
in the related prospectus supplement, the debt service coverage ratio of a
multifamily loan or commercial loan at any given time is the ratio of (1) the
net operating income of the related mortgaged property for a twelve-month period
to (2) the annualized scheduled payments on the mortgage loan and on any other
loan that is secured by a lien on the mortgaged property prior to the lien of
the related mortgage. Net operating incomes is: the total operating revenues
derived from a multifamily, commercial or mixed-use property, as applicable,
during that period, minus the total operating expenses incurred in respect of
that property during that period other than (a) non-cash items such as
depreciation and amortization, (b) capital expenditures and (c) debt service on
loans (including the related mortgage loan) secured by liens on that property.
The net operating income of a multifamily, commercial or mixed-use property, as
applicable, will fluctuate over time and may or may not be sufficient to cover
debt service on the related mortgage loan at any given time. As the primary
source of the operating revenues of a multifamily, commercial or mixed- use
property, as applicable, rental income (and maintenance payments from
tenant-stockholders of a cooperatively owned multifamily property) may be
affected by the condition of the applicable real estate market and/or area
economy. Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in
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governmental rules, regulations and fiscal policies, may also affect the risk of
default on a multifamily, commercial or mixed-use loan. Lenders also look to the
loan-to-value ratio of a multifamily, commercial or mixed-use loan as a measure
of risk of loss if a property must be liquidated following a default.
Typically, the underwriting process used by an originator is as described
in this and the next two following paragraphs. The prospectus supplement for a
series will describe any variations to this process as it applies to the related
mortgage assets. Initially, a prospective borrower is required to complete an
application with respect to the applicant's liabilities, income and credit
history and personal information, as well as an authorization to apply for a
credit report that summarizes the borrower's reported credit history with local
merchants and lenders and any record of bankruptcy. In addition, an employment
verification is obtained that reports the borrower's current salary and may
contain information regarding length of employment. If a prospective borrower is
self- employed, the borrower is required to submit copies of signed tax returns
or other proof of business income. The borrower may also be required to
authorize verification of deposits at financial institutions where the borrower
has demand or savings accounts. In the case of a multifamily loan, commercial
loan or mixed-use loan, the mortgagor will also be required to provide certain
information regarding the related mortgaged property, including a current rent
roll and operating income statements which may be pro forma and unaudited. In
addition, the originator will generally also consider the location of the
mortgaged property, the availability of competitive lease space and rental
income of comparable properties in the relevant market area, the overall economy
and demographic features of the geographic area and the mortgagor's prior
experience in owning and operating properties similar to the multifamily
properties or commercial properties, as the case may be.
In determining the adequacy of the property as collateral, an appraisal is
made of each property considered for financing, except in the case of new
manufactured homes whose appraised value is determined using the list price of
the unit and accessories as described above under "Description of the Trust
Funds". Each appraiser is selected in accordance with predetermined guidelines
established for appraisers. 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, when
deemed appropriate, the cost of replacing the home. With respect to multifamily
properties, commercial properties and mixed-use properties, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis was
used. An appraisal employing the income approach to value analyzes a property's
projected net cash flow, capitalization and other operational information in
determining the property's value. The market approach to value analyzes the
prices paid for the purchase of similar properties in the property's area, with
adjustments made for variations between those other properties and the property
being appraised. The cost approach to value requires the appraiser to make an
estimate of land value and then determine the current cost of reproducing the
improvements less any accrued depreciation. The value of the property being
financed, as indicated by the appraisal, must be high enough so that it
currently supports, and is anticipated to support in the future, the outstanding
loan balance.
In the case of single family loans and contracts, once all applicable
employment, credit and property information is received, the originator reviews
the applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation,
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reviews the credit history of the applicant, calculates the debt
service-to-income ratio to determine the applicant's ability to repay the loan,
reviews the type of property being financed and reviews the property. In
evaluating the credit quality of borrowers, the originator may utilize the FICO
score supplied by the credit bureau with the credit report (a statistical
ranking of likely future credit performance developed by Fair, Isaac & Company
and three national credit data repositories - Equifax, TransUnion and Experian).
In the case of a mortgage loan secured by a leasehold interest in a
residential property, the title to which is held by a third party lessor, the
mortgage loan seller, or another party on its behalf, will be required to
warrant, among other things, that the remaining term of the lease and any
sublease be at least five years longer than the remaining term of the mortgage
loan.
With respect to any loan insured by the FHA, the mortgage loan seller is
required to represent that the FHA loan complies with the applicable
underwriting policies of the FHA. SEE "DESCRIPTION OF PRIMARY INSURANCE
POLICIES--FHA INSURANCE".
With respect to any loan guaranteed by the VA, the mortgage loan seller
will be required to represent that the VA loan complies with the applicable
underwriting policies of the VA. SEE "DESCRIPTION OF PRIMARY INSURANCE
POLICIES--VA GUARANTEES".
The recent foreclosure or repossession and delinquency experience with
respect to loans serviced by the master servicer or, if applicable, a
significant sub-servicer will be provided in the related prospectus supplement.
QUALIFICATIONS OF ORIGINATORS AND MORTGAGE LOAN SELLERS
Each originator will be required to satisfy the qualifications set forth in
this paragraph. Each originator must be an institution experienced in
originating conventional mortgage loans in accordance with customary and
reasonable practices and the mortgage loan seller's or the depositor's
guidelines, and must maintain satisfactory facilities to originate those loans.
Each originator must be a HUD-approved mortgagee or an institution the deposit
accounts in which are insured by the Bank Insurance Fund or Savings Association
Insurance Fund of the FDIC. In addition, with respect to FHA loans or VA loans,
each originator must be approved to originate the mortgage loans by the FHA or
VA, as applicable. Each originator and mortgage loan seller must also satisfy
criteria as to financial stability evaluated on a case by case basis by the
depositor.
REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN SELLERS; REMEDIES FOR BREACH OF
REPRESENTATION
Each mortgage loan seller, or a party on its behalf, will have made
representations and warranties in respect of the mortgage loans sold by that
mortgage loan seller. The following material representations and warranties as
to the mortgage loans will be made by or on behalf of each mortgage loan seller:
o that any required hazard insurance was effective at the origination of
each mortgage loan, and that each required policy remained in effect
on the date of purchase of the mortgage loan from the mortgage loan
seller by or on behalf of the depositor;
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o that either (A) title insurance insuring, subject only to permissible
title insurance exceptions, the lien status of the Mortgage was
effective at the origination of each mortgage loan and the policy
remained in effect on the date of purchase of the mortgage loan from
the mortgage loan seller by or on behalf of the depositor or (B) if
the mortgaged property securing any mortgage loan is located in an
area where title insurance policies are generally not available, there
is in the related mortgage file an attorney's certificate of title
indicating, subject to permissible exceptions set forth therein, the
lien status of the mortgage;
o that the mortgage loan seller had good title to each mortgage loan and
each mortgage loan was subject to no valid offsets, defenses,
counterclaims or rights of rescission except to the extent that any
buydown agreement described herein may forgive some indebtedness of a
borrower;
o that each Mortgage constituted a valid lien on, or security interest
in, the mortgaged property, subject only to permissible title
insurance exceptions and senior liens, if any, and that the mortgaged
property was free from material damage and was in good repair;
o that there were no delinquent tax or assessment liens against the
mortgaged property;
o that each mortgage loan was not currently more than 90 days delinquent
as to required monthly payments of principal and interest; and
o 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 a person other than a mortgage loan seller makes any of the foregoing
representations and warranties on behalf of the mortgage loan seller, the
identity of the person will be specified in the related prospectus supplement.
Any person making representations and warranties on behalf of a mortgage loan
seller shall be an affiliate of the mortgage loan seller or a person acceptable
to the depositor having knowledge regarding the subject matter of those
representations and warranties.
All of the representations and warranties made by or on behalf of a
mortgage loan seller in respect of a mortgage loan will have been made as of the
date on which the mortgage loan seller sold the mortgage loan to or on behalf of
the depositor. A substantial period of time may have elapsed between the date
the representation or warranty was made to or on behalf of the depositor and the
date of initial issuance of the series of securities evidencing an interest in
the related mortgage loan.
In the event of a breach of any representation or warranty made by a mortgage
loan seller, the mortgage loan seller will be obligated to cure the breach or
repurchase or replace the affected mortgage loan as described in the second
following paragraph. Since the representations and warranties made by or on
behalf of a mortgage loan seller do not address events that may occur following
the sale of a mortgage loan by that mortgage loan seller, it will have a cure,
repurchase or substitution obligation in connection with a breach of a
representation and warranty only if the relevant event that causes the breach
occurs prior to the date of the sale to or on behalf of the depositor. A
mortgage loan seller would have no repurchase or substitution obligations if the
relevant event that causes the breach occurs after the date of the sale to or on
behalf of the depositor. However, the depositor will not include any mortgage
loan in the trust fund for any series of
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securities if anything has come to the depositor's attention that would cause it
to believe that the representations and warranties made in respect of a mortgage
loan will not be accurate and complete in all material respects as of the date
of initial issuance of the related series of securities.
The only representations and warranties to be made for the benefit of
holders of securities in respect of any mortgage loan relating to the period
commencing on the date of sale of a mortgage loan by the mortgage loan seller to
or on behalf of the depositor will be the limited representations of the
depositor and of the master servicer described below under "Description of the
Securities-- Assignment of Trust Fund Assets; Review of Files by Trustee". If
the master servicer is also a mortgage loan seller with respect to a particular
series, the representations will be in addition to the representations and
warranties made by the master servicer in its capacity as a mortgage loan
seller.
The master servicer and the trustee, or the trustee, will promptly notify
the relevant mortgage loan seller of any breach of any representation or
warranty made by or on behalf of it in respect of a mortgage loan that
materially and adversely affects the value of that mortgage loan or the
interests in the mortgage loan of the securityholders. If the mortgage loan
seller cannot cure a breach within a specified time period from the date on
which the mortgage loan seller was notified of the breach, then the mortgage
loan seller will be obligated to repurchase the affected mortgage loan from the
trustee within a specified time period from the date on which the mortgage loan
seller was notified of the breach, at the purchase price therefor. A mortgage
loan seller, rather than repurchase a mortgage loan as to which a breach has
occurred, may have the option, within a specified period after initial issuance
of the related series of securities, to cause the removal of the mortgage loan
from the trust fund and substitute in its place one or more other mortgage
loans, in accordance with the standards described below under "Description of
the Securities--Assignment of the Mortgage Loans". The master servicer will be
required under the applicable servicing agreement to use its best efforts to
enforce the repurchase or substitution obligations of the mortgage loan seller
for the benefit of the trustee and the holders of the securities, following the
practices it would employ in its good faith business judgment were it the owner
of the mortgage loan. This repurchase or substitution obligation will constitute
the sole remedy available to holders of securities or the trustee for a breach
of representation by a mortgage loan seller. SEE "DESCRIPTION OF THE
SECURITIES".
Neither the depositor nor the master servicer will be obligated to purchase
or substitute for a mortgage loan if a mortgage loan seller defaults on its
obligation to do so, and no assurance can be given that mortgage loan sellers
will carry out their repurchase or substitution obligations with respect to
mortgage loans. To the extent that a breach of the representations and
warranties of a mortgage loan seller may also constitute a breach of a
representation made by the depositor, the depositor may have a repurchase or
substitution obligation as described below under "Description of the
Securities--Assignment of Trust Fund Assets; Review of Files by Trustee".
DESCRIPTION OF THE SECURITIES
The securities will be issued in series. Each series of certificates
evidencing interests in a trust fund consisting of mortgage loans will be issued
in accordance with a pooling and servicing agreement among the depositor, the
master servicer and the trustee named in the prospectus supplement. Each series
of notes evidencing indebtedness of a trust fund consisting of mortgage loans
will be issued in accordance with an indenture between the related issuer and
the trustee named in the prospectus supplement. The issuer of notes will be the
depositor or an owner trust established
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under an owner trust agreement between the depositor and the owner trustee for
the purpose of issuing a series of notes. Where the issuer is an owner trust,
the ownership of the trust fund will be evidenced by equity certificates issued
under the owner trust agreement. The provisions of each agreement will vary
depending upon the nature of the securities to be issued thereunder and the
nature of the related trust fund. Various forms of pooling and servicing
agreement, servicing agreement, owner trust agreement, trust agreement and
indenture have been filed as exhibits to the registration statement of which
this prospectus is a part. The following summaries describe specific provisions
which will appear in each agreement. The prospectus supplement for a series of
securities will describe additional provisions of the agreement relating to a
series. This prospectus together with the prospectus supplement will describe
the material terms of the agreement governing the trust fund related to a series
of securities. As used in this prospectus supplement with respect to any series,
the term certificate or the term note refers to all of the certificates or notes
of that series, whether or not offered by this prospectus and by the related
prospectus supplement, unless the context otherwise requires.
The certificates of each series, including any class of certificates not
offered hereby, will be issued in fully registered form only and will represent
the entire beneficial ownership interest in the trust fund created by the
related pooling and servicing agreement. The notes of each series, including any
class of notes not offered hereby, will be issued in fully registered form only
and will represent indebtedness of the trust fund created by the related
indenture. If so provided in the prospectus supplement, any class of securities
of any series may be represented by a certificate or note registered in the name
of a nominee of The Depository Trust Company. The interests of beneficial owners
of securities registered in the name of DTC will be represented by entries on
the records of participating members of DTC. Definitive certificates or notes
will be available for securities registered in the name of DTC only under the
limited circumstances provided in the related prospectus supplement. The
securities will be transferable and exchangeable for like securities of the same
class and series in authorized denominations at the corporate trust office of
the trustee as specified in the related prospectus supplement. The prospectus
supplement for each series of securities will describe any limitations on
transferability. No service charge will be made for any registration of exchange
or transfer of securities, but the depositor or the trustee or any agent of the
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
Each series of securities may consist of either:
o a single class of securities evidencing the entire beneficial
ownership of or indebtedness of the related trust fund;
o two or more classes of securities evidencing the entire beneficial
ownership of or indebtedness of the related trust fund, one or more
classes of which will be senior in right of payment to one or more of
the other classes;
o two or more classes of securities, one or more classes of which are
entitled to (a) principal distributions, with disproportionate,
nominal or no interest distributions or (b) interest distributions,
with disproportionate, nominal or no principal distributions;
o two or more classes of securities which differ as to timing,
sequential order, priority of payment, security interest rate or
amount of distributions of principal or interest or both, or as
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to which distributions of principal or interest or both on any class
may be made upon the occurrence of specified events, in accordance
with a schedule or formula, or on the basis of collections from
designated portions of the mortgage pool, which series may include one
or more classes of securities, as to which accrued interest or a
portion thereof will not be distributed but rather will be added to
the principal balance of the security on each distribution date in the
manner described in the related prospectus supplement; and
o other types of classes of securities, as described in the related
prospectus supplement.
With respect to any series of notes, the equity certificates, insofar as
they represent the beneficial ownership interest in the issuer, will be
subordinate to the related notes.
Each class of securities, other than interest only Strip Securities, will
have a stated principal amount and, unless otherwise provided in the related
prospectus supplement, will be entitled to payments of interest on the stated
principal amount based on a fixed, variable or adjustable interest rate. The
security interest rate of each security offered hereby will be stated in the
related prospectus supplement as the pass-through rate with respect to a
certificate and the note interest rate with respect to a note. SEE
"--DISTRIBUTION OF INTEREST ON THE SECURITIES" AND "--DISTRIBUTION OF PRINCIPAL
OF THE SECURITIES" BELOW.
The specific percentage ownership interest of each class of securities and
the minimum denomination for each security will be set forth in the related
prospectus supplement.
As to each series of certificates with respect to which a REMIC election is
to be made, the master servicer or the trustee will be obligated to take all
actions required in order to comply with applicable laws and regulations, and
will be obligated to pay any Prohibited Transaction Taxes or Contribution Taxes
arising out of a breach of its obligations with respect to its compliance
without any right of reimbursement therefor from the trust fund or from any
securityholder. A Prohibited Transaction Tax or Contribution Tax resulting from
any other cause will be charged against the related trust fund, resulting in a
reduction in amounts otherwise distributable to securityholders. SEE "FEDERAL
INCOME TAX CONSEQUENCES."
ASSIGNMENT OF TRUST FUND ASSETS; REVIEW OF FILES BY TRUSTEE
At the time of issuance of any series of securities, the depositor will
cause the pool of mortgage assets to be included in the related trust fund to be
assigned to the trustee, together with all principal and interest received by or
on behalf of the depositor on or with respect to the mortgage assets after the
related cut-off date, other than principal and interest due on or before the
cut-off date and other than any retained interest. The trustee will,
concurrently with the assignment of mortgage assets, deliver the securities to
the depositor in exchange for the trust fund assets. Each mortgage asset will be
identified in a schedule appearing as an exhibit to the related agreement. The
schedule of mortgage assets will include detailed information as to the mortgage
asset included in the related trust fund, including the outstanding principal
balance of each mortgage asset after application of payments due on the cut-off
date, information regarding the interest rate on the mortgage asset, the
interest rate net of the sum of the rates at which the servicing fees and the
retained interest, if any, are calculated, the retained interest, if any, the
current scheduled monthly payment of principal and
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interest, the maturity of the mortgage note, the value of the mortgaged
property, the loan-to-value ratio at origination and other information with
respect to the mortgage assets.
If so specified in the related prospectus supplement, and in accordance
with the rules of membership of Merscorp, Inc. and/or Mortgage Electronic
Registration Systems, Inc. or, MERS, assignments of the mortgages for the
mortgage loans in the related trust will be registered electronically through
Mortgage Electronic Registration Systems, Inc., or MERS(R) System. With respect
to mortgage loans registered through the MERS(R) System, MERS shall serve as
mortgagee of record solely as a nominee in an administrative capacity on behalf
of the trustee and shall not have any interest in any of those mortgage loans.
The depositor will, with respect to each mortgage asset, deliver or cause
to be delivered to the trustee, or to the custodian hereinafter referred to:
o With respect to each mortgage loan, (1) the mortgage note endorsed,
without recourse, to the order of the trustee or in blank, (2) the
original Mortgage with evidence of recording indicated thereon and,
except with respect to home equity revolving credit loans, an
assignment of the Mortgage to the trustee or in blank, in recordable
form. The depositor may deliver lost note affidavit and indemnity in
lieu of a mortgage note that is missing. If a Mortgage has not yet
been returned from the public recording office, the depositor will
deliver or cause to be delivered, in lieu of the original Mortgage, a
copy of the Mortgage together with the depositor's certificate that
the original of the Mortgage was delivered to the recording office.
The depositor will promptly cause the assignment of each related
mortgage loan to be recorded in the appropriate public office for real
property records, except for Mortgages held under the MERS(R)System
and except in the State of California or in other states where, in the
opinion of counsel acceptable to the trustee, recording of the
assignment is not required to protect the trustee's interest in the
mortgage loan against the claim of any subsequent transferee or any
successor to or creditor of the depositor, the master servicer, the
relevant mortgage loan seller or any other prior holder of the
mortgage loan. If the depositor uses the MERS(R)System, it will
deliver evidence that the Mortgage is held for the trustee through the
MERS(R)System instead of an assignment of the Mortgage in recordable
form.
o With respect to each cooperative loan, (1) the cooperative note, (2)
the original security agreement, (3) the proprietary lease or
occupancy agreement, (4) the related stock certificate and related
stock powers endorsed in blank, and (5) a copy of the original filed
financing statement together with an assignment thereof to the trustee
in a form sufficient for filing. The depositor may deliver lost note
affidavit and indemnity in lieu of a cooperative note that is missing.
The depositor will promptly cause the assignment and financing
statement of each related cooperative loan to be filed in the
appropriate public office, except in states where in the opinion of
counsel acceptable to the trustee, filing of the assignment and
financing statement is not required to protect the trustee's interest
in the cooperative loan against the claim of any subsequent transferee
or any successor to or creditor of the depositor, the master servicer,
the relevant mortgage loan seller or any prior holder of the
cooperative loan.
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o With respect to each manufactured housing contract or home improvement
contract, (1) the original contract endorsed, without recourse, to the
order of the trustee and copies of documents and (2) instruments
related to the contract and the security interest in the property
securing the contract, and (3) a blanket assignment to the trustee of
all contracts in the related trust fund and the documents and
instruments. In order to give notice of the right, title and interest
of the securityholders to the contracts, the depositor will cause to
be executed and delivered to the trustee a UCC-1 financing statement
identifying the trustee as the secured party and identifying all
contracts as collateral.
With respect to any mortgage loan secured by a mortgaged property located
in Puerto Rico, the Mortgages with respect to these mortgage loans either (a)
secure a specific obligation for the benefit of a specified person or (b) secure
an instrument transferable by endorsement. Endorsable Puerto Rico Mortgages do
not require an assignment to transfer the related lien. Rather, transfer of
endorsable mortgages follows an effective endorsement of the related mortgage
note and, therefore, delivery of the assignment referred to in the first bullet
point above would be inapplicable. Puerto Rico Mortgages that secure a specific
obligation for the benefit of a specified person, however, require an assignment
to be recorded with respect to any transfer of the related lien and the
assignment for that purpose would be delivered to the trustee.
The trustee, or the custodian, will review the mortgage loan documents
within a specified period after receipt, and the trustee, or the custodian, will
hold the mortgage loan documents in trust for the benefit of the
securityholders. If any mortgage loan document is found to be missing or
defective in any material respect, the trustee, or the custodian, shall notify
the master servicer and the depositor, and the master servicer shall immediately
notify the relevant mortgage loan seller. If the mortgage loan seller cannot
cure the omission or defect within a specified number of days after receipt of
notice, the mortgage loan seller will be obligated to repurchase the related
mortgage asset from the trustee at the repurchase price or substitute for the
mortgage asset. There can be no assurance that a mortgage loan seller will
fulfill this repurchase or substitution obligation. Although the master servicer
is obligated to use its best efforts to enforce the repurchase or substitution
obligation to the extent described above under "The Depositor's Mortgage Loan
Purchase Program--Representations by or on behalf of Mortgage Loan Sellers;
Remedies for Breach of Representation", neither the master servicer nor the
depositor will be obligated to repurchase or substitute for that mortgage asset
if the mortgage loan seller defaults on its obligation. The assignment of the
mortgage assets to the trustee will be without recourse to the depositor and
this repurchase or substitution obligation constitutes the sole remedy available
to the securityholders or the trustee for omission of, or a material defect in,
a constituent document.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
With respect to the mortgage assets included in a trust fund, the
depositor, the originator or the mortgage loan seller, will make representations
and warranties as of a specified date, covering by way of example, the following
matters:
o the type of mortgaged property;
o the geographical concentration of the mortgage assets;
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o the original loan-to-value ratio;
o the principal balance as of the cut-off date;
o the interest rate and maturity; and
o the payment status of the mortgage asset; and the accuracy of the
information set forth for each mortgage asset on the related mortgage
loan schedule.
Upon a breach of any representation of the depositor, the originator or the
mortgage loan seller that materially and adversely affects the value of a
mortgage asset or the interests of the securityholders in the mortgage asset,
the depositor, the originator or the mortgage loan seller, as applicable, will
be obligated either to cure the breach in all material respects, repurchase the
mortgage asset at the repurchase price or substitute for that mortgage asset as
described in the paragraph below.
If the depositor, the originator or the mortgage loan seller discovers or
receives notice of any breach of its representations or warranties with respect
to a mortgage asset, the depositor, the originator or the mortgage loan seller,
as applicable, may be permitted under the agreement governing the trust fund to
remove the mortgage asset from the trust fund, rather than repurchase the
mortgage asset, and substitute in its place one or more mortgage assets, but
only if (a) with respect to a trust fund for which a REMIC election is to be
made, the substitution is effected within two years of the date of initial
issuance of the certificates, plus permissible extensions, or (b) with respect
to a trust fund for which no REMIC election is to be made, the substitution is
effected within 180 days of the date of initial issuance of the securities. Each
substitute mortgage asset will, on the date of substitution, comply with the
following requirements:
(1) have an outstanding principal balance, after deduction of all
scheduled payments due in the month of substitution, not in
excess of, and not more than $10,000 less than, the outstanding
principal balance, after deduction of all unpaid scheduled
payments due as of the date of substitution, of the deleted
mortgage asset,
(2) have an interest rate not less than, and not more than 1% greater
than, the interest rate of the deleted mortgage asset,
(3) have a remaining term to maturity not greater than, and not more
than one year less than, that of the deleted mortgage asset,
(4) have a Lockout Date, if applicable, not earlier than the Lockout
Date on the deleted mortgage loan, and
(5) comply with all of the representations and warranties set forth
in the pooling and servicing agreement or indenture as of the
date of substitution.
In connection with any substitution, an amount equal to the difference
between the purchase price of the deleted mortgage asset and the outstanding
principal balance of the substitute mortgage asset, after deduction of all
scheduled payments due in the month of substitution, together with one
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month's interest at the applicable rate at which interest accrued on the deleted
mortgage loan, less the servicing fee rate and the retained interest, if any, on
the difference, will be deposited in the distribution account and distributed to
securityholders on the first distribution date following the prepayment period
in which the substitution occurred. In the event that one mortgage asset is
substituted for more than one deleted mortgage asset, or more than one mortgage
asset is substituted for one or more deleted mortgage assets, then the amount
described in (1) above will be determined on the basis of aggregate principal
balances, the rate described in (2) above with respect to deleted mortgage
assets will be determined on the basis of weighted average interest rates, and
the terms described in (3) above will be determined on the basis of weighted
average remaining terms to maturity and the Lockout Dates described in (4) above
will be determined on the basis of weighted average Lockout Dates.
With respect to any series as to which credit support is provided by means
of a mortgage pool insurance policy, in addition to making the representations
and warranties described above, the depositor or the related mortgage loan
seller, or another party on behalf of the related mortgage loan seller, as
specified in the related prospectus supplement, will represent and warrant to
the trustee that no action has been taken or failed to be taken, no event has
occurred and no state of facts exists or has existed on or prior to the date of
the initial issuance of the securities which has resulted or will result in the
exclusion from, denial of or defense to coverage under any applicable primary
mortgage insurance policy, FHA insurance policy, mortgage pool insurance policy,
special hazard insurance policy or bankruptcy bond, irrespective of the cause of
the failure of coverage but excluding any failure of an insurer to pay by reason
of the insurer's own breach of its insurance policy or its financial inability
to pay. This representation is referred to in this prospectus and the related
prospectus supplement as the insurability representation. Upon a breach of the
insurability representation which materially and adversely affects the interests
of the securityholders in a mortgage loan, the depositor or the mortgage loan
seller or such other party, as the case may be, will be obligated either to cure
the breach in all material respects or to purchase the affected mortgage asset
at the purchase price. The related prospectus supplement may provide that the
performance of an obligation to repurchase mortgage assets following a breach of
an insurability representation will be ensured in the manner specified in the
prospectus supplement. SEE "DESCRIPTION OF PRIMARY INSURANCE POLICIES" AND
"DESCRIPTION OF CREDIT SUPPORT" IN THIS PROSPECTUS AND IN THE RELATED PROSPECTUS
SUPPLEMENT FOR INFORMATION REGARDING THE EXTENT OF COVERAGE UNDER THE
AFOREMENTIONED INSURANCE POLICIES.
The obligation to repurchase or, other than with respect to the
insurability representation if applicable, to substitute mortgage loans
constitutes the sole remedy available to the securityholders or the trustee for
any breach of the representations.
The master servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
servicing agreement. Upon a breach of any representation of the master servicer
which materially and adversely affects the interests of the securityholders, the
master servicer will be obligated to cure the breach in all material respects.
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ESTABLISHMENT OF COLLECTION ACCOUNT; DEPOSITS TO COLLECTION ACCOUNT IN RESPECT
OF TRUST FUND ASSETS
The master servicer or the trustee will, as to each trust fund, establish
and maintain or cause to be established and maintained one or more separate
accounts for the collection of payments on the related trust fund assets. These
accounts are collectively referred to in this prospectus and the related
prospectus supplement as the collection account. The collection account must be
either
o maintained with a bank or trust company, and in a
manner, satisfactory to the rating agency or agencies
rating any class of securities of the series,
o an account or accounts the deposits in which are
insured by the BIF or the SAIF, to the limits
established by the FDIC or
o a trust account or accounts maintained with the
corporate trust department of a federal or state
chartered depository institution or trust company
acting in its fiduciary capacity.
The collateral eligible to secure amounts in the collection account is
limited to United States government securities and other high-quality
investments specified in the related servicing agreement as permitted
investments. A collection account may be maintained as an interest bearing or a
non-interest bearing account, or the funds held in the collection account may be
invested pending each succeeding distribution date in permitted investments. Any
interest or other income earned on funds in the collection account will be paid
to the master servicer or the trustee or their designee as additional
compensation. The collection account may be maintained with an institution that
is an affiliate of the master servicer or the trustee, provided that the
institution meets the standards set forth in the bullet points above. If
permitted by the rating agency or agencies and so specified in the related
prospectus supplement, a collection account may contain funds relating to more
than one series of pass-through certificates and may, if applicable, contain
other funds respecting payments on mortgage loans belonging to the master
servicer or serviced or master serviced by it on behalf of others.
Each sub-servicer servicing a trust fund asset under a sub-servicing
agreement will establish and maintain one or more separate accounts which may be
interest bearing and which will comply with the standards with respect to
collection accounts or other standards as may be acceptable to the master
servicer. The sub-servicer is required to credit to the related sub-servicing
account on a daily basis the amount of all proceeds of mortgage assets received
by the sub-servicer, less its servicing compensation. The sub-servicer will
remit to the master servicer by wire transfer of immediately available funds all
funds held in the sub-servicing account with respect to each mortgage asset on
the monthly remittance date or dates specified in the related servicing
agreement.
The master servicer will deposit or cause to be deposited in the collection
account for each trust fund including mortgage loans, the following payments and
collections received, or advances made, by the master servicer or on its behalf
subsequent to the cut-off date, other than payments due on or before the cut-off
date and exclusive of any retained interest, unless otherwise specified in the
related prospectus supplement:
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(1) all payments on account of principal, including principal
prepayments, on the mortgage assets;
(2) all payments on account of interest on the mortgage assets, net
of any portion retained by the master servicer or by a sub-servicer as its
servicing compensation and net of any retained interest;
(3) all proceeds of the hazard insurance policies and any special
hazard insurance policy, other than amounts to be not applied to the
restoration or repair of the property or released to the mortgagor in
accordance with the normal servicing procedures of the master servicer or
the related sub-servicer, subject to the terms and conditions of the
related Mortgage and mortgage note, any primary mortgage insurance policy,
any FHA insurance policy, any VA guarantee, any bankruptcy bond and any
mortgage pool insurance policy and all other amounts received and retained
in connection with the liquidation of defaulted mortgage loans, by
foreclosure or otherwise, together with the net proceeds on a monthly basis
with respect to any mortgaged properties acquired for the benefit of
securityholders by foreclosure or by deed in lieu of foreclosure or
otherwise;
(4) any amounts required to be paid under any letter of credit, as
described below under "Description of Credit Support--Letter of Credit";
(5) any advances made as described below under "Advances by the
Master Servicer in respect of Delinquencies on the Trust Funds Assets";
(6) if applicable, all amounts required to be transferred to the
collection account from a reserve fund, as described below under
"Description of Credit Support--Reserve Funds";
(7) any buydown funds, and, if applicable, investment earnings
thereon, required to be deposited in the collection account as described in
the first paragraph below;
(8) all proceeds of any mortgage loan or property in respect of the
mortgage asset purchased by the master servicer, the depositor, any
sub-servicer or any mortgage loan seller as described under "The
Depositor's Mortgage Loan Purchase Program-Representations by or on behalf
of Mortgage Loan Sellers; Remedies for Breach of Representations" or
"--Assignment of Trust Fund Assets; Review of Files by Trustee" above,
exclusive of the retained interest, if any, in respect of the mortgage
asset;
(9) all proceeds of any mortgage loan repurchased as described under
"--Termination" below;
(10) all payments required to be deposited in the collection account
with respect to any deductible clause in any blanket insurance policy
described under "Description of Primary Insurance Policies--Primary Hazard
Insurance Policies"; and
(11) any amount required to be deposited by the master servicer in
connection with net losses realized on investments for the benefit of the
master servicer of funds held in the collection account.
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With respect to each buydown mortgage loan, the master servicer, or a
sub-servicer, will deposit related buydown funds in a custodial account, which
may be interest bearing, and that otherwise meets the standards for collection
accounts. This account is referred to in this prospectus and the related
prospectus supplement as a buydown account. The terms of all buydown mortgage
loans provide for the contribution of buydown funds in an amount not less than
either (a) the total payments to be made from the buydown funds under the
related buydown plan or (b) if the buydown funds are present valued, that amount
that, together with investment earnings thereon at a specified rate, compounded
monthly, will support the scheduled level of payments due under the buydown
mortgage loan. Neither the master servicer, the sub-servicer nor the depositor
will be obligated to add to the buydown funds any of its own funds should
investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any insufficiency in buydown funds is not
recoverable from the borrower, distributions to securityholders will be
affected. With respect to each buydown mortgage loan, the master servicer will
deposit in the collection account the amount, if any, of the buydown funds, and,
if applicable, investment earnings thereon, for each buydown mortgage loan that,
when added to the amount due from the borrower on the buydown mortgage loan,
equals the full monthly payment which would be due on the buydown mortgage loan
if it were not subject to the buydown plan.
If a buydown mortgage loan is prepaid in full or liquidated, the related
buydown funds will be applied as follows. If the mortgagor on a buydown mortgage
loan prepays the loan in its entirety during the buydown period, the master
servicer will withdraw from the buydown account and remit to the mortgagor in
accordance with the related buydown plan any buydown funds remaining in the
buydown account. If a prepayment by a mortgagor during the buydown period
together with buydown funds will result in a prepayment in full, the master
servicer will withdraw from the buydown account for deposit in the collection
account the buydown funds and investment earnings thereon, if any, which
together with the prepayment will result in a prepayment in full. If the
mortgagor defaults during the buydown period with respect to a buydown mortgage
loan and the mortgaged property is sold in liquidation, either by the master
servicer or the insurer under any related insurance policy, the master servicer
will withdraw from the buydown account the buydown funds and all investment
earnings thereon, if any, for deposit in the collection account or remit the
same to the insurer if the mortgaged property is transferred to the insurer and
the insurer pays all of the loss incurred in respect of the default. In the case
of any prepaid or defaulted buydown mortgage loan the buydown funds in respect
of which were supplemented by investment earnings, the master servicer will
withdraw from the buydown account and either deposit in the collection account
or remit to the borrower, depending upon the terms of the buydown plan, any
investment earnings remaining in the related buydown account.
Any buydown funds, and any investment earnings thereon, deposited in the
collection account in connection with a full prepayment of the related buydown
mortgage loan will be deemed to reduce the amount that would be required to be
paid by the borrower to repay fully the related mortgage loan if the mortgage
loan were not subject to the buydown plan.
WITHDRAWALS. With respect to each series of securities, the master
servicer, trustee or special servicer may make withdrawals from the collection
account for the related trust fund for any of the following purposes, unless
otherwise provided in the related agreement and described in the related
prospectus supplement:
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(1) to make distributions to the related securityholders on each
distribution date;
(2) to reimburse the master servicer or any other specified person for
unreimbursed amounts advanced by it in respect of mortgage loans in
the trust fund as described under "Advances by Master Servicer in
Respect of Delinquencies on the Trust Fund Assets" above, these
reimbursement to be made out of amounts received which were identified
and applied by the master servicer as late collections of interest
(net of related servicing fees) on and principal of the particular
mortgage assets with respect to which the advances were made or out of
amounts drawn under any form of credit enhancement with respect to the
mortgage assets;
(3) to reimburse the master servicer or a special servicer for unpaid
servicing fees earned by it and some unreimbursed servicing expenses
incurred by it with respect to mortgage assets in the trust fund and
properties acquired in respect thereof, these reimbursement to be made
out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular mortgage assets and properties,
and net income collected on the particular properties, with respect to
which the fees were earned or the expenses were incurred or out of
amounts drawn under any form of credit enhancement with respect to the
mortgage assets and properties;
(4) to reimburse the master servicer or any other specified person for any
advances described in clause (2) above made by it and any servicing
expenses referred to in clause (3) above incurred by it which, in the
good faith judgment of the master servicer or the other person, will
not be recoverable from the amounts described in clauses (2) and (3),
respectively, the reimbursement to be made from amounts collected on
other mortgage assets in the trust fund or, if and to the extent so
provided by the related servicing agreement or indenture and described
in the related prospectus supplement, only from that portion of
amounts collected on the other mortgage assets that is otherwise
distributable on one or more classes of subordinate securities of the
related series;
(5) if and to the extent described in the related prospectus supplement,
to pay the master servicer, a special servicer or another specified
entity (including a provider of credit enhancement) interest accrued
on the advances described in clause (2) above made by it and the
servicing expenses described in clause (3) above incurred by it while
these remain outstanding and unreimbursed;
(6) to reimburse the master servicer, the company, or any of their
respective directors, officers, employees and agents, as the case may
be, for expenses, costs and liabilities incurred thereby, as and to
the extent described under "Matters Regarding the Master Servicer and
the Depositor";
(7) if and to the extent described in the related prospectus supplement,
to pay the fees of the trustee;
(8) to reimburse the trustee or any of its directors, officers, employees
and agents, as the case may be, for expenses, costs and liabilities
incurred thereby, as and to the extent described under "Description of
the Trustee";
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(9) to pay the master servicer or the trustee, as additional compensation,
interest and investment income earned in respect of amounts held in
the collection account;
(10) to pay, generally from related income, the master servicer or a
special servicer for costs incurred in connection with the operation,
management and maintenance of any mortgaged property acquired by the
trust fund by foreclosure or by deed in lieu of foreclosure;
(11) if one or more elections have been made to treat the trust fund or
designated portions thereof as a REMIC, to pay any federal, state or
local taxes imposed on the trust fund or its assets or transactions,
as and to the extent described under "Federal Income Tax
Consequences--REMICS--Prohibited Transactions and Other Possible REMIC
Taxes";
(12) to pay for the cost of an independent appraiser or other expert in
real estate matters retained to determine a fair sale price for a
defaulted mortgage loan or a property acquired in respect thereof in
connection with the liquidation of the mortgage loan or property;
(13) to pay for the cost of various opinions of counsel obtained pursuant
to the related servicing agreement or indenture for the benefit of the
related securityholders;
(14) to pay to itself, the depositor, a mortgage loan seller or any other
appropriate person all amounts received with respect to each mortgage
loan purchased, repurchased or removed from the trust fund pursuant to
the terms of the related servicing agreement and not required to be
distributed as of the date on which the related purchase price is
determined;
(15) to make any other withdrawals permitted by the related pooling and
servicing agreement or the related servicing agreement and indenture
and described in the related prospectus supplement;
(16) to pay for costs and expenses incurred by the trust fund for
environmental site assessments performed with respect to multifamily
or commercial properties that constitute security for defaulted
mortgage loans, and for any containment, clean-up or remediation of
hazardous wastes and materials present on that mortgaged properties,
as described under "Procedures for Realization Upon Defaulted Mortgage
Loans"; and
(17) to clear and terminate the collection account upon the termination of
the trust fund.
DEPOSITS TO DISTRIBUTION ACCOUNT
The trustee will, as to each trust fund, establish and maintain a
distribution account which must be an eligible account. The trustee will deposit
or cause to be deposited in the distribution account for each trust fund amounts
received from the master servicer or otherwise in respect of the related
securities.
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DISTRIBUTIONS ON THE SECURITIES
Distributions allocable to principal and interest on the securities of each
series will be made by or on behalf of the trustee each month on each date as
specified in the related prospectus supplement and referred to as a distribution
date, commencing with the month following the month in which the applicable
cut-off date occurs. Distributions will be made to the persons in whose names
the securities are registered at the close of business on the Record Date, and
the amount of each distribution will be determined as of the close of business
on the date specified in the related prospectus supplement and referred to as
the determination date. All distributions with respect to each class of
securities on each distribution date will be allocated pro rata among the
outstanding securities in that class. Payments to the holders of securities of
any class on each distribution date will be made to the securityholders of the
respective class of record on the next preceding Record Date, other than in
respect of the final distribution, based on the aggregate fractional undivided
interests in that class represented by their respective securities. Payments
will be made by wire transfer in immediately available funds to the account of a
securityholder, if the securityholder holds securities in the requisite amount
specified in the related prospectus supplement and if the securityholder has so
notified the depositor or its designee no later than the date specified in the
related prospectus supplement. Otherwise, payments will be made by check mailed
to the address of the person entitled to payment as it appears on the security
register maintained by the depositor or its agent. The final distribution in
retirement of the securities will be made only upon presentation and surrender
of the securities at the office or agency of the depositor or its agent
specified in the notice to securityholders of the final distribution. With
respect to each series of certificates or notes, the security register will be
referred to as the certificate register or note register, respectively.
All distributions on the securities of each series on each distribution
date will be made from the available distribution amount described in the next
sentence, in accordance with the terms described in the related prospectus
supplement. The available distribution amount for each series of securities will
be described in the related prospectus supplement and will generally include the
following amounts for each distribution date:
(1) the total amount of all cash on deposit in the related
distribution account as of the corresponding determination date, exclusive
of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period,
(b) all prepayments, together with related payments of the
interest thereon, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related Prepayment
Period, and
(c) all amounts in the distribution account that are due or
reimbursable to the depositor, the trustee, a mortgage loan seller, a
sub-servicer or the master servicer or that are payable in respect of
specified expenses of the related trust fund;
(2) if the related prospectus supplement so provides, interest or
investment income on amounts on deposit in the distribution account;
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(3) all advances with respect to the distribution date;
(4) if the related prospectus supplement so provides, amounts paid
with respect to interest shortfalls resulting from prepayments during the
related Prepayment Period;
(5) to the extent not on deposit in the related distribution account
as of the corresponding determination date, any amounts collected under,
from or in respect of any credit support with respect to the distribution
date; and
(6) any other amounts described in the related prospectus
supplement.
The entire available distribution amount will be distributed among the
related securities, including any securities not offered hereby, on each
distribution date, and accordingly will be released from the trust fund and will
not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES. Each class of securities may
earn interest at a different rate, which may be a fixed, variable or adjustable
security interest rate. The related prospectus supplement will specify the
security interest rate for each class, or, in the case of a variable or
adjustable security interest rate, the method for determining the security
interest rate. Unless otherwise specified in the related prospectus supplement,
interest on the securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
With respect to each series of securities and each distribution date, the
distribution in respect of interest on each security, other than principal only
Strip Securities, will be equal to one month's interest on the outstanding
principal balance of the security immediately prior to the distribution date, at
the applicable security interest rate, subject to the following. As to each
Strip Security with no or a nominal principal balance, the distributions in
respect of interest on any distribution date will be on the basis of a notional
amount and equal one month's Stripped Interest. Prior to the time interest is
distributable on any class of Accrual Securities, interest accrued on that class
will be added to the principal balance thereof on each distribution date.
Interest distributions on each security of a series will be reduced in the event
of shortfalls in collections of interest resulting from prepayments on mortgage
loans, with that shortfall allocated among all of the securities of that series
if specified in the related prospectus supplement unless the master servicer is
obligated to cover the shortfalls from its own funds up to its servicing fee for
the related due period. With respect to each series of certificates or notes,
the interest distributions payable will be referred to in the applicable
prospectus supplement as the accrued certificate interest or accrued note
interest, respectively. SEE "YIELD AND MATURITY CONSIDERATIONS" in this
prospectus.
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES. The principal balance of a
security, at any time, will equal the maximum amount that the holder will be
entitled to receive in respect of principal out of the future cash flow on the
mortgage assets and other assets included in the related trust fund. The
principal balance of each security offered hereby will be stated in the related
prospectus supplement as the certificate principal balance with respect to a
certificate and the note balance with respect to a note. With respect to each
security, distributions generally will be applied to undistributed accrued
interest thereon, and thereafter to principal. The outstanding principal balance
of a security will be reduced to the extent of distributions of principal on
that security, and, if and to the extent so provided on the related prospectus
supplement, by the amount of any realized losses, allocated to
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that security. The outstanding principal balance of a security may be increased
by any deferred interest if so specified in the related prospectus supplement.
The initial aggregate principal balance of a series and each class of securities
related to a series will be specified in the related prospectus supplement.
Distributions of principal will be made on each distribution date to the class
or classes of securities entitled to principal until the principal balance of
that class has been reduced to zero. With respect to a Senior/Subordinate
Series, distributions allocable to principal of a class of securities will be
based on the percentage interest in the related trust fund evidenced by the
class, which in turn will be based on the principal balance of that class as
compared to the principal balance of all classes of securities of the series.
Distributions of principal of any class of securities will be made on a pro rata
basis among all of the securities of the class. Strip Securities with no
principal balance will not receive distributions of principal.
ALLOCATION TO SECURITYHOLDERS OF LOSSES ON THE TRUST FUND ASSETS. With
respect to any defaulted mortgage loan that is finally liquidated, through
foreclosure sale or otherwise, the amount of the realized loss incurred in
connection with liquidation will equal the excess, if any, of the unpaid
principal balance of the liquidated loan immediately prior to liquidation, over
the aggregate amount of Liquidation Proceeds derived from liquidation remaining
after application of the proceeds to unpaid accrued interest on the liquidated
loan and to reimburse the master servicer or any sub- servicer for related
unreimbursed servicing expenses. With respect to mortgage loans the principal
balances of which have been reduced in connection with bankruptcy proceedings,
the amount of that reduction also will be treated as a realized loss. As to any
series of securities, other than a Senior/Subordinate Series, any realized loss
not covered as described under "Description of Credit Support" will be allocated
among all of the securities on a pro rata basis. As to any Senior/Subordinate
Series, realizes losses will be allocated first to the most subordinate class of
securities as described below under "Description of Credit
Support--Subordination".
ADVANCES BY MASTER SERVICER IN RESPECT OF DELINQUENCIES ON THE TRUST FUND ASSETS
With respect to any series of securities, the master servicer will advance
on or before each distribution date its own funds or funds held in the
collection account that are not included in the available distribution amount
for that distribution date unless the master servicer, in good faith, determines
that any advances made will not be reimbursable from proceeds subsequently
recovered on the mortgage asset related to the advance. The amount of each
advance will be equal to the aggregate of payments of interest, net of related
servicing fees and retained interest, that were due during the related Due
Period and were delinquent on the related determination date. The prospectus
supplement for a series may also provide that the master servicer will advance,
together with delinquent interest, the aggregate amount of principal payments
that were due during the related Due Period and delinquent as of the
determination date, subject to the same reimbursement determination, except
that, with respect to balloon loans, the master servicer will not have to
advance a delinquent balloon payment.
Advances are intended to maintain a regular flow of scheduled interest
payments to holders of the class or classes of securities entitled to payments,
rather than to guarantee or insure against losses. Advances of the master
servicer's funds will be reimbursable only out of related recoveries on the
mortgage assets respecting which advances were made, including amounts received
under any form of credit support; provided, however, that any advance will be
reimbursable from any amounts in the distribution account to the extent that the
master servicer shall determine that the advance is
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not ultimately recoverable from Related Proceeds. If advances have been made by
the master servicer from excess funds in the distribution account, the master
servicer will replace those funds in the distribution account on any future
distribution date to the extent that funds in the distribution account on that
distribution date are less than payments required to be made to securityholders
on that date. If so specified in the related prospectus supplement, the
obligations of the master servicer to make advances may be secured by a cash
advance reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any surety bond, will be
set forth in the related prospectus supplement.
Advances in respect of delinquencies will not be made in connection with
home equity revolving credit loans, except as otherwise provided in the related
prospectus supplement. In the case of home equity revolving credit loans, the
master servicer or servicer is required to advance funds to cover any draws made
on a home equity revolving credit loan, subject to reimbursement by the entity
specified in the accompanying prospectus supplement, provided that as specified
in the accompanying prospectus supplement during any revolving period associated
with the related series of securities, draws may be covered first from principal
collections on the other loans in the mortgage pool.
FORM OF REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of securities of a series,
the master servicer or the trustee, will forward or cause to be forwarded to
each securityholder, to the depositor and to those other parties as may be
specified in the related servicing agreement, a statement setting forth the
following as of the distribution date:
(1) the amount of the distribution to holders of securities of
that class applied to reduce the principal balance of the securities;
(2) the amount of the distribution to holders of securities of
that class allocable to interest;
(3) the amount of related administration or servicing
compensation received by the trustee or the master servicer and any
sub-servicer and any other customary information as the master servicer
deems necessary or desirable, or that a securityholder reasonably requests,
to enable securityholders to prepare their tax returns;
(4) if applicable, the aggregate amount of advances included in
the distribution, and the aggregate amount of unreimbursed advances at the
close of business on that distribution date;
(5) the aggregate principal balance of the mortgage loans at
the close of business on that distribution date;
(6) the number and aggregate principal balance of mortgage loans
(a) delinquent one month, (b) delinquent two or more months, and (c) as to
which foreclosure proceedings have been commenced;
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(7) with respect to any mortgaged property acquired on behalf of
securityholders through foreclosure or deed in lieu of foreclosure during
the preceding calendar month, the principal balance of the related mortgage
loan as of the close of business on the distribution date in that month;
(8) the aggregate principal balance of each class of securities
(including any class of securities not offered hereby) at the close of
business on that distribution date, separately identifying any reduction in
the principal balance due to the allocation of any realized loss;
(9) the amount of any special hazard realized losses allocated
to the subordinate securities, if any, at the close of business on that
distribution date;
(10) the aggregate amount of principal prepayments made and
realized losses incurred during the related Prepayment Period;
(11) the amount deposited in the reserve fund, if any, on that
distribution date;
(12) the amount remaining in the reserve fund, if any, as of
the close of business on that distribution date;
(13) the aggregate unpaid accrued interest, if any, on each class
of securities at the close of business on that distribution date;
(14) in the case of securities that accrue interest at the
variable rate, the security interest rate applicable to that distribution
date, as calculated in accordance with the method specified in the related
prospectus supplement; and
(15) as to any series which includes credit support, the amount
of coverage of each instrument of credit support included in the trust fund
as of the close of business on that distribution date.
In the case of information furnished under subclauses (1)-(3) above, the
amounts shall be expressed as a dollar amount per minimum denomination of
securities or for other specified portion thereof. With respect to each series
of certificates or notes, securityholders will be referred to as the
certificateholders or the noteholders, respectively.
Within a reasonable period of time after the end of each calendar year, the
master servicer or the trustee, as provided in the related prospectus
supplement, shall furnish to each person who at any time during the calendar
year was a holder of a security a statement containing the information set forth
in subclauses (1)-(3) above, aggregated for that calendar year or the applicable
portion thereof during which that person was a securityholder. The obligation of
the master servicer or the trustee shall be deemed to have been satisfied to the
extent that substantially comparable information shall be provided by the master
servicer or the trustee in accordance with any requirements of the Code as are
from time to time in force.
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COLLECTION AND OTHER SERVICING PROCEDURES EMPLOYED BY THE MASTER SERVICER
The master servicer, directly or through sub-servicers, will make
reasonable efforts to collect all scheduled payments under the mortgage loans
and will follow or cause to be followed the collection procedures as it would
follow with respect to mortgage assets that are comparable to the mortgage
assets and held for its own account, provided these procedures are consistent
with the related servicing agreement and any related insurance policy,
bankruptcy bond, letter of credit or other insurance instrument described under
"Description of Primary Insurance Policies" or "Description of Credit Support".
Consistent with this servicing standard, the master servicer may, in its
discretion, waive any late payment charge in respect of a late mortgage loan
payment and, only upon determining that the coverage under any related insurance
instrument will not be affected, extend or cause to be extended the due dates
for payments due on a mortgage note for a period not greater than 180 days.
In instances in which a mortgage asset is in default, or if default is
reasonably foreseeable, and if determined by the master servicer to be in the
best interests of the related securityholders, the master servicer may permit
modifications of the mortgage asset rather than proceeding with foreclosure. In
making that determination, the estimated realized loss that might result if the
mortgage asset were liquidated would be taken into account. Modifications may
have the effect of reducing the interest rate on the mortgage asset, forgiving
the payment of principal or interest or extending the final maturity date of the
mortgage asset. Any modified mortgage asset may remain in the related trust
fund, and the reduction in collections resulting from the modification may
result in reduced distributions of interest, or other amounts, on, or may extend
the final maturity of, one or more classes of the related securities.
In connection with any significant partial prepayment of a mortgage asset,
the master servicer, to the extent not inconsistent with the terms of the
mortgage note and local law and practice, may permit the mortgage asset to be
reamortized so that the monthly payment is recalculated as an amount that will
fully amortize the remaining principal amount of the mortgage asset by the
original maturity date based on the original interest rate. Reamortization will
not be permitted if it would constitute a modification of the mortgage asset for
federal income tax purposes.
In any case in which property securing a mortgage asset, other than an ARM
Loan, multifamily loan or commercial loan, has been, or is about to be, conveyed
by the borrower, or in any case in which property securing a multifamily loan or
commercial loan has been, or is about to be, encumbered by the borrower, the
master servicer will exercise or cause to be exercised on behalf of the related
trust fund the lender's rights to accelerate the maturity of the mortgage asset
under any due-on-sale or due-on-encumbrance clause applicable to that mortgage
asset. The master servicer will only exercise these rights only if the exercise
of any these rights is permitted by applicable law and will not impair or
threaten to impair any recovery under any related insurance instrument. If these
conditions are not met or if the master servicer reasonably believes it is
unable under applicable law to enforce a due-on-sale or due-on-encumbrance
clause, the master servicer will enter into or cause to be entered into an
assumption and modification agreement with the person to whom the property has
been or is about to be conveyed or encumbered, under which that person becomes
liable under the mortgage note, cooperative note, manufactured housing contract
or home improvement contract and, to the extent permitted by applicable law, the
borrower remains liable thereon. The original mortgagor may be released from
liability on a mortgage asset if the master
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servicer shall have determined in good faith that a release will not adversely
affect the collectability of the mortgage asset. An ARM Loan may be assumed if
the ARM Loan is by its terms assumable and if, in the reasonable judgment of the
master servicer, the proposed transferee of the related mortgaged property
establishes its ability to repay the loan and the security for the ARM Loan
would not be impaired by the assumption. If a mortgagor transfers the mortgaged
property subject to an ARM Loan without consent, that ARM Loan may be declared
due and payable. 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. In connection with any
assumption, the terms of the related mortgage asset may not be changed except in
the instance where an assumption is related to a defaulted cure. SEE "LEGAL
ASPECTS OF ASSETS--ENFORCEABILITY OF PROVISIONS".
In the case of multifamily loans, commercial loans or mixed-use loans, a
mortgagor's failure to make scheduled payments may mean that operating income is
insufficient to service the mortgage debt, or may reflect the diversion of that
income from the servicing of the mortgage debt. In addition, a mortgagor under a
multifamily loan, commercial loan or mixed-use loan that is unable to make
scheduled payments may also be unable to make timely payment of all required
taxes and otherwise to maintain and insure the related mortgaged property. In
general, the master servicer will be required to monitor any multifamily loan,
commercial loan or mixed-use loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related mortgaged property, initiate
corrective action in cooperation with the mortgagor if cure is likely, inspect
the related mortgaged property and take such other actions as are consistent
with the related servicing agreement. A significant period of time may elapse
before the servicer is able to assess the success of any such corrective action
or the need for additional initiatives. The time within which the master
servicer can make the initial determination of appropriate action, evaluate the
success of corrective action, develop additional initiatives, institute
foreclosure proceedings and actually foreclose (or accept a deed to a mortgaged
property in lieu of foreclosure) on behalf of the securityholders of the related
series may vary considerably depending on the particular multifamily loan,
commercial loan or mixed-use loan, the mortgaged property, the mortgagor, the
presence of an acceptable party to assume the multifamily loan, commercial loan
or mixed-use loan and the laws of the jurisdiction in which the mortgaged
property is located.
If a mortgagor files a bankruptcy petition, the servicer may not be
permitted to accelerate the maturity of the related mortgage asset or to
foreclose on the mortgaged property for a considerable period of time. SEE
"LEGAL ASPECTS OF MORTGAGE ASSETS."
DESCRIPTION OF SUB-SERVICING
Any master servicer may delegate its servicing obligations in respect of
the mortgage assets to third-party servicers, but the master servicer will
remain obligated under the related servicing agreement. Each sub-servicer will
be required to perform the customary functions of a servicer of comparable
assets, including:
o collecting payments from borrowers and remitting the collections to
the master servicer,
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o maintaining primary hazard insurance as described in this prospectus
and in any related prospectus supplement,
o filing and settling claims under primary hazard insurance policies,
which may be subject to the right of the master servicer to approve in
advance any settlement,
o maintaining escrow or impoundment accounts of borrowers for payment of
taxes, insurance and other items required to be paid by any borrower
in accordance with the mortgage asset,
o processing assumptions or substitutions where a due-on-sale clause is
not exercised,
o attempting to cure delinquencies,
o supervising foreclosures or repossessions,
o inspecting and managing mortgaged properties, if applicable, and
o maintaining accounting records relating to the mortgage assets.
The master servicer will be responsible for filing and settling claims in
respect of mortgage assets in a particular mortgage pool under any applicable
mortgage pool insurance policy, bankruptcy bond, special hazard insurance policy
or letter of credit. SEE "DESCRIPTION OF CREDIT SUPPORT".
The sub-servicing agreement between any master servicer and a sub-servicer
will be consistent with the terms of the related servicing agreement and will
not result in a withdrawal or downgrading of any class of securities issued in
accordance with the related agreement. With respect to those mortgage assets
serviced by the master servicer through a sub-servicer, the master servicer will
remain liable for its servicing obligations under the related policy and
servicing agreement or servicing agreement as if the master servicer alone were
servicing those mortgage assets. Although each sub-servicing agreement will be a
contract solely between the master servicer and the sub- servicer, the agreement
under which a series of securities is issued will provide that, if for any
reason the master servicer for the series of securities is no longer acting in a
servicing capacity, the trustee or any successor master servicer must recognize
the sub-servicer's rights and obligations under the sub-servicing agreement.
The master servicer will be solely liable for all fees owed by it to any
sub-servicer, irrespective of whether the master servicer's compensation under
the related agreement is sufficient to pay the fees. However, a sub-servicer may
be entitled to a retained interest in mortgage assets. Each sub- servicer will
be reimbursed by the master servicer for expenditures which it makes, generally
to the same extent the master servicer would be reimbursed under the related
servicing agreement. SEE "DESCRIPTION OF THE SECURITIES--RETAINED INTEREST,
SERVICING OR ADMINISTRATION COMPENSATION AND PAYMENT OF EXPENSES".
The master servicer may require any sub-servicer to agree to indemnify the
master servicer for any liability or obligation sustained by the master servicer
in connection with any act or failure to act
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by the sub-servicer in its servicing capacity. Each sub-servicer is required to
maintain a fidelity bond and an errors and omissions policy with respect to its
officers, employees and other persons acting on its behalf or on behalf of the
master servicer.
PROCEDURES FOR REALIZATION UPON DEFAULTED MORTGAGE ASSETS
The master servicer will be required to foreclose upon or otherwise take
title in the name of the trustee, on behalf of the securityholders, of mortgaged
properties relating to defaulted mortgage assets to which no satisfactory
arrangements can be made for collection of delinquent payments, but the master
servicer will not be required to foreclose if it determines that foreclosure
would not be in the best interests of the securityholders or the provider of
credit support, if any.
In addition, unless otherwise specified in the related prospectus
supplement, the master servicer may not acquire title to any multifamily
property or commercial property securing a mortgage loan or take any other
action that would cause the related trustee, for the benefit of securityholders
of the related series, or any other specified person to be considered to hold
title to, to be a "mortgagee-in- possession" of, or to be an "owner" or an
"operator" of such mortgaged property within the meaning of federal
environmental laws, unless the master servicer has previously determined, based
on a report prepared by a person who regularly conducts environmental audits
(which report will be an expense of the trust fund), that either:
(1) the mortgaged property is in compliance with applicable
environmental laws and regulations or, if not, that taking actions as are
necessary to bring the mortgaged property into compliance with these laws
is reasonably likely to produce a greater recovery on a present value basis
than not taking those actions; and
(2) there are no circumstances or conditions present at the mortgaged
property that have resulted in any contamination for which investigation,
testing, monitoring, containment, clean-up or remediation could be required
under any applicable environmental laws and regulations or, if those
circumstances or conditions are present for which any such action could be
required, taking those actions with respect to the mortgaged property is
reasonably likely to produce a greater recovery on a present value basis
than not taking those actions. SEE "LEGAL ASPECTS OF MORTGAGE
ASSETS--ENVIRONMENTAL LEGISLATION."
As servicer of the mortgage loans, the master servicer, on behalf of
itself, the trustee and the securityholders, will present claims to the insurer
under each insurance instrument, and will take reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
mortgage assets. As set forth above under "-Collection and Other Servicing
Procedures Employed by the Master Servicer", all collections by or on behalf of
the master servicer under any insurance instrument, other than amounts to be
applied to the restoration of a mortgaged property or released to the mortgagor,
are to be deposited in the distribution account for the related trust fund,
subject to withdrawal as previously described. The master servicer or its
designee will not receive payment under any letter of credit included as an
insurance instrument with respect to a defaulted mortgage asset unless all
Liquidation Proceeds and Insurance Proceeds which it deems to be finally
recoverable have been realized; however, the master servicer will be entitled to
reimbursement for any unreimbursed advances and reimbursable expenses
thereunder.
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If any property securing a defaulted mortgage asset is damaged and
proceeds, if any, from the related hazard insurance policy or special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the related credit insurance instrument, if
any, the master servicer is not required to expend its own funds to restore the
damaged property unless it determines (a) that the restoration will increase the
proceeds to securityholders on liquidation of the mortgage loan after
reimbursement of the master servicer for its expenses and (b) that its expenses
will be recoverable by it from related Insurance Proceeds or Liquidation
Proceeds.
If recovery on a defaulted mortgage asset under any related credit
insurance instrument is not available for the reasons set forth in the preceding
paragraph, the master servicer nevertheless will be obligated to follow or cause
to be followed the normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted mortgage asset. If the proceeds of any
liquidation of the property securing the defaulted mortgage loan are less than
the outstanding principal balance of the defaulted mortgage loan plus interest
accrued thereon at the interest rate plus the aggregate amount of expenses
incurred by the master servicer in connection with those proceedings and which
are reimbursable under the servicing agreement, the trust fund will realize a
loss in the amount of the difference. The master servicer will be entitled to
withdraw or cause to be withdrawn from the collection or distribution account
out of the Liquidation Proceeds recovered on any defaulted mortgage asset, prior
to the distribution of any Liquidation Proceeds to securityholders, amounts
representing its normal servicing compensation on the mortgage loan,
unreimbursed servicing expenses incurred with respect to the mortgage asset and
any unreimbursed advances of delinquent monthly payments made with respect to
the mortgage loan.
If the master servicer or its designee recovers Insurance Proceeds with
respect to any defaulted mortgage loan, the master servicer will be entitled to
withdraw or cause to be withdrawn from the collection account or distribution
account out of Insurance Proceeds, prior to distribution of that amount to
securityholders, amounts representing its normal servicing compensation on that
mortgage loan, unreimbursed servicing expenses incurred with respect to the
mortgage loan and any unreimbursed advances of delinquent monthly payments made
with respect to the mortgage loan. In the event that the master servicer has
expended its own funds to restore damaged property and those funds have not been
reimbursed under any insurance instrument, it will be entitled to withdraw from
the collection account out of related Liquidation Proceeds or Insurance Proceeds
an amount equal to the expenses incurred by it, in which event the trust fund
may realize a loss up to the amount so charged. Because Insurance Proceeds
cannot exceed deficiency claims and expenses incurred by the master servicer, no
payment or recovery will result in a recovery to the trust fund which exceeds
the principal balance of the defaulted mortgage asset together with accrued
interest thereon at the interest rate net of servicing fees and the retained
interest, if any. In addition, when property securing a defaulted mortgage asset
can be resold for an amount exceeding the outstanding principal balance of the
related mortgage asset together with accrued interest and expenses, it may be
expected that, if retention of any amount is legally permissible, the insurer
will exercise its right under any related mortgage pool insurance policy to
purchase the property and realize for itself any excess proceeds. SEE
"DESCRIPTION OF PRIMARY INSURANCE POLICIES" AND "DESCRIPTION OF CREDIT SUPPORT".
With respect to collateral securing a cooperative loan, 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 proprietary lease or occupancy agreement securing the cooperative
loan. This approval is usually based on the purchaser's income and net worth and
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numerous other factors. The necessity of acquiring board approval could limit
the number of potential purchasers for those shares and otherwise limit the
master servicer's ability to sell, and realize the value of, those shares. SEE
"LEGAL ASPECTS OF MORTGAGE ASSETS--FORECLOSURE ON COOPERATIVES".
Realization on defaulted contracts may be accomplished through repossession
and subsequent resale of the underlying manufactured home or home improvement.
With respect to a defaulted home improvement contract, the master servicer will
decide whether to foreclose upon the mortgaged property or write off the
principal balance of such home improvement contract as a bad debt or take an
unsecured note. In doing so, the master servicer will estimate the expected
proceeds and expenses to determine whether a foreclosure proceeding or a
repossession and resale is appropriate. If a home improvement contract secured
by a lien on a mortgaged property is junior to another lien on the related
mortgaged property, following any default thereon, unless foreclosure proceeds
for such home improvement contract are expected to at least satisfy the related
senior mortgage loan in full and to pay foreclosure costs, it is likely that
such home improvement contract will be written off as bad debt with no
foreclosure proceeding.
RETAINED INTEREST; SERVICING OR ADMINISTRATION COMPENSATION AND PAYMENT OF
EXPENSES
The prospectus supplement for a series of securities will specify whether
there will be any retained interest from the trust fund assets. A retained
interest in a trust fund asset represents a specified portion of the interest
payable thereon. The retained interest will be deducted from borrower payments
as received and will not be part of the related trust fund. Any partial recovery
of interest on a mortgage asset, after deduction of all applicable servicing
fees, will be allocated between retained interest, if any, and interest at the
interest rate on the mortgage loan, net of the rates at which the servicing fees
and the retained interest are calculated, on a pari passu basis.
The master servicer's primary compensation with respect to a series of
securities will come from the monthly payment to it, with respect to each
interest payment on a trust fund asset, of an amount equal to one-twelfth of the
servicing fee rate specified in the related prospectus supplement times the
scheduled principal balance of the trust fund asset. Since any retained interest
and the master servicer's primary compensation are percentages of the scheduled
principal balance of each trust fund asset, these amounts will decrease in
accordance with the amortization schedule of the trust fund assets. As
additional compensation in connection with a series of securities relating to
mortgage loans, the master servicer or the sub-servicers will retain all
assumption fees, late payment charges and , unless otherwise stated in the
prospectus supplement, prepayment penalties, to the extent collected from
mortgagors. Any interest or other income which may be earned on funds held in
the collection account, distribution account, sub-servicing account or any other
account created under the related servicing agreement may be paid as additional
compensation to the master servicer or the sub-servicers, as the case may be.
Any sub-servicer will receive a portion of the master servicer's primary
compensation as its sub-servicing compensation.
In addition to amounts payable to any sub-servicer, the master servicer may
pay from its servicing compensation expenses incurred in connection with its
servicing of the mortgage loans, including, without limitation, payment of the
fees and disbursements of the trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
securityholders, and other expenses, as described in the related prospectus
supplement.
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The master servicer is entitled to reimbursement for expenses incurred by
it in connection with the liquidation of defaulted mortgage assets, including
expenditures incurred by it in connection with the restoration of mortgaged
properties, the right of reimbursement being prior to the rights of
securityholders to receive any related Liquidation Proceeds. The master servicer
is also entitled to reimbursement from the collection account for advances.
ANNUAL EVIDENCE AS TO THE COMPLIANCE OF THE MASTER SERVICER
Each servicing agreement with respect to a series of securities will
provide that, on or before a specified date in each year, the first date being
at least six months after the related cut-off date, a firm of independent public
accountants will furnish a statement to the trustee to the effect that, on the
basis of the examination by the firm conducted substantially in compliance with
either the Uniform Single Attestation Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for Freddie Mac, the servicing by or on behalf of
the master servicer of mortgage assets under servicing agreements substantially
similar to each other, including the related servicing agreement, was conducted
in compliance with the terms of those agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for Freddie Mac, or paragraph 4 of the
Uniform Single Attestation Program for Mortgage Bankers, requires it to report.
In rendering its statement the accounting firm may rely, as to matters relating
to the direct servicing of mortgage assets by sub-servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for Freddie Mac, rendered within one year of the statement,
of firms of independent public accountants with respect to the related
sub-servicer.
Each servicing agreement will also provide for delivery to the trustee, on
or before a specified date in each year, of an annual statement signed by an
officer of the master servicer to the effect that the master servicer has
fulfilled its obligations under the related agreement throughout the preceding
year.
Copies of the annual accountants' statement and the officer's statement of
the master servicer may be obtained by securityholders without charge upon
written request to the master servicer at the address set forth in the related
prospectus supplement.
MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The master servicer under each servicing agreement will be named in the
related prospectus supplement. The entity serving as master servicer may be an
affiliate of the depositor and may have other normal business relationships with
the depositor or the depositor's affiliates.
Each servicing agreement will provide that the master servicer may resign
from its obligations and duties under the related agreement only if its
resignation, and the appointment of a successor, will not result in a
downgrading of any class of securities or upon a determination that its duties
under the related agreement are no longer permissible under applicable law. No
resignation will become effective until the trustee or a successor servicer has
assumed the master servicer's obligations and duties under the related
agreement.
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Each servicing agreement will further provide that neither the master
servicer, the depositor nor any director, officer, employee, or agent of the
master servicer or the depositor will be under any liability to the related
trust fund or securityholders for any action taken, or for refraining from the
taking of any action, in good faith under the related agreement, or for errors
in judgment; provided, however, that neither the master servicer, the depositor
nor any such person will be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. Each servicing agreement will
further provide that the master servicer, the depositor and any director,
officer, employee or agent of the master servicer or the depositor will be
entitled to indemnification by the related trust fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the related agreement or the securities, other than any loss,
liability or expense that is related to any specific mortgage loan or mortgage
loans, unless that loss, liability or expense is otherwise reimbursable under
the related agreement, and other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each servicing agreement will provide that
neither the master servicer nor the depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the related agreement and which in its opinion
may involve it in any expense or liability. The master servicer or the depositor
may, however, in its discretion undertake any action which it may deem necessary
or desirable with respect to the related agreement and the rights and duties of
the parties and the interests of the securityholders. In that event, the legal
expenses and costs of the action and any resulting liability will be expenses,
costs and liabilities of the securityholders, and the master servicer or the
depositor, as the case may be, will be entitled to be reimbursed and to charge
the trust fund for the reimbursement. Distributions to securityholders will be
reduced to pay for the reimbursement as set forth in the related prospectus
supplement and servicing agreement.
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 agreement, so
long as that person is qualified to sell mortgage loans to, and service mortgage
loans on behalf of, Fannie Mae or Freddie Mac.
EVENTS OF DEFAULT UNDER THE GOVERNING AGREEMENT AND RIGHTS UPON EVENTS OF
DEFAULT
POOLING AND SERVICING AGREEMENT
Events of default under each pooling and servicing agreement will include
each of the following unless otherwise stated in the related prospectus
supplement:
o any failure by the master servicer to distribute or cause to be
distributed to securityholders, or to remit to the trustee for
distribution to securityholders, any required payment that
continues unremedied for a specified number of business days
after the giving of written notice of the failure to the master
servicer by the trustee or the depositor, or to the master
servicer, the depositor and the trustee by the holders of
certificates evidencing not less than 25% of the voting rights;
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o any failure by the master servicer duly to observe or perform in
any material respect any of its other covenants or obligations
under the agreement which continues unremedied for a specified
number of days after the giving of written notice of the failure
to the master servicer by the trustee or the depositor, or to the
master servicer, the depositor and the trustee by the holders of
certificates evidencing not less than 25% of the voting rights;
and
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and actions by or on
behalf of the master servicer indicating its insolvency or
inability to pay its obligations.
So long as an event of default under a pooling and servicing agreement
remains unremedied, the depositor or the trustee may, unless otherwise provided
in the related prospectus supplement, and at the direction of holders of
certificates evidencing not less than 51% of the voting rights, the trustee
shall, terminate all of the rights and obligations of the master servicer under
the pooling and servicing agreement relating to the trust fund and in and to the
mortgage assets, other than any retained interest of the master servicer,
whereupon the trustee will succeed to all of the responsibilities, duties and
liabilities of the master servicer under the agreement and will be entitled to
similar compensation arrangements. If the trustee is prohibited by law from
obligating itself to make advances regarding delinquent mortgage assets, then
the trustee will not be so obligated.
If the trustee is unwilling or unable so to act, it may or, at the written
request of the holders of certificates entitled to at least 51% of the voting
rights, it shall appoint, or petition a court of competent jurisdiction for the
appointment of, a loan servicing institution acceptable to the rating agency
with a net worth at the time of the appointment of at least $1,000,000 to act as
successor to the master servicer under the agreement. Pending the appointment of
a successor, the trustee is obligated to act in the capacity of master servicer.
The trustee and any successor master servicer may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the master servicer under the related agreement.
No certificateholder will have the right under any pooling and servicing
agreement to institute any proceeding under the agreement unless:
o the certificateholder previously has given to the trustee written
notice of default,
o the holders of certificates evidencing not less than 25% of the voting
rights have made written request upon the trustee to institute the
proceeding in its own name as trustee thereunder,
o have offered to the trustee reasonable indemnity, and
o the trustee for fifteen days has neglected or refused to institute a
proceeding. The trustee, however, is under no obligation to exercise
any of the trusts or powers vested in it by any pooling and servicing
agreement or to make any investigation of matters arising thereunder
or to institute, conduct or defend any litigation at the request,
order or direction of any of the holders of certificates covered by
the agreement, unless the
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certificateholders have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be
incurred.
SERVICING AGREEMENT
A servicing default under the related servicing agreement will include each
of the following unless otherwise provided in the related prospectus supplement:
o any failure by the master servicer to make a required
deposit to the collection account or, if the master servicer
is so required, to distribute to the holders of any class of
notes or equity certificates of the series any required
payment which continues unremedied for a specified number of
business days after the giving of written notice of the
failure to the master servicer by the trustee or the issuer;
o any failure by the master servicer duly to observe or
perform in any material respect any other of its covenants
or agreements in the servicing agreement with respect to the
series of notes which continues unremedied for a specified
number of days after the giving of written notice of the
failure to the master servicer by the trustee or the issuer;
o events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings regarding the
master servicer and actions by the master servicer
indicating its insolvency or inability to pay its
obligations and
o any other servicing default as set forth in the servicing
agreement.
So long as a servicing default remains unremedied, either the depositor or
the trustee may, by written notification to the master servicer and to the
issuer or the trustee or trust fund, as applicable, terminate all of the rights
and obligations of the master servicer under the servicing agreement, other than
any right of the master servicer as noteholder or as holder of the equity
certificates and other than the right to receive servicing compensation and
expenses for servicing the mortgage loans during any period prior to the date of
the termination. Upon termination of the master servicer the trustee will
succeed to all responsibilities, duties and liabilities of the master servicer
under the servicing agreement, other than the obligation to repurchase mortgage
loans, and will be entitled to similar compensation arrangements. If the trustee
would be obligated to succeed the master servicer but is unwilling to so act, it
may appoint, or if it is unable to so act, it shall appoint, or petition a court
of competent jurisdiction for the appointment of an approved mortgage servicing
institution with a net worth of at least $1,000,000 to act as successor to the
master servicer under the servicing agreement. Pending the appointment of a
successor, the trustee is obligated to act in the capacity of master servicer.
The trustee and the successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation to the initial
master servicer under the servicing agreement.
INDENTURE
An event of default under the indenture will include each of the following
unless otherwise provided in the related prospectus supplement:
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o a default for a specified number of days or more in the payment of any
principal of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture which continues for a specified number of days
after notice of failure is given in accordance with the procedures
described in the related prospectus supplement;
o any representation or warranty made by the depositor or the trust fund
in the indenture or in any related certificate or other writing having
been incorrect in a material respect as of the time made, and the
breach is not cured within a specified number of days after notice of
breach is given in accordance with the procedures described in the
related prospectus supplement;
o events of bankruptcy, insolvency, receivership or liquidation of the
depositor or the issuer; or
o any other event of default provided with respect to notes of that
series.
If an event of default with respect to the notes of any series occurs and
is continuing, the trustee or the holders of a majority of the then aggregate
outstanding amount of the notes of the series may declare the principal amount,
or, if the notes of that series are Accrual Securities, the portion of the
principal amount as may be specified in the terms of that series, as provided in
the related prospectus supplement, of all the notes of the series to be due and
payable immediately. That declaration may, under the circumstances set forth in
the indenture, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related notes.
If following an event of default with respect to any series of notes, the
notes of the series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue to
apply payments on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of the series as they would
have become due if there had not been a declaration. In addition, the trustee
may not sell or otherwise liquidate the collateral securing the notes of a
series following an event of default, unless
o the holders of 100% of the then aggregate outstanding amount of the
notes of the series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series at the date of the sale, or
o the trustee determines that the collateral would not be sufficient on
an ongoing basis to make all payments on the notes as the payments
would have become due if the notes had not been declared due and
payable, and the trustee obtains the consent of the holders of 66 2/3%
of the then aggregate outstanding amount of the notes of the series.
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If the trustee liquidates the collateral in connection with an event of
default, the indenture may provide that the trustee will have a prior lien on
the proceeds of any liquidation for unpaid fees and expenses. As a result, upon
the occurrence of an event of default, the amount available for payments to the
noteholders would be less than would otherwise be the case. However, the trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the indenture
for the benefit of the noteholders after the occurrence of an event of default.
If the principal of the notes of a series is declared due and payable, the
holders of those notes issued at a discount from par may be entitled to receive
no more than an amount equal to the unpaid principal amount of the note less the
amount of the discount that is unamortized.
No noteholder or holder of an equity certificate generally will have any
right under an owner trust agreement or indenture to institute any proceeding
with respect to the agreement unless:
o the holder previously has given to the trustee written notice of
default and the default is continuing,
o the holders of notes or equity certificates of any class evidencing
not less than 25% of the aggregate percentage interests constituting
the class (1) have made written request upon the trustee to institute
a proceeding in its own name as trustee thereunder and (2) have
offered to the trustee reasonable indemnity,
o the trustee has neglected or refused to institute a proceeding for 60
days after receipt of the request and indemnity, and
o no direction inconsistent with the written request has been given to
the trustee during the 60 day period by the holders of a majority of
the note balances of the class. However, the trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the
applicable agreement or to institute, conduct or defend any litigation
at the request, order or direction of any of the holders of notes or
equity certificates covered by the agreement, unless the holders have
offered to the trustee reasonable security or indemnity against the
costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT OF THE GOVERNING AGREEMENTS
With respect to each series of certificates, each related pooling and
servicing agreement or trust agreement may be amended by the depositor, the
master servicer, and the trustee, upon consent of any credit support provider,
without the consent of any of the holders of certificates covered by the
agreement, to cure any ambiguity, to correct, modify or supplement any provision
in the agreement, or to make any other provisions with respect to matters or
questions arising under the agreement which are not inconsistent with the
provisions of the agreement, provided that the action will not adversely affect
in any material respect the interests of any holder of certificates covered by
the agreement. Each agreement may also be amended by the depositor, the master
servicer, if any, and the trustee, with the consent of the holders of
certificates evidencing not less than 66% of the voting rights, for any purpose,
but that no amendment may
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o reduce in any manner the amount of or delay the timing of, payments
received on trust fund assets which are required to be distributed on
any certificate without the consent of the holder of the certificate,
o adversely affect in any material respect the interests of the holders
of any class of certificates in a manner other than as described in
the preceding bullet point, without the consent of the holders of
certificates of that class evidencing not less than 66% of the
aggregate voting rights of that class, or
o reduce the percentage of voting rights required by the preceding
bullet point for the consent to any amendment without the consent of
the holders of all certificates covered by the agreement then
outstanding.
However, with respect to any series of certificates as to which a REMIC
election is to be made, the trustee will not consent to any amendment of the
agreement unless it shall first have received an opinion of counsel to the
effect that the amendment will not cause the trust fund to fail to qualify as a
REMIC at any time that the related certificates are outstanding. The voting
rights evidenced by any certificate will be the portion of the voting rights of
all of the certificates in the related series allocated in the manner described
in the related prospectus supplement.
With respect to each series of notes, each related servicing agreement or
indenture may be amended by the parties to the agreement without the consent of
any of the holders of the notes covered by the agreement, to cure any ambiguity,
to correct, modify or supplement any provision in the agreement, or to make any
other provisions with respect to matters or questions arising under the
agreement which are not inconsistent with the provisions of the agreement,
provided that the action will not adversely affect in any material respect the
interests of any holder of notes covered by the agreement. Each agreement may
also be amended by the parties to the agreement with the consent of the holders
of notes evidencing not less than 66% of the voting rights, for any purpose, but
that no amendment may
o reduce in any manner the amount of or delay the timing of, payments
received on trust fund assets which are required to be distributed on
any note without the consent of the holder of that note,
o adversely affect in any material respect the interests of the holders
of any class of notes in a manner other than as described in the
preceding bullet point, without the consent of the holders of notes of
that class evidencing not less than 66% of the aggregate voting rights
of that class, or
o reduce the percentage of voting rights required by the preceding
bullet point for the consent to any amendment without the consent of
the holders of all notes covered by the agreement then outstanding.
The voting rights evidenced by any note will be the portion of the
voting rights of all of the notes in the related series allocated in
the manner described in the related prospectus supplement.
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TERMINATION OF THE TRUST FUND AND DISPOSITION OF TRUST FUND ASSETS
The obligations created by the related agreements for each series of
securities will terminate upon the payment to securityholders of that series of
all amounts held in the distribution account or by the master servicer and
required to be paid to them under the agreements following the earlier of
o the final payment or other liquidation of the last asset included in
the related trust fund or the disposition of all underlying property
subject to the trust fund assets acquired upon foreclosure of the
trust fund assets, and
o the purchase of all of the assets of the trust fund by the party
entitled to effect the termination, under the circumstances and in the
manner set forth in the related prospectus supplement.
In no event, however, will the trust created by the related agreements
continue beyond the date specified in the related agreement. Written notice of
termination of the related agreements will be given to each securityholder, and
the final distribution will be made only upon surrender and cancellation of the
securities at an office or agency appointed by the trustee which will be
specified in the notice of termination.
Any purchase of assets of the trust fund in connection with a termination,
shall be made at the price set forth in the related prospectus supplement which
in most cases will be equal to the greater of:
o the sum of (a) 100% of the stated principal balance of each mortgage
asset as of the day of the purchase plus accrued interest thereon at
the applicable interest rate net of the rates at which the servicing
fees and the retained interest, if any, are calculated to the first
day of the month following the purchase plus (b) the appraised value
of any underlying property subject to the mortgage assets acquired for
the benefit of securityholders, and
o the aggregate fair market value of all of the assets in the trust
fund, as determined by the trustee, the master servicer, and, if
different than both such persons, the person entitled to effect the
termination, in each case taking into account accrued interest at the
applicable interest rate net of the rates at which the servicing fees
and the retained interest, if any, are calculated to the first day of
the month following the purchase.
The exercise of an optimal termination right will effect early retirement
of the securities of that series, but the right of the person entitled to effect
the termination is subject to the aggregate principal balance of the outstanding
trust fund assets for the series at the time of purchase being less than the
percentage of the aggregate principal balance of the trust fund assets at the
cut-off date for that series specified in the related prospectus supplement,
which percentage will be between 25% and 0%.
In addition to the repurchase of the assets in the related trust fund
at the Clean-up Call, if so specified in the related prospectus supplement, a
holder of a non-offered class of securities described in the preceding paragraph
will have the right, solely at its discretion, to terminate the related trust
fund on any distribution date after the 12th distribution date following the
date of initial
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issuance of the related series of securities and until the date as the Clean-up
Call becomes exercisable and thereby effect early retirement of the securities
of the series. Any call of this type will be of the entire trust fund at one
time; multiple calls with respect to any series of securities will not be
permitted. If the call option is exercised, the Call Class must remit to the
trustee a price equal to 100% of the principal balance of the securities offered
hereby as of the day of the purchase plus accrued interest thereon at the
applicable security interest rate during the related period on which interest
accrues on the securities which the trustee will distribute to securityholders.
If funds to terminate are not deposited with the related trustee, the securities
will remain outstanding. There will not be any additional remedies available to
securityholders. In addition, in the case of a trust fund for which a REMIC
election or elections have been made, an early termination will constitute a
"qualified liquidation" under Section 860F of the Code. In connection with a
call by the Call Class, the final payment to the securityholders will be made
upon surrender of the related securities to the trustee. Once the securities
have been surrendered and paid in full, there will not be any continuing
liability from the securityholders or from the trust fund to securityholders.
OPTIONAL PURCHASE BY THE MASTER SERVICER OF DEFAULTED MORTGAGE LOANS
The master servicer under the related servicing agreement will have the
option to purchase from the trust fund any mortgage asset 90 days or more
delinquent at a purchase price generally equal to the outstanding principal
balance of the delinquent mortgage asset as of the date of purchase, plus all
accrued and unpaid interest on that principal balance.
DUTIES OF THE TRUSTEE
The trustee makes no representations as to the validity or sufficiency of
any agreement, the securities or any mortgage loan or related document and is
not accountable for the use or application by or on behalf of the master
servicer of any funds paid to the master servicer or its designee in respect of
the securities or the mortgage loans, or deposited into or withdrawn from the
collection account or any other account by or on behalf of the master servicer.
If no event of default has occurred and is continuing, the trustee is required
to perform only those duties specifically required under the related agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the trustee is required to examine the documents
and to determine whether they conform to the requirements of the related
agreement.
DESCRIPTION OF THE TRUSTEE
The trustee or indenture trustee, each referred to as the trustee, under
each pooling and servicing agreement, trust agreement or indenture will be named
in the related prospectus supplement. The owner trustee for each series of notes
will be named in the related prospectus supplement. The commercial bank,
national banking association or trust company serving as trustee or owner
trustee may have normal banking relationships with the depositor and its
affiliates and with the master servicer and its affiliates.
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DESCRIPTION OF CREDIT SUPPORT
For any series of securities, credit support may be provided with respect
to one or more classes thereof or the related mortgage assets. Credit support
may be in the form of the subordination of one or more classes to other classes
in a series of securities, letters of credit, insurance policies, surety bonds,
guarantees, the establishment of one or more reserve funds,
cross-collateralization, overcollateralization or another method of credit
support described in the related prospectus supplement, or any combination of
the foregoing. If so provided in the related prospectus supplement, any form of
credit support may be structured so as to be drawn upon by more than one series
of securities.
The credit support provided for a series of securities will in most cases
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the securities and interest
thereon. If losses or shortfalls occur that exceed the amount covered by credit
support or that are not covered by credit support, securityholders will bear
their allocable share of deficiencies. Also, if a form of credit support covers
more than one pool of mortgage assets in a trust fund or more than one series of
securities, holders of securities evidencing interests in any of the covered
pools or covered trusts will be subject to the risk that the credit support will
be exhausted by the claims of other covered pools or covered trusts prior to
that covered pool or covered trust receiving any of its intended share of the
coverage.
If credit support is provided with respect to one or more classes of
securities of a series, or the related mortgage assets, the related prospectus
supplement will include a description of
o the nature and amount of coverage under such credit support,
o any conditions to payment thereunder not otherwise described in
this prospectus,
o the conditions under which the amount of coverage under the
credit support may be reduced, terminated or replaced, and ,
o the material provisions relating to the credit support.
Additionally, the related prospectus supplement will set forth certain
information with respect to the credit support provider, including:
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business,
o if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business, and
o its total assets and its stockholders' or policyholders' surplus,
if applicable, as of the date specified in the prospectus
supplement.
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A copy of the policy or agreement, as applicable, governing the
applicable credit support 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 related
series.
SUBORDINATION
One or more classes of securities may be subordinate securities. In the
event of any realized losses on mortgage assets not in excess of the limitations
described in the following paragraph, the rights of the subordinate
securityholders to receive distributions with respect to the mortgage loans will
be subordinate to the rights of the senior securityholders to the extent
described in the related prospectus supplement.
All realized losses will be allocated to the subordinate securities of
the related series, or, if the series includes more than one class of
subordinate securities, to the outstanding class of subordinate securities
having the first priority for allocation of realized losses and then to
additional outstanding classes of subordinate securities, if any, until the
principal balance of the applicable subordinate securities has been reduced to
zero. Any additional realized losses will be allocated to the senior securities
or, if the series includes more than one class of senior securities, either on a
pro rata basis among all of the senior securities in proportion to their
respective outstanding principal balances or as otherwise provided in the
related prospectus supplement. However, with respect to realized losses that are
attributable to physical damage to mortgaged properties of a type that is not
covered by standard hazard insurance policies, the amount thereof that may be
allocated to the subordinate securities of the related series may be limited to
an amount specified in the related prospectus supplement. If so, any realized
losses of this type in excess of the amount allocable to the subordinate
securities will be allocated among all outstanding classes of securities of the
related series, on a pro rata basis in proportion to their respective
outstanding principal balances, regardless of whether any subordinate securities
remain outstanding, or as otherwise provided in the related prospectus
supplement. Any allocation of a realized loss to a security will be made by
reducing the principal balance thereof as of the distribution date following the
Prepayment Period in which the realized loss was incurred.
As set forth under "Description of the Securities--Distributions of
Principal of the Securities", the rights of holders of the various classes of
securities of any series to receive distributions of principal and interest is
determined by the aggregate principal balance of each class.
The principal balance of any security will be reduced by all amounts previously
distributed on that security in respect of principal, and by any realized losses
allocated to that security. If there were no realized losses or prepayments of
principal on any of the mortgage loans, the respective rights of the holders of
securities of any series to future distributions would not change. However, to
the extent so provided in the related prospectus supplement, holders of senior
securities may be entitled to receive a disproportionately larger amount of
prepayments received, which will have the effect of accelerating the
amortization of the senior securities and increasing the respective percentage
interest in future distributions evidenced by the subordinate securities in the
related trust fund, with a corresponding decrease in the senior percentage, as
well as preserving the availability of the subordination provided by the
subordinate securities. In addition, as set forth in the paragraph above,
realized losses will be first allocated to subordinate securities by reduction
of the principal balance thereof, which will have the effect of increasing the
respective interest in future distributions evidenced by the senior securities
in the related trust fund.
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If so provided in the related prospectus supplement, amounts otherwise
payable on any distribution date to holders of subordinate securities may be
deposited into a reserve fund. Amounts held in any reserve fund may be applied
as described below under "--Reserve Funds" and in the related prospectus
supplement.
With respect to any Senior/Subordinate Series, the terms and provisions
of the subordination may vary from those described in the preceding paragraphs
and any variation will be described in the related prospectus supplement.
If so provided in the related prospectus supplement, the credit support
for the senior securities of a Senior/Subordinate Series may include, in
addition to the subordination of the subordinate securities of the series and
the establishment of a reserve fund, any of the other forms of credit support
described in this prospectus supplement. If any of the other forms of credit
support described below is maintained solely for the benefit of the senior
securities of a Senior/Subordinate Series, then that coverage described may be
limited to the extent necessary to make required distributions on the senior
securities or as otherwise specified in the related prospectus supplement. If so
provided in the related prospectus supplement, the obligor on any other forms of
credit support maintained for the benefit of the senior securities of a
Senior/Subordinate Series may be reimbursed for amounts paid thereunder out of
amounts otherwise payable on the subordinate securities.
LETTER OF CREDIT
As to any series of securities to be covered by a letter of credit, a
bank will deliver to the trustee an irrevocable letter of credit. The master
servicer or trustee will exercise its best reasonable efforts to keep or cause
to be kept the letter of credit in full force and effect, unless coverage
thereunder has been exhausted through payment of claims. The master servicer
will agree to pay the fees for the letter of credit on a timely basis unless, as
described in the related prospectus supplement, the payment of those fees is
otherwise provided for.
The master servicer or the trustee will make or cause to be made draws
on the letter of credit bank under each letter of credit. Subject to any
differences as will be described in the related prospectus supplement, letters
of credit may cover all or any of the following amounts, in each case up to a
maximum amount set forth in the letter of credit:
(1) For any mortgage asset that became a liquidated asset
during the related Prepayment Period, other than mortgage assets as to
which amounts paid or payable under any related hazard insurance
instrument, including the letter of credit as described in (2) below,
are not sufficient either to restore the mortgaged property or to pay
the outstanding principal balance of the mortgage asset plus accrued
interest, an amount which, together with all Liquidation Proceeds,
Insurance Proceeds, and other collections on the liquidated loan, net
of amounts payable or reimbursable therefrom to the master servicer for
related unpaid servicing fees and unreimbursed servicing expenses, will
equal the sum of (A) the unpaid principal balance of the liquidated
asset, plus accrued interest at the applicable interest rate net of the
rates at which the servicing fee and retained interest are calculated,
plus (B) the amount of related servicing expenses, if any, not
reimbursed to the master servicer from Liquidation Proceeds, Insurance
Proceeds and other collections on the liquidation asset, which shall be
paid to the master servicer;
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(2) For each mortgage asset that is delinquent and as to
which the mortgaged property has suffered damage, other than physical
damage caused by hostile or warlike action in time of war or peace, by
any weapons of war, by any insurrection or rebellion, or by any nuclear
reaction or nuclear radiation or nuclear contamination whether
controlled or uncontrolled, or by any action taken by any governmental
authority in response to any of the foregoing, and for which any
amounts paid or payable under the related primary hazard insurance
policy or any special hazard insurance policy are not sufficient to pay
either of the following amounts, an amount which, together with all
Insurance Proceeds paid or payable under the related primary hazard
insurance policy or any special hazard insurance policy, net, if the
proceeds are not to be applied to restore the mortgaged property, of
all amounts payable or reimbursable therefrom to the master servicer
for related unpaid servicing fees and unreimbursed servicing expenses,
will be equal to the lesser of (A) the amount required to restore the
mortgaged property and (B) the sum of (1) the unpaid principal balance
of the mortgage asset plus accrued interest at the applicable interest
rate net of the rates at which the servicing fees and retained
interest, if any, are calculated, plus (2) the amount of related
servicing expenses, if any, not reimbursed to the master servicer from
Insurance Proceeds paid under the related primary hazard insurance
policy or any special hazard insurance policy; and
(3) For any mortgage asset that has been subject to
bankruptcy proceedings as described above, the amount of any debt
service reduction or the amount by which the principal balance of the
mortgage asset has been reduced by the bankruptcy court.
If the related prospectus supplement so provides, upon payment by the
letter of credit bank with respect to a liquidated asset, or a payment of the
full amount owing on a mortgage asset as to which the mortgaged property has
been damaged, as described in (2)(B) above, the liquidated asset will be removed
from the related trust fund in accordance with the terms set forth in the
related prospectus supplement and will no longer be subject to the agreement.
Unless otherwise provided in the related prospectus supplement, mortgage assets
that have been subject to bankruptcy proceedings, or as to which payment under
the letter of credit has been made for the purpose of restoring the related
mortgaged property, as described in (2)(A) above, will remain part of the
related trust fund. The maximum dollar coverages provided under any letter of
credit will each be reduced to the extent of related unreimbursed draws
thereunder.
In the event that the bank that has issued a letter of credit ceases to
be a duly organized commercial bank, or its debt obligations are rated lower
than the highest rating on any class of the securities on the date of issuance
by the rating agency or agencies, the master servicer or trustee will use its
best reasonable efforts to obtain or cause to be obtained, as to each letter of
credit, a substitute letter of credit issued by a commercial bank that meets
these requirements and providing the same coverage; provided, however, that, if
the fees charged or collateral required by the successor bank shall be more than
the fees charged or collateral required by the predecessor bank, each component
of coverage thereunder may be reduced proportionately to a level as results in
the fees and collateral being not more than the fees then charged and collateral
then required by the predecessor bank.
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MORTGAGE POOL INSURANCE POLICY
As to any series of securities to be covered by a mortgage pool
insurance policy with respect to any realized losses on liquidated loans, the
master servicer will exercise its best reasonable efforts to maintain or cause
to be maintained the mortgage pool insurance policy in full force and effect,
unless coverage thereunder has been exhausted through payment of claims. The
master servicer will agree to pay the premiums for each mortgage pool insurance
policy on a timely basis unless, as described in the related prospectus
supplement, the payment of those fees is otherwise provided.
The master servicer will present or cause to be presented claims to the
insurer under each mortgage pool insurance policy. Mortgage pool insurance
policies, however, are not blanket policies against loss, since claims
thereunder may be made only upon satisfaction of certain conditions, as
described in the next paragraph and, if applicable, in the related prospectus
supplement.
Mortgage pool insurance policies do not cover losses arising out of the
matters excluded from coverage under the primary mortgage insurance policy, or
losses due to a failure to pay or denial of a claim under a primary mortgage
insurance policy, irrespective of the reason therefor.
Mortgage pool insurance policies in general provide that no claim may
validly be presented thereunder with respect to a mortgage loan unless:
o an acceptable primary mortgage insurance policy, if
the initial loan-to-value ratio of the mortgage loan
exceeded 80%, has been kept in force until the
loan-to-value ratio is reduced to 80%;
o premiums on the primary hazard insurance policy have
been paid by the insured and real estate taxes and
foreclosure, protection and preservation expenses
have been advanced by or on behalf of the insured, as
approved by the insurer;
o if there has been physical loss or damage to the
mortgaged property, it has been restored to its
physical condition at the time the mortgage loan
became insured under the mortgage pool insurance
policy, subject to reasonable wear and tear; and
o the insured has acquired good and merchantable title
to the mortgaged property, free and clear of all
liens and encumbrances, except permitted
encumbrances, including any right of redemption by or
on behalf of the mortgagor, and if required by the
insurer, has sold the property with the approval of
the insurer.
Assuming the satisfaction of these conditions, the insurer has the
option to either (a) acquire the property securing the defaulted mortgage loan
for a payment equal to the principal balance of the defaulted mortgage loan plus
accrued and unpaid interest at the interest rate on the mortgage loan to the
date of acquisition and expenses described above advanced by or on behalf of the
insured, on condition that the insurer must be provided with good and
merchantable title to the mortgaged
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property, unless the property has been conveyed under the terms of the
applicable primary mortgage insurance policy, or (b) pay the amount by which the
sum of the principal balance of the defaulted mortgage loan and accrued and
unpaid interest at the interest rate to the date of the payment of the claim and
the expenses exceed the proceeds received from a sale of the mortgaged property
which the insurer has approved. In both (a) and (b), the amount of payment under
a mortgage pool insurance policy will be reduced by the amount of the loss paid
under the primary mortgage insurance policy.
Unless earlier directed by the insurer, a claim under a mortgage pool
insurance policy must be filed (a) in the case when a primary mortgage insurance
policy is in force, within a specified number of days (typically, 60 days) after
the claim for loss has been settled or paid thereunder, or after acquisition by
the insured or a sale of the property approved by the insurer, whichever is
later, or (b) in the case when a primary mortgage insurance policy is not in
force, within a specified number of days (typically, 60 days) after acquisition
by the insured or a sale of the property approved by the insurer. A claim must
be paid within a specified period (typically, 30 days) after the claim is made
by the insured.
The amount of coverage under each mortgage pool insurance policy will
generally be reduced over the life of the securities of any series by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the insurer upon disposition of all acquired properties. The amount
of claims paid includes certain expenses incurred by the master servicer as well
as accrued interest on delinquent mortgage loans to the date of payment of the
claim. Accordingly, if aggregate net claims paid under a mortgage pool insurance
policy reach the applicable policy limit, coverage thereunder will be exhausted
and any further losses will be borne by securityholders of the related series.
SEE "LEGAL ASPECTS OF MORTGAGE ASSETS--FORECLOSURE ON MORTGAGES" AND
"--REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS".
If an insurer under a mortgage pool insurance policy ceases to be a
private mortgage guaranty insurance company duly qualified as such under
applicable laws and approved as an insurer by Freddie Mac or Fannie Mae and
having a claims-paying ability acceptable to the rating agency or agencies, the
master servicer will use its best reasonable efforts to obtain or cause to be
obtained from another qualified insurer a replacement insurance policy
comparable to the mortgage pool insurance policy with a total coverage equal to
the then outstanding coverage of the mortgage pool insurance policy; provided,
however, that if the cost of the replacement policy is greater than the cost of
the original mortgage pool insurance policy, the coverage of the replacement
policy may be reduced to the level that its premium rate does not exceed the
premium rate on the original mortgage pool insurance policy. However, if the
insurer ceases to be a qualified insurer solely because it ceases to be approved
as an insurer by Freddie Mac or Fannie Mae, the master servicer will review, or
cause to be reviewed, the financial condition of the insurer with a view towards
determining whether recoveries under the mortgage pool insurance policy are
jeopardized for reasons related to the financial condition of the insurer. If
the master servicer determines that recoveries are so jeopardized, it will
exercise its best reasonable efforts to obtain from another qualified insurer a
replacement policy, subject to the same cost limitation.
Because each mortgage pool insurance policy will require that the
property subject to a defaulted mortgage loan be restored to its original
condition prior to claiming against the insurer, the policy will not provide
coverage against hazard losses. As set forth in the immediately following
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paragraph, the primary hazard insurance policies covering the mortgage loans
typically exclude from coverage physical damage resulting from a number of
causes and, even when the damage is covered, may afford recoveries that are
significantly less than the full replacement cost of the losses. Further, a
special hazard insurance policy, or a letter of credit that covers special
hazard realized losses, will not cover all risks, and the coverage thereunder
will be limited in amount. These hazard risks will, as a result, be uninsured
and will therefore be borne by securityholders.
SPECIAL HAZARD INSURANCE POLICY
As to any series of securities to be covered by an insurance instrument
that does not cover losses that are attributable to physical damage to the
mortgaged properties of a type that is not covered by standard hazard insurance
policies, in other words, special hazard realized losses, the related prospectus
supplement may provide that the master servicer will exercise its best
reasonable efforts to maintain or cause to be maintained a special hazard
insurance policy in full force and effect covering the special hazard amount,
unless coverage thereunder has been exhausted through payment of claims;
provided, however, that the master servicer will be under no obligation to
maintain the policy if any insurance instrument covering the series as to any
realized losses on liquidated loans is no longer in effect. The master servicer
will agree to pay the premiums on each special hazard insurance policy on a
timely basis unless, as described in the related prospectus supplement, payment
of those premiums is otherwise provided for.
Each special hazard insurance policy will, subject to the limitations
described in the next paragraph, protect holders of securities of the related
series from
o loss by reason of damage to mortgaged properties caused by
certain hazards, including earthquakes and mudflows, not
insured against under the primary hazard insurance policies or
a flood insurance policy if the property is in a designated
flood area, and
o loss from partial damage caused by reason of the application
of the co-insurance clause contained in the primary hazard
insurance policies.
Special hazard insurance policies usually will not cover losses
occasioned by normal wear and tear, war, civil insurrection, governmental
actions, errors in design, nuclear or chemical reaction or contamination, faulty
workmanship or materials, flood, if the property is located in a designated
flood area, and other risks.
Subject to the foregoing limitations, each special hazard insurance
policy will provide that, when there has been damage to property securing a
defaulted mortgage asset acquired by the insured and to the extent the damage is
not covered by the related primary hazard insurance policy or flood insurance
policy, the insurer will pay the lesser of:
(1) the cost of repair to the property and
(2) upon transfer of the property to the insurer, the unpaid
principal balance of the mortgage asset at the time of
acquisition of the property by foreclosure, deed in lieu of
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foreclosure or repossession, plus accrued interest to the date
of claim settlement and expenses incurred by or on behalf of the
master servicer with respect to the property.
The amount of coverage under the special hazard insurance policy will
be reduced by the sum of (a) the unpaid principal balance plus accrued interest
and certain expenses paid by the insurer, less any net proceeds realized by the
insurer from the sale of the property, plus (b) any amount paid as the cost of
repair of the property.
Restoration of the property with the proceeds described under clause
(1) of the immediately preceding paragraph will satisfy the condition under an
insurance instrument providing coverage as to credit, or other non-hazard risks,
that the property be restored before a claim thereunder may be validly presented
with respect to the defaulted mortgage asset secured by the property. The
payment described under clause (2) of the immediately preceding paragraph will
render unnecessary presentation of a claim in respect of the mortgage loan under
an insurance instrument providing coverage as to credit, or other non-hazard
risks, as to any realized losses on a liquidated loan. Therefore, so long as the
insurance instrument providing coverage as to credit, or other non-hazard risks,
remains in effect, the payment by the insurer of either of the above alternative
amounts will not affect the total insurance proceeds paid to securityholders,
but will affect the relative amounts of coverage remaining under any special
hazard insurance policy and any credit insurance instrument.
The sale of a mortgaged property must be approved by the insurer under
any special hazard insurance policy and funds received by the insured in excess
of the unpaid principal balance of the mortgage asset plus interest thereon to
the date of sale plus expenses incurred by or on behalf of the master servicer
with respect to the property, not to exceed the amount actually paid by the
insurer, must be refunded to the insurer and, to that extent, coverage under the
special hazard insurance policy will be restored. If aggregate claim payments
under a special hazard insurance policy reach the policy limit, coverage
thereunder will be exhausted and any further losses will be borne by
securityholders.
A claim under a special hazard insurance policy generally must be filed
within a specified number of days, typically 60 days, after the insured has
acquired good and merchantable title to the property, and a claim payment is
payable within a specified number of days, typically 30 days, after a claim is
accepted by the insurer. Special hazard insurance policies provide that no claim
may be paid unless primary hazard insurance policy premiums, flood insurance
premiums, if the property is located in a federally designated flood area, and,
as approved by the insurer, real estate property taxes, property protection and
preservation expenses and foreclosure or repossession costs have been paid by or
on behalf of the insured, and unless the insured has maintained the primary
hazard insurance policy and, if the property is located in a federally
designated flood area, flood insurance, as required by the special hazard
insurance policy.
If a special hazard insurance policy is canceled or terminated for any
reason, other than the exhaustion of total policy coverage, the master servicer
will use its best reasonable efforts to obtain or cause to be obtained from
another insurer a replacement policy comparable to that special hazard insurance
policy with a total coverage that is equal to the then existing coverage of the
replaced special hazard insurance policy; provided, however, that if the cost of
the replacement policy is greater than the cost of that special hazard insurance
policy, the coverage of the replacement policy
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may be reduced to a level so that its premium rate does not exceed the premium
rate on that special hazard insurance policy.
Since each special hazard insurance policy is designed to permit full
recoveries as to any realized losses on liquidated loans under a credit
insurance instrument in circumstances in which recoveries would otherwise be
unavailable because property has been damaged by a cause not insured against by
a primary hazard insurance policy and thus would not be restored, each agreement
governing the trust fund will provide that, if the related credit insurance
instrument shall have lapsed or terminated or been exhausted through payment of
claims, the master servicer will be under no further obligation to maintain the
special hazard insurance policy.
BANKRUPTCY BOND
As to any series of securities to be covered by a bankruptcy bond with
respect to actions that may be taken by a bankruptcy court in connection with a
mortgage asset, the master servicer will exercise its best reasonable efforts to
maintain or cause to be maintained the bankruptcy bond in full force and effect,
unless coverage thereunder has been exhausted through payment of claims. The
master servicer will pay or cause to be paid the premiums for each bankruptcy
bond on a timely basis, unless, as described in the related prospectus
supplement, payment of those premiums is otherwise provided for. Subject to the
limit of the dollar amount of coverage provided, each bankruptcy bond will cover
certain losses resulting from an extension of the maturity of a mortgage asset,
or a reduction by the bankruptcy court of the principal balance of or the
interest rate on a mortgage asset, and the unpaid interest on the amount of a
principal reduction during the pendency of a proceeding under the Bankruptcy
Code. SEE "LEGAL ASPECTS OF MORTGAGE ASSETS--FORECLOSURE ON MORTGAGES" AND
"--REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS".
FINANCIAL GUARANTEE INSURANCE
Financial guarantee insurance, if any, with respect to a series of
securities will be provided by one or more insurance companies. The financial
guarantee insurance will guarantee, with respect to one or more classes of
securities of a series, timely distributions of interest only, timely
distributions of interest and ultimate distribution of principal or timely
distributions of interest and distributions of principal on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. If so specified in the related
prospectus supplement, the financial guarantee insurance will also guarantee
against any payment made to a securityholder that is subsequently recovered as a
voidable preference payment under federal bankruptcy law. A copy of the
financial guarantee insurance policy 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 with
the Commission within 15 days of issuance of the securities of the related
series.
RESERVE FUND
If so provided in the related prospectus supplement, the depositor will
deposit or cause to be deposited in an account, a reserve fund, any combination
of cash, one or more irrevocable letters of credit or one or more permitted
investments in specified amounts, or any other instrument satisfactory to the
rating agency or agencies, which will be applied and maintained in the manner
and under the conditions specified in the prospectus supplement. In the
alternative or in addition to a
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deposit, the prospectus supplement for a Senior/Subordinate Series may provide
that, a reserve fund be funded through application of all or a portion of
amounts otherwise payable on the subordinate securities. Amounts in a reserve
fund may be distributed to securityholders, or applied to reimburse the master
servicer for outstanding advances, or may be used for other purposes, in the
manner specified in the related prospectus supplement. A reserve fund will
typically not be deemed to be part of the related trust fund.
Amounts deposited in any reserve fund for a series will be invested in
permitted investments by, or at the direction of, the master servicer or any
other person named in the related prospectus supplement.
OVERCOLLATERALIZATION
If so specified in the related prospectus supplement, interest
collections on the mortgage assets may exceed interest payments on the
securities for the related distribution date. The excess interest may be
deposited into a reserve fund or applied as an additional payment of principal
on one or more classes of the securities of the related series. If excess
interest is applied as principal payments on the securities, the effect will be
to reduce the principal balance of the securities relative to the outstanding
balance of the mortgage loans, thereby creating overcollateralization and
additional protection to the securityholders, as specified in the related
prospectus supplement. If so provided in the related prospectus supplement,
overcollateralization may also be provided on the date of issuance of the
securities by the issuance of securities in an initial aggregate principal
amount which is less than the aggregate principal amount of the mortgage assets
in the related trust fund.
CROSS-SUPPORT FEATURES
If the trust fund assets for a series are divided into separate asset
groups, the beneficial ownership of which is evidenced by a separate class or
classes of a series, credit support may be provided by a cross-support feature
which requires that distributions be made on senior securities evidencing the
beneficial ownership of one asset group prior to distributions on subordinate
securities evidencing the beneficial ownership interest in another asset group
within the trust fund. The related prospectus supplement for a series which
includes a cross-support feature will describe the manner and conditions for
applying that cross-support feature. As to any trust fund that includes a
cross-support feature, only assets of the trust fund will be used to provide
cross-support, and cross- support will be provided only to securities issued by
the trust fund. A trust fund will not provide a cross-support feature that
benefits securities issued by any other trust fund, and a trust fund will not
receive cross-support from any other trust fund.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE SECURITIES
SWAPS AND YIELD SUPPLEMENT AGREEMENTS
The trustee on behalf of a trust fund may enter into interest rate
swaps and related caps, floors and collars to minimize the risk of
securityholders from adverse changes in interest rates, which are collectively
referred to as swaps, and other yield supplement agreements or similar yield
maintenance arrangements that do not involve swap agreements or other notional
principal contracts, which are collectively referred to as yield supplement
agreements.
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An interest rate swap is an agreement between two parties to exchange a
stream of interest payments on an agreed hypothetical or "notional" principal
amount. No principal amount is exchanged between the counterparties to an
interest rate swap. In the typical swap, one party agrees to pay a fixed rate on
a notional principal amount, while the counterparty pays a floating rate based
on one or more reference interest rates including the London Interbank Offered
Rate, or LIBOR, a specified bank's prime rate or U.S. Treasury Bill rates.
Interest rate swaps also permit counterparties to exchange a floating rate
obligation based upon one reference interest rate, such as LIBOR, for a floating
rate obligation based upon another referenced interest rate, such as U.S.
Treasury Bill rates.
Yield supplement agreements may be entered into to supplement the
interest rate or other rates on one or more classes of the securities of any
series. Additionally, agreements relating to other types of derivative products
that are designed to provide credit enhancement to the related series may be
entered into by a trustee and one or more counterparties. The terms of any
derivative product agreement and any counterparties will be described in the
accompanying prospectus supplement.
There can be no assurance that the trustee will be able to enter into
or offset swaps or enter into yield supplement agreements or derivative product
agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the swaps and yield supplement
agreements may provide for termination under various circumstances, there can be
no assurance that the trustee will be able to terminate a swap or yield
supplement agreement when it would be economically advantageous to the trust
fund to do so.
PURCHASE OBLIGATIONS
Some types of trust assets and some classes of securities of any
series, as specified in the accompanying prospectus supplement, may be subject
to a purchase obligation that would become applicable on one or more specified
dates, or upon the occurrence of one or more specified events, or on demand made
by or on behalf of the applicable securityholders. A purchase obligation may be
in the form of a conditional or unconditional purchase commitment, liquidity
facility, remarketing agreement, maturity guaranty, put option or demand
feature. The terms and conditions of each purchase obligation, including the
purchase price, timing and payment procedure, will be described in the
accompanying prospectus supplement. A purchase obligation relating to trust
assets may apply to those trust assets or to the related securities. Each
purchase obligation may be a secured or unsecured obligation of the provider
thereof, which may include a bank or other financial institution or an insurance
company. Each purchase obligation will be evidenced by an instrument delivered
to the trustee for the benefit of the applicable securityholders of the related
series. As specified in the accompanying prospectus supplement, each purchase
obligation relating to trust assets will be payable solely to the trustee for
the benefit of the securityholders of the related series. Other purchase
obligations may be payable to the trustee or directly to the holders of the
securities to which that obligation relate.
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DESCRIPTION OF PRIMARY INSURANCE POLICIES
Each mortgage loan will be covered by a primary hazard insurance policy
and, if so specified in the prospectus supplement, a primary mortgage insurance
policy.
PRIMARY MORTGAGE INSURANCE POLICIES
Although the terms and conditions of primary mortgage insurance
policies differ, each primary mortgage insurance policy will generally cover
losses up to an amount equal to the excess of the unpaid principal amount of a
defaulted mortgage loan, plus accrued and unpaid interest thereon and approved
expenses, over a specified percentage of the value of the related mortgaged
property.
As conditions to the filing or payment of a claim under a primary
mortgage insurance policy, the insured will typically be required, in the event
of default by the borrower, to:
o advance or discharge (1) hazard insurance premiums and (2) as
necessary and approved in advance by the insurer, real estate
taxes, property protection and preservation expenses and
foreclosure and related costs,
o in the event of any physical loss or damage to the mortgaged
property, have the mortgaged property restored to at least its
condition at the effective date of the primary mortgage insurance
policy, ordinary wear and tear excepted, and
o tender to the insurer good and merchantable title to, and
possession of, the mortgaged property.
Multifamily loans, commercial loans and mixed-use loans will not be
covered by primary mortgage insurance policies, regardless of the related
loan-to-value ratio.
PRIMARY HAZARD INSURANCE POLICIES
Each servicing agreement will require the master servicer to cause the
borrower on each mortgage loan to maintain a primary hazard insurance policy
providing for coverage of the standard form of fire insurance policy with
extended coverage customary in the state in which the mortgaged property is
located. The primary hazard coverage will be in general in an amount equal to
the lesser of the principal balance owing on the mortgage loan and the amount
necessary to fully compensate for any damage or loss to the improvements on the
mortgaged property on a replacement cost basis, but in either case not less than
the amount necessary to avoid the application of any co-insurance clause
contained in the hazard insurance policy. The ability of the master servicer to
assure that hazard insurance proceeds are appropriately applied may be dependent
upon its being named as an additional insured under any primary hazard insurance
policy and under any flood insurance policy referred to in the paragraph below,
and upon the borrower furnishing information to the master servicer in respect
of a claim. All amounts collected by the master servicer under any primary
hazard insurance policy, except for amounts to be applied to the restoration or
repair of the mortgaged property or released to the borrower in accordance with
the master servicer's normal servicing procedures, and subject to the terms and
conditions of the related Mortgage and mortgage note, will be deposited in the
collection account. The agreement will provide that the master
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servicer may satisfy its obligation to cause each borrower to maintain a hazard
insurance policy by the master servicer's maintaining a blanket policy insuring
against hazard losses on the mortgage loans. If the blanket policy contains a
deductible clause, the master servicer will deposit in the collection account
all sums that would have been deposited in the collection account but for that
clause. The master servicer also is required to maintain a fidelity bond and
errors and omissions policy with respect to its officers and employees that
provides coverage against losses that may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions in
failing to maintain insurance, subject to limitations as to amount of coverage,
deductible amounts, conditions, exclusions and exceptions.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms, and therefore will not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most hazard insurance policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods and
other water-related causes, earth movement, including earthquakes, landslides
and mudflows, nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in some cases, vandalism. This list is merely
indicative of the kinds of uninsured risks and is not intended to be
all-inclusive. When a mortgaged property is located at origination in a
federally designated flood area and flood insurance is available, each agreement
will require the master servicer to cause the borrower to acquire and maintain
flood insurance in an amount equal in general to the lesser of (1) the amount
necessary to fully compensate for any damage or loss to the improvements which
are part of the mortgaged property on a replacement cost basis and (2) the
maximum amount of insurance available under the federal flood insurance program,
whether or not the area is participating in the program.
The hazard insurance policies covering the mortgaged properties
typically contain a co- insurance clause that in effect requires the insured at
all times to carry insurance of a specified percentage, generally 80% to 90%, of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, the co-insurance clause generally provides that
the insurer's liability in the event of partial loss does not exceed the lesser
of (1) the replacement cost of the improvements less physical depreciation and
(2) the proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of the improvements.
The master servicer will not require that a hazard or flood insurance
policy be maintained for any cooperative loan. Generally, the cooperative is
responsible for maintenance of hazard insurance for the property owned by the
cooperative, and the tenant-stockholders of that cooperative do not maintain
individual hazard insurance policies. However, if a cooperative and the related
borrower on a cooperative note do not maintain hazard insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of the damaged property, damage to the related borrower's
cooperative apartment or the cooperative's building could significantly reduce
the value of the collateral securing the cooperative note.
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Since the amount of hazard insurance the master servicer will cause to
be maintained on the improvements securing the mortgage loans declines as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds collected
in connection with a partial loss may be insufficient to restore fully the
damaged property. The terms of the mortgage loans provide that borrowers are
required to present claims to insurers under hazard insurance policies
maintained on the mortgaged properties. The master servicer, on behalf of the
trustee and securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
mortgaged properties. However, the ability of the master servicer to present or
cause to be presented these claims is dependent upon the extent to which
information in this regard is furnished to the master servicer by borrowers.
FHA INSURANCE
The Federal Housing Administration is responsible for administering
various federal programs, including mortgage insurance, authorized under The
Housing Act and the United States Housing Act of 1937, as amended. If so
provided in the related prospectus supplement, a number of the mortgage loans
will be insured by the FHA.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such mortgage loans made under Sections
221 (d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of such a mortgage loan may be up to 40 years and the ratio of the loan
amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The master servicer will be obligated to purchase any
debenture issued in satisfaction of a defaulted FHA insured mortgage loan
serviced by it for an amount equal to the principal amount of that debenture.
The master servicer will be required to take steps as are reasonably
necessary to keep FHA insurance in full force and effect.
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Some of the mortgage loans contained in a trust fund may be Title I
loans as described below and in the related prospectus supplement. The
regulations, rules and procedures promulgated by the FHA under Title I contain
the requirements under which lenders approved for participation in the Title I
Program may obtain insurance against a portion of losses incurred with respect
to eligible loans that have been originated and serviced in accordance with FHA
regulations, subject to the amount of insurance coverage available in such Title
I lender's FHA reserve, as described below and in the related prospectus
supplement. In general, an insurance claim against the FHA may be denied or
surcharged if the Title I loan to which it relates does not strictly satisfy the
requirements of the National Housing Act and FHA regulations but FHA regulations
permit the Secretary of the Department of Housing and Urban Development, subject
to statutory limitations, to waive a Title I Lender's noncompliance with FHA
regulations if enforcement would impose an injustice on the lender.
Unless otherwise specified in the related prospectus supplement, the
master servicer will either serve as or contract with the person specified in
the prospectus supplement to serve as the administrator for FHA claims pursuant
to an FHA claims administration agreement. The FHA claims administrator will be
responsible for administering, processing and submitting FHA claims with respect
to the Title I loans. The securityholders will be dependent on the FHA claims
administrator to (1) make claims on the Title I loans in accordance with FHA
regulations and (2) remit all FHA insurance proceeds received from the FHA in
accordance with the related agreement. The securityholders' rights relating to
the receipt of payment from and the administration, processing and submission of
FHA claims by any FHA claims administrator is limited and governed by the
related agreement and the FHA claims administration agreement and these
functions are obligations of the FHA claims administrator, but not the FHA.
Under Title I, the FHA maintains an FHA insurance coverage reserve
account for each Title I lender. The amount in each Title I lender's FHA reserve
is a maximum of 10% of the amounts disbursed, advanced or expended by a Title I
lender in originating or purchasing eligible loans registered with the FHA for
Title I insurance, with certain adjustments permitted or required by FHA
regulations. The balance of such FHA reserve is the maximum amount of insurance
claims the FHA is required to pay to the related Title I lender. Mortgage loans
to be insured under Title I will be registered for insurance by the FHA.
Following either the origination or transfer of loans eligible under Title I,
the Title I lender will submit such loans for FHA insurance coverage within its
FHA reserve by delivering a transfer of note report or by an electronic
submission to the FHA in the form prescribed under the FHA regulations. The
increase in the FHA insurance coverage for such loans in the Title I lender's
FHA reserve will occur on the date following the receipt and acknowledgment by
the FHA of the transfer of note report for such loans. The insurance available
to any trust fund will be subject to the availability, from time to time, of
amounts in each Title I lender's FHA reserve, which will initially be limited to
the amount specified in the related prospectus supplement.
If so provided in the related prospectus supplement the trustee or FHA
claims administrator may accept an assignment of the FHA reserve for the related
Title I loans, notify FHA of such assignment and request that the portion of the
depositor's FHA reserves allocable to the Title I loans be transferred to the
trustee or the FHA claims administrator on the closing date. Alternatively, in
the absence of such provision, the FHA reserves may be retained by the depositor
and, upon an insolvency and receivership of the depositor, the related trustee
will notify FHA and request that the portion of the depositor's FHA reserves
allocable to the Title I loans be transferred to the trustee or
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the FHA claims administrator. Although each trustee will request such a transfer
of reserves, FHA is not obligated to comply with such a request, and may
determine that it is not in FHA's interest to permit a transfer of reserves. In
addition, FHA has not specified how insurance reserves would be allocated in a
transfer, and there can be no assurance that any reserve amount, if transferred
to the trustee or the FHA claims administrator, as the case may be, would not be
substantially less than 10% of the outstanding principal amount of the related
Title I loans. It is likely that the depositor, the trustee or the FHA claims
administrator would be the lender of record on other Title I loans, so that any
FHA reserves that are retained, or permitted to be transferred, would become
commingled with FHA reserves available for other Title I loans. FHA also
reserves the right to transfer reserves with "earmarking" (segregating reserves
so that they will not be commingled with the reserves of the transferee) if it
is in FHA's interest to do so.
Under Title I, the FHA will reduce the insurance coverage available in
a Title I lender's FHA reserve with respect to loans insured under that Title I
lender's contract of insurance by (1) the amount of FHA insurance claims
approved for payment related to those loans and (2) the amount of reduction of
the Title I lender's FHA reserve by reason of the sale, assignment or transfer
of loans registered under the Title I lender's contract of insurance. The FHA
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I lender that are subsequently rejected by the FHA.
Unlike certain other government loan insurance programs, loans under
Title I (other than loans in excess of $25,000) are not subject to prior review
by the FHA. The FHA disburses insurance proceeds with respect to defaulted loans
for which insurance claims have been filed by a Title I lender prior to any
review of those loans. A Title I lender is required to repurchase a Title I loan
from the FHA that is determined to be ineligible for insurance after insurance
claim payments for such loan have been paid to the lender. Under the FHA
regulations, if the Title I lender's obligation to repurchase the Title I loan
is unsatisfied, the FHA is permitted to offset the unsatisfied obligation
against future insurance claim payments owed by the FHA to such lender. FHA
regulations permit the FHA to disallow an insurance claim with respect to any
loan that does not qualify for insurance for a period of up to two years after
the claim is made and to require the Title I lender that has submitted the
insurance claim to repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including the alteration, repair or improvement of
residential property, the purchase of a manufactured home or lot (or cooperative
interest therein) on which to place the home or the purchase of both a
manufactured home and the lot (or cooperative interest therein) on which the
home is placed.
Subject to certain limitations described below, eligible Title I loans
are generally insured by the FHA for 90% of an amount equal to the sum of
o the net unpaid principal amount and the uncollected interest
earned to the date of default,
o interest on the unpaid loan obligation from the date of default
to the date of the initial submission of the insurance claim,
plus 15 calendar days (the total period not to exceed nine
months) at a rate of 7% per annum,
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o uncollected court costs,
o title examination costs,
o fees for required inspections by the lenders or its agents, up to
$75, and
o origination fees up to a maximum of 5% of the loan amount.
Accordingly if sufficient insurance coverage is available in such FHA
reserve, then the Title I lender bears the risk of losses on a Title I loan for
which a claim for reimbursement is paid by the FHA of at least 10% of the unpaid
principal, uncollected interest earned to the date of default, interest from the
date of default to the date of the initial claim submission and certain
expenses.
In general, the FHA will insure home improvement contracts up to
$25,000 for a single family property, with a maximum term of 20 years. The FHA
will insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit for a
$48,000 limit for four units for owner-occupied multifamily homes. If the loan
amount is $15,000 or more, the FHA requires a drive-by appraisal, the current
tax assessment value, or a full Uniform Residential Appraisal Report dated
within 12 months of the closing to verify the property's value. The maximum loan
amount on transactions requiring an appraisal is the amount of equity in the
property shown by the market value determination of the property.
With respect to Title I loans, the FHA regulations do not require that
a borrower obtain title or fire and casualty insurance. However, if the related
mortgaged property is located in a flood hazard area, flood insurance in an
amount at least equal to the loan amount is required. In addition, the FHA
regulations do not require that the borrower obtain insurance against physical
damage arising from earth movement (including earthquakes, landslides and
mudflows). Accordingly, if a mortgaged property that secures a Title I loan
suffers any uninsured hazard or casualty losses, holders of the related series
of securities that are secured in whole or in part by such Title I loan may bear
the risk of loss to the extent that such losses are not recovered by foreclosure
on the defaulted loans or from any FHA insurance proceeds. Such loss may be
otherwise covered by amounts available from the credit enhancement provided for
the related series of securities, if specified in the related prospectus
supplement.
Following a default on a Title I loan insured by the FHA, the master
servicer may, subject to certain conditions and mandatory loss mitigation
procedures, either commence foreclosure proceedings against the improved
property securing the loan, if applicable, or submit a claim to FHA, but may
submit a claim to FHA after proceeding against the improved property only with
the prior approval of the Secretary of HUD. The availability of FHA Insurance
following a default on a Title I loan is subject to a number of conditions,
including strict compliance with FHA regulations in originating and servicing
the Title I loan. Failure to comply with FHA regulations may result in a denial
of or surcharge on the FHA insurance claim. Prior to declaring a Title I loan in
default and submitting a claim to FHA, the master servicer must take certain
steps to attempt to cure the default, including personal contact with the
borrower either by telephone or in a meeting and providing the borrower with 30
days' written notice prior to declaration of default. FHA may deny insurance
coverage if the borrower's nonpayment is related to a valid objection to faulty
contractor performance. In such event, the master servicer or other entity as
specified in the related prospectus
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supplement will seek to obtain payment by or a judgment against the borrower,
and may resubmit the claim to FHA following such a judgment.
VA GUARANTEES
The United States Department of Veterans Affairs is an Executive Branch
Department of the United States, headed by the Secretary of Veterans Affairs.
The VA currently administers a variety of federal assistance programs on behalf
of eligible veterans and their dependents and beneficiaries. The VA administers
a loan guaranty program under which the VA guarantees a portion of loans made to
eligible veterans. If so provided in the prospectus supplement, a number of the
mortgage loans will be guaranteed by the VA.
Under the VA loan guaranty program, a VA loan may be made to any
eligible veteran by an approved private sector mortgage lender. The VA
guarantees payment to the holder of that loan of a fixed percentage of the loan
indebtedness, up to a maximum dollar amount, in the event of default by the
veteran borrower. When a delinquency is reported to the VA and no realistic
alternative to foreclosure is developed by the loan holder or through the VA's
supplemental servicing of the loan, the VA determines, through an economic
analysis, whether the VA will (a) authorize the holder to convey the property
securing the VA loan to the Secretary of Veterans Affairs following termination
or (b) pay the loan guaranty amount to the holder. The decision as to
disposition of properties securing defaulted VA loans is made on a case-by-case
basis using the procedures set forth in 38 U.S.C. Section 3732(c), as amended.
The master servicer will be required to take steps as are reasonably
necessary to keep the VA guarantees in full force and effect.
LEGAL ASPECTS OF MORTGAGE ASSETS
The following discussion contains general summaries of legal aspects of
loans secured by residential and commercial properties. Because these legal
aspects are governed in part 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 the security for the mortgage assets is situated. If there
is a concentration of the mortgage assets included in a trust fund in a
particular state, the prospectus supplement for the related series of securities
will discuss any laws of that state that could materially impact the interest of
the securityholders.
MORTGAGE LOANS
The single-family loans, multifamily loans, commercial loans and
mixed-use loans will be secured by either mortgages, deeds of trust, security
deeds or deeds to secure debt depending upon the type of security instrument
customary to grant a security interest according to the prevailing practice in
the state in which the property subject to that mortgage loan is located. The
filing of a mortgage or a deed of trust creates a lien upon or conveys title to
the real property encumbered by that instrument and represents the security for
the repayment of an obligation that is customarily evidenced by a promissory
note. It is not prior to the lien for real estate taxes and assessments.
Priority with respect to mortgages and deeds of trust depends on their terms and
generally on the
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order of recording with the applicable state, county or municipal office. There
are two parties to a mortgage, the mortgagor, who is the borrower/homeowner or
the land trustee, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In the case of a land trust, title to the property is held by a land
trustee under a land trust agreement, while the borrower/homeowner is the
beneficiary of the land trust; at origination of a mortgage loan, the borrower
executes a separate undertaking to make payments on the mortgage note. Although
a deed of trust is similar to a mortgage, a deed of trust normally has three
parties, the trustor, similar to a mortgagor, who may or may not be the
borrower, the beneficiary, similar to a mortgagee, who is the lender, and the
trustee, a third-party grantee. Under a deed of trust, the trustor grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the trustee to secure payment of the obligation. A security deed and
a deed to secure debt are special types of deeds which indicate on their face
that they are granted to secure an underlying debt. By executing a security deed
or deed to secure debt, the grantor conveys title to, as opposed to merely
creating a lien upon, the subject property to the grantee until the time as the
underlying debt is repaid. The mortgagee's authority under a mortgage and the
trustee's authority under a deed of trust, security deed or deed to secure debt
are governed by the law of the state in which the real property is located, the
express provisions of the mortgage, deed of trust, security deed or deed to
secure debt and, sometimes, the directions of the beneficiary.
COOPERATIVE LOANS
The cooperative owns or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for project management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage on the
cooperative apartment building and underlying land, or one or the other, the
cooperative, as project mortgagor, is also responsible for meeting these blanket
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with either the construction or purchase of the
cooperative's apartment building or the obtaining of capital by the cooperative.
There may be a lease on the underlying land and the cooperative, as lessee, is
also responsible for meeting the rental obligation. The interests of the
occupants under proprietary leases or occupancy agreements as to which the
cooperative is the landlord are generally subordinate to the interests of the
holder of the blanket mortgage and to the interest of the holder of a land
lease. If the cooperative is unable to meet the payment obligations (a) 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 or (b) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, 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 final payment
at final maturity. The inability of the cooperative to refinance this mortgage
and its consequent inability to make the final payment could lead to foreclosure
by the mortgagee. Similarly, a land lease has an expiration date and the
inability of the cooperative to extend its term or, in the alternative, to
purchase the land could lead to termination of the cooperative's interest in the
property and termination of all proprietary leases and occupancy agreements. In
either event, foreclosure by the holder of the blanket mortgage or the
termination of the underlying lease could eliminate or significantly diminish
the value of any collateral held by the lender that financed the
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purchase by an individual tenant-stockholder of cooperative shares or, in the
case of the trust fund, 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 the 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 occupancy rights is
financed through a cooperative share loan evidenced by a promissory note and
secured by an assignment of and a security interest in the occupancy agreement
or proprietary lease and a security interest in the related cooperative shares.
The lender generally 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
is filed in the appropriate state and local offices to perfect the lender's
interest in its collateral. 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 as described under "Foreclosure on Cooperative
Shares" below.
MANUFACTURED HOUSING CONTRACTS
Under the laws of most states, manufactured housing that is not
permanently affixed to its site constitutes personal property and is subject to
the motor vehicle registration laws of the state or other jurisdiction in which
the unit is located. In a few states, where certificates of title are not
required for manufactured homes, security interests are perfected by the filing
of a financing statement under Article 9 of the UCC which has been adopted by
all states. Financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department, or a similar entity, of the state. In the states that have
enacted certificate of title laws, a security interest in a unit of manufactured
housing, so long as it is not attached to land in so permanent a fashion as to
become a fixture, is generally perfected by the recording of the interest on the
certificate of title to the unit in the appropriate motor vehicle registration
office or by delivery of the required documents and payment of a fee to such
office, depending on state law.
The master servicer will be required under the related servicing
agreement to effect the notation or delivery of the required documents and fees,
and to obtain possession of the certificate of title, as appropriate under the
laws of the state in which any manufactured home is registered. If the master
servicer fails, due to clerical errors or otherwise, to effect the notation or
delivery, or files the security interest under the wrong law, for example, under
a motor vehicle title statute rather than under the UCC, in a few states, the
trustee may not have a first priority security interest in the manufactured home
securing a manufactured housing contract. As manufactured homes have become
larger and often have been attached to their sites without any apparent
intention by the borrowers to move them, courts in many states have held that
manufactured homes may become subject to real estate title and recording laws.
As a result, a security interest in a manufactured
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home could be rendered subordinate to the interests of other parties claiming an
interest in the home under applicable state real estate law. In order to perfect
a security interest in a manufactured home under real estate laws, the holder of
the security interest must file either a fixture filing under the provisions of
the UCC or a real estate mortgage under the real estate laws of the state where
the home is located. These filings must be made in the real estate records
office of the county where the home is located. Generally, manufactured housing
contracts will contain provisions prohibiting the obligor from permanently
attaching the manufactured home to its site. So long as the obligor does not
violate this agreement, a security interest in the manufactured home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest in
the manufactured home. If, however, a manufactured home is permanently attached
to its site, other parties could obtain an interest in the manufactured home
that is prior to the security interest originally retained by the seller and
transferred to the depositor.
The depositor will assign or cause to be assigned a security interest
in the manufactured homes to the trustee, on behalf of the securityholders.
Neither the depositor, the master servicer nor the trustee will amend the
certificates of title to identify the trustee, on behalf of the securityholders,
as the new secured party and, accordingly, the depositor or the mortgage loan
seller will continue to be named as the secured party on the certificates of
title relating to the manufactured homes. In most states, an assignment is an
effective conveyance of a security interest in a manufactured home without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the depositor's rights as the secured party. However,
in several states there exists a risk that, in the absence of an amendment to
the certificate of title, the assignment of the security interest might not be
held effective against creditors of the depositor or mortgage loan seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the trustee against the rights of subsequent purchasers of
a manufactured home or subsequent lenders who take a security interest in the
manufactured home. If there are any manufactured homes as to which the depositor
has failed to perfect or cause to be perfected the security interest assigned to
the trust fund, the security interest would be subordinate to subsequent
purchasers for value of manufactured homes and holders of perfected security
interests. There also exists a risk in not identifying the trustee, on behalf of
the securityholders, as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the trustee could be
released.
If the owner of a manufactured home moves it to a state other than the
state in which the manufactured home initially is registered, under the laws of
most states, the perfected security interest in the manufactured home would
continue for four months after the relocation and thereafter until the owner
re-registers the manufactured home in that state. If the owner were to relocate
a manufactured home to another state and re-register the manufactured home in
the new state, and if the depositor did not take steps to re-perfect its
security interest in the new state, the security interest in the manufactured
home would cease to be perfected. A majority of states generally require
surrender of a certificate of title to re-register a manufactured home.
Accordingly, the depositor must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered in states that provide for notation of lien, the depositor would
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receive notice of surrender if the security interest in the manufactured home is
noted on the certificate of title. Accordingly, the depositor would have the
opportunity to re-perfect its security interest in the manufactured home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related servicing agreement, the master servicer will be
obligated to take those steps, at the master servicer's expense, as are
necessary to maintain perfection of security interests in the manufactured
homes.
Under the laws of most states, liens for repairs performed on a
manufactured home take priority even over a perfected security interest. The
depositor will obtain the representation of the mortgage loan seller that it has
no knowledge of any liens of that type with respect to any manufactured home
securing a manufactured home loan. However, liens could arise at any time during
the term of a manufactured home loan. No notice will be given to the trustee or
securityholders in the event a lien for repairs arises.
HOME IMPROVEMENT CONTRACTS
The home improvement contracts, other than those home improvement
contracts that are unsecured or secured by mortgages on real estate, generally
are "chattel paper" or constitute "purchase money security interests", each as
defined in the UCC. Pursuant to the UCC, the sale of chattel paper is treated in
a manner similar to perfection of a security interest in chattel paper. Under
the related agreement, the depositor will transfer physical possession of the
contracts to the trustee or a designated custodian or may retain possession of
the contracts as custodian for the trustee. In addition, the depositor will make
an appropriate filing of a UCC-1 financing statement in the appropriate states
to give notice of the trustee's ownership of the contracts. The contracts will
not be stamped or otherwise marked to reflect their assignment from the
depositor to the trustee. Therefore, if through negligence, fraud or otherwise,
a subsequent purchaser were able to take physical possession of the contracts
without notice of such assignment, the trustee's interest in the contracts could
be defeated.
The contracts that are secured by the home improvements financed
thereby grant to the originator of the contracts a purchase money security
interest in such home improvements to secure all or part of the purchase price
of the home improvements and related services. A financing statement generally
is not required to be filed to perfect a purchase money security interest in
consumer goods. Such purchase money security interests are assignable. In
general, a purchase money security interest grants to the holder a security
interest that has priority over a conflicting security interest in the same
collateral and the proceeds of such collateral. However, to the extent that the
collateral subject to a purchase money security interest becomes a fixture, in
order for the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such home
improvement must generally be perfected by a timely fixture filing. In general,
under the UCC, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home improvement
contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such
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characterization, upon incorporation of the materials into the related property,
will not be secured by a purchase money security interest in the home
improvement being financed.
So long as the home improvement has not become subject to the real
estate law, a creditor can repossess a home improvement securing a contract by
voluntary surrender, "self-help" repossession that is "peaceful", i.e., without
breach of the peace, or, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, judicial process. The holder of a
contract must give the debtor a number of days' notice, which varies from 10 to
30 days or more depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states restrict
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the
related property so that the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equity principles, may limit or delay the ability of
a lender to repossess and resell collateral or enforce a deficiency judgment.
FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust,
which authorizes the trustee to sell the property upon any default by the
borrower under the terms of the note or deed of trust. In several states, 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 a notice of default
and notice of sale. In addition, the trustee in several states must provide
notice to any other individual having an interest in the real property,
including any junior lienholder. The trustor, borrower, or any person having a
junior encumbrance on the real estate, may, during a reinstatement period, cure
the default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers. In addition, several state laws
require that a copy of the notice of sale be posted on the property, recorded
and sent to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage and in the mortgaged
property. It is regulated by statutes and rules and subject throughout to the
court's equitable powers. A mortgagor is usually bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, the court may relieve a mortgagor of a default
and deny the mortgagee foreclosure on proof that the mortgagor's default was
neither willful nor in bad faith and that the mortgagee's action established a
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waiver of fraud, bad faith, oppressive or unconscionable conduct warranted a
court of equity to refuse affirmative relief to the mortgagee. A court of equity
may relieve the mortgagor from an entirely technical default where the default
was not willful.
A foreclosure action or sale in accordance with a power of sale is
subject to most of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring up to several years to
complete. Moreover, recent judicial decisions suggest that a non- collusive,
regularly conducted foreclosure sale or sale in accordance with a power of sale
may be challenged as a fraudulent conveyance, regardless of the parties' intent,
if a court determines that the sale was for less than fair consideration and the
sale occurred while the mortgagor was insolvent and within one year, or within
the state statute of limitations if the trustee in bankruptcy elects to proceed
under state fraudulent conveyance law, of the filing of bankruptcy. Similarly, a
suit against the debtor on the mortgage note may take several years.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount equal to the principal amount of the
mortgage or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure. Thereafter, the lender will assume the burdens of ownership,
including obtaining casualty insurance, paying taxes and making repairs at its
own expense as are necessary to render the property suitable for sale. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property. Any loss may be reduced by
the receipt of any mortgage insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages if the mortgagor is in
default thereunder. In either event the amounts expended will be added to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, if the foreclosure of a junior mortgage triggers
the enforcement of a due-on-sale clause in a senior mortgage, 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 some governmental liens. The proceeds
received by the referee or trustee from the sale are applied first to the costs,
fees and expenses of sale, real estate taxes 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 proceedings.
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If the master servicer were to foreclose on any junior lien it would do
so subject to any related senior lien. In order for the debt related to the
junior mortgage loan to be paid in full at the sale, a bidder at the foreclosure
sale of the junior mortgage loan would have to bid an amount sufficient to pay
off all sums due under the junior mortgage loan and the senior lien or purchase
the mortgaged property subject to the senior lien. If proceeds from a
foreclosure or similar sale of the mortgaged property are insufficient to
satisfy all senior liens and the junior mortgage loan in the aggregate, the
trust fund as the holder of the junior lien and, accordingly, holders of one or
more classes of related securities bear (1) the risk of delay in distributions
while a deficiency judgment against the borrower is obtained and (2) the risk of
loss if the deficiency judgment is not realized upon. Moreover, deficiency
judgments may not be available in a jurisdiction. In addition, liquidation
expenses with respect to defaulted junior mortgage loans do not vary directly
with the outstanding principal balance of the loans at the time of default.
Therefore, assuming that the master servicer took the same steps in realizing
upon a defaulted junior mortgage loan having a small remaining principal balance
as it would in the case of a defaulted junior mortgage loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
small junior mortgage loan than would be the case with the defaulted junior
mortgage loan having a large remaining principal balance.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In a few cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
a lender to foreclose if the default under the mortgage instrument is not
monetary, for example, the borrower's failure to adequately maintain the
property or the borrower's execution of a second mortgage or deed of trust
affecting the property. Finally, a few courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due process
concerns for adequate notice require that borrowers under deeds of trust or
mortgages receive notices in addition to the statutorily-prescribed minimums.
For the most part, these cases have upheld the notice provisions as being
reasonable or have found that the sale by a trustee under a deed of trust, or
under a mortgage having a power of sale, does not involve sufficient state
action to afford constitutional protection to the borrower.
FORECLOSURE ON MORTGAGED PROPERTIES LOCATED IN THE COMMONWEALTH OF PUERTO RICO
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a
real estate mortgage usually follows an ordinary civil action filed in the
Superior Court for the district where the mortgaged property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least
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once a week for two weeks. There may be as many as three public sales of the
mortgaged property.
If the defendant contests the foreclosure, the case may be tried and judgment
rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of these actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale
upon foreclosure of a mortgaged property that (1) is subject to a mortgage loan
that was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of the property and (2) is occupied by
the mortgagor as his principal residence, the mortgagor of the property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of the property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year after the sale. This payment
would reduce the amount of sales proceeds available to satisfy the mortgage loan
and may increase the amount of the loss.
FORECLOSURE ON COOPERATIVE SHARES
The cooperative shares and proprietary lease or occupancy agreement
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 by-laws, as well as in the proprietary lease or
occupancy agreement, and may be canceled by the cooperative for failure by the
tenant- stockholder to pay rent or other obligations or charges owed by the
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by the tenant-stockholder. Typically, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate the
lease or agreement in the event the tenant- stockholder fails to make payments
or defaults in the performance of covenants required thereunder.
Typically, the lender and the cooperative enter into a recognition agreement
that, together with any lender protection provisions contained in the
proprietary lease, establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and 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 a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under the
proprietary lease or occupancy agreement or that have become liens on the shares
relating to the proprietary lease or occupancy agreement. The total amount owed
to the
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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.
Under the laws applicable in most states, foreclosure on the
cooperative shares is accomplished by a sale in accordance with the provisions
of Article 9 of the UCC and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
commercially reasonable manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation 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.
REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
Repossession of manufactured housing is governed by state law. A few
states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. Unless as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of the manufactured
home in the event of a default by the obligor will generally be governed by the
UCC. Article 9 of the UCC provides the statutory framework for the repossession
of manufactured housing. While the UCC as adopted by the various states may vary
in minimal ways, the general repossession procedure established by the UCC is as
follows:
o Except in those states where the debtor must receive
notice of the right to cure a default, repossession can
commence immediately upon default without prior notice.
Repossession may be effected either through self- help
pursuant to a peaceable retaking without court order,
voluntary repossession or through judicial process by
means of repossession under a court-issued writ of
replevin. The self-help or voluntary repossession
methods are more commonly employed, and are
accomplished simply by retaking possession of the
manufactured home. In cases in which the
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debtor objects or raises a defense to repossession, a
court order must be obtained from the appropriate state
court, and the manufactured home must then be
repossessed in accordance with that order. Whether the
method employed is self-help, voluntary repossession or
judicial repossession, the repossession can be
accomplished either by an actual physical removal of
the manufactured home to a secure location for
refurbishment and resale or by removing the occupants
and their belongings from the manufactured home and
maintaining possession of the manufactured home on the
location where the occupants were residing. Various
factors may affect whether the manufactured home is
physically removed or left on location, such as the
nature and term of the lease of the site on which it is
located and the condition of the unit. In many cases,
leaving the manufactured home on location is preferable
if the home is already set up because the expenses of
retaking and redelivery will be saved. However, in
those cases where the home is left on location,
expenses for site rentals will usually be incurred.
o Once repossession has been achieved, preparation for
the subsequent disposition of the manufactured home can
commence. The disposition may be by public or private
sale provided the method, manner, time, place and terms
of the sale are commercially reasonable.
o Sale proceeds are to be applied first to repossession
expenses like those expenses incurred in retaking,
storage, preparing for sale including refurbishing
costs and selling, and then to satisfaction of the
indebtedness. While several states impose prohibitions
or limitations on deficiency judgments if the net
proceeds from resale do not cover the full amount of
the indebtedness, the remainder may be sought from the
debtor in the form of a deficiency judgment in those
states that do not prohibit or limit deficiency
judgments. The deficiency judgment is a personal
judgment against the debtor for the shortfall.
Occasionally, after resale of a manufactured home and
payment of all expenses and indebtedness, there is a
surplus of funds. In that case, the UCC requires the
party suing for the deficiency judgment to remit the
surplus to the debtor. Because the defaulting owner of
a manufactured home generally has very little capital
or income available following repossession, a
deficiency judgment may not be sought in many cases or,
if obtained, will be settled at a significant discount
in light of the defaulting owner's strained financial
condition.
RIGHTS OF REDEMPTION WITH RESPECT TO MORTGAGE LOANS
In several states, after sale in accordance with a deed of trust or
foreclosure of a mortgage, the trustor or mortgagor and foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. The right of redemption should be distinguished from the
equity of redemption, which is a nonstatutory right that must be exercised prior
to the foreclosure sale. In several states, redemption may occur only upon
payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be
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authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The right of redemption would defeat the
title of any purchaser acquired at a public sale. Consequently, the practical
effect of a right of redemption is to force the lender to retain the property
and pay the expenses of ownership and maintenance of the property until the
redemption period has expired. In several states, there is no right to redeem
property after a trustee's sale under a deed of trust.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
While state laws do not usually require notice to be given to debtors
prior to repossession, many states do require delivery of a notice of default
and of the debtor's right to cure defaults before repossession of a manufactured
home. The law in most states also requires that the debtor be given notice of
sale prior to the resale of the home so that the owner may redeem at or before
resale. In addition, the sale must comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Several states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In several states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to realize upon collateral or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, the
filing of a petition acts as a stay against the enforcement of remedies of
collection of a debt. Moreover, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 13 rehabilitative plan to cure a
monetary default with respect to a mortgage loan on a debtor's residence by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court (provided
no sale of the property had yet occurred) prior to the filing of the debtor's
Chapter 13 petition. Several courts with federal bankruptcy jurisdiction have
approved plans, based on the particular facts of the reorganization case, that
effected the curing of a mortgage loan default by paying arrearages over a
number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified
if the borrower has filed a petition under
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Chapter 13. These courts have suggested that the modifications may include
reducing the amount of each monthly payment, changing the rate of interest,
altering the repayment schedule and reducing the lender's security interest to
the value of the residence, thus leaving the lender a general unsecured creditor
for the difference between the value of the residence and the outstanding
balance of the loan. Federal bankruptcy law and limited case law indicate that
the foregoing modifications could not be applied to the terms of a loan secured
by property that is the principal residence of the debtor. In all cases, the
secured creditor is entitled to the value of its security plus post-petition
interest, attorneys' fees and costs to the extent the value of the security
exceeds the debt.
The Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission for purposes of analyzing the nation's bankruptcy laws and
making recommendations to Congress for legislative changes to the bankruptcy
laws. A similar commission was involved in developing the Bankruptcy Code. The
NBRC delivered its report to Congress, the President of the United States and
the Chief Justice of the Supreme Court on October 20, 1997. Among other topics,
high leverage loans were addressed in the NBRC's report. Despite several
ambiguities, the NBRC's report appears to recommend that Congress amend
Bankruptcy Code section 1322(b)(2) by treating a claim secured only by a junior
security interest in a debtor's principal residence as protected only to the
extent that the claim was secured when the security interest was made if the
value of the property securing the junior security interest is less than that
amount. However, the express language of the report implies that a claim secured
only by a junior security interest in a debtor's principal residence may not be
modified to reduce the claim below the appraised value of the property at the
time the security interest was made. A strong dissent by some members of the
NBRC recommends that the protections of Bankruptcy Code section 1322(b)(2) be
extended to creditors principally secured by the debtor's principal residence.
Additionally, the NBRC's report recommends that a creditor's secured claim in
real property should be determined by the property's fair market value, less
hypothetical costs of sale. The standard advocated by this recommendation would
not apply to mortgages on the primary residence of a Chapter 11 or 13 debtor who
retains the residence if the mortgages are protected from modification such as
those senior mortgages not subject to modification under Bankruptcy Code
Sections 1322(b)(2) and 1123(b)(5). The final NBRC report may ultimately lead to
substantive changes to the existing Bankruptcy Code, such as reducing
outstanding loan balances to the appraised value of a debtor's principal
residence at the time the security interest in the property was taken, which
could affect the mortgage loans included in a trust fund and the enforcement of
rights therein.
Several tax liens arising under the Code, may provide priority over the
lien of a mortgage or deed of trust. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination and the
servicing of single family mortgage loans by numerous federal and state consumer
protection laws. These laws include the Federal Truth-in-Lending Act, Regulation
Z, Real Estate Settlement Procedures Act, Regulation X, Equal Credit Opportunity
Act, Regulation B, Fair Credit Billing Act, Fair Housing Act, Fair Credit
Reporting Act and related statutes. These federal laws impose specific statutory
liabilities upon lenders who originate mortgage loans and who fail to comply
with the provisions of the law. This liability may affect assignees of the
mortgage loans. In particular, the originators' failure to comply with
requirements of the Federal Truth-in-Lending Act, as implemented by Regulation
Z, could subject both originators and assignees of the obligations to monetary
penalties and could result in obligors' rescinding loans against either
originators or assignees.
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In addition, the mortgage loans included in a trust fund may also be
subject to the Home Ownership and Equity Protection Act of 1994, if the mortgage
loans were originated on or after October 1, 1995, are not mortgage loans made
to finance the purchase of the mortgaged property and have interest rates or
origination costs in excess of prescribed levels. The Homeownership Act requires
additional disclosures, specifies the timing of the disclosures and limits or
prohibits inclusion of specific provisions in mortgages subject to the
Homeownership Act. Remedies available to the mortgagor include monetary
penalties, as well as recission rights if the appropriate disclosures were not
given as required or if the particular mortgage includes provisions prohibited
by law. The Homeownership Act also provides that any purchaser or assignee of a
mortgage covered by the Homeownership Act is subject to all of the claims and
defenses to loan payment, whether under the Federal Truth-in-Lending Act, as
amended by the Homeownership Act or other law, which the borrower could assert
against the original lender unless the purchaser or assignee did not know and
could not with reasonable diligence have determined that the mortgage loan was
subject to the provisions of the Homeownership Act. The maximum damages that may
be recovered under the Homeownership Act from an assignee is the remaining
amount of indebtedness plus the total amount paid by the borrower in connection
with the mortgage loan.
FOR COOPERATIVE LOANS
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Several 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.
JUNIOR MORTGAGES
The mortgage loans 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 trust fund. The rights of the securityholders 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 in
accordance with 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 ON MORTGAGES".
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. If there is a
conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right 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 sums, these sums will generally
have priority over all sums due under the junior mortgage.
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HOME EQUITY LINE OF CREDIT LOANS
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make home equity line of credit loans typically
contains a 'future advance' clause, which provides, in essence, that additional
amounts advanced to or on behalf of the borrower by the beneficiary or lender
are to be secured by the deed of trust or mortgage. Any amounts so advances
after the cut-off date with respect to any Mortgage will not be included in the
trust fund. The priority of the lien securing any advance made under the clause
may depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of the intervening junior trust deeds
or mortgages and other liens at the time of the advance. In most states, the
trust deed or mortgage liens securing mortgage loans of the type which includes
home equity credit lines applies retroactively to the date of the original
recording of the trust deed or mortgage, provided that the total amount of
advances under the home equity credit line does not exceed the maximum specified
principal amount of the recorded trust deed or mortgage, except as to advances
made after receipt by the lender of a written notice of lien from a judgment
lien creditor of the trustor.
CONSUMER PROTECTION LAWS WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS AND HOME
IMPROVEMENT CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
Federal Truth-in-Lending Act, Regulation Z, the Equal Credit Opportunity Act,
Regulation B, the Fair Credit Reporting Act, the Real Estate Settlement
Procedures Act, Regulation X, the Fair Housing Act and related statutes. These
laws can impose specific statutory liabilities upon creditors who fail to comply
with their provisions. This liability may affect an assignee's ability to
enforce a contract. In particular, the originators' failure to comply with
requirements of the Federal Truth-in-Lending Act, as implemented by Regulation
Z, could subject both originators and assignees of the obligations to monetary
penalties and could result in obligors' rescinding the contracts against either
the originators or assignees. Further, if the manufactured housing contracts or
home improvement contracts are deemed High Cost Loans within the meaning of the
Homeownership Act, they would be subject to the same provisions of the
Homeownership Act as mortgage loans as described in "--Anti- Deficiency
Legislation and Other Limitations on Lenders" above.
Manufactured housing contracts and home improvement contracts often
contain provisions obligating the obligor to pay late charges if payments are
not timely made. Federal and state law may specifically limit the amount of late
charges that may be collected. Unless the prospectus supplement indicates
otherwise, under the related servicing agreement, late charges will be retained
by the master servicer as additional servicing compensation, and any inability
to collect these amounts will not affect payments to securityholders.
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Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called Holder-in-Due-Course Rule of the Federal Trade Commission
has the effect of subjecting a seller, and related creditors and their
assignees, in a consumer credit transaction and any assignee of the creditor to
all claims and defenses which the debtor in the transaction could assert against
the seller of the goods. Liability under the FTC Rule is limited to the amounts
paid by a debtor on the contract, and the holder of the contract may also be
unable to collect amounts still due thereunder.
Most of the manufactured housing contracts and home improvement
contracts in a trust fund will be subject to the requirements of the FTC Rule.
Accordingly, the trustee, as holder of the manufactured housing contracts or
home improvement contracts, will be subject to any claims or defenses that the
purchaser of the related home or manufactured home may assert against the seller
of the home or manufactured home, subject to a maximum liability equal to the
amounts paid by the obligor on the manufactured housing contract or home
improvement contract. If an obligor is successful in asserting this type of
claim or defense, and if the mortgage loan seller had or should have had
knowledge of that claim or defense, the master servicer will have the right to
require the mortgage loan seller to repurchase the manufactured housing contract
or home improvement contract because of a breach of its mortgage loan seller's
representation and warranty that no claims or defenses exist that would affect
the obligor's obligation to make the required payments under the manufactured
housing contract or home improvement contract. The mortgage loan seller would
then have the right to require the originating dealer to repurchase the
manufactured housing contract from it and might also have the right to recover
from the dealer for any losses suffered by the mortgage loan seller with respect
to which the dealer would have been primarily liable to the obligor.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions including federal bankruptcy laws and
related state laws may interfere with or affect the ability of a lender to
realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
lender from repossessing a home, and as part of the rehabilitation plan reduce
the amount of the secured indebtedness to the market value of the home at the
time of bankruptcy, as determined by the court, leaving the party providing
financing as a general unsecured creditor for the remainder of the indebtedness.
A bankruptcy court may also reduce the monthly payments due under a contract or
change the rate of interest and time of repayment of the indebtedness.
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ENFORCEABILITY OF PROVISIONS
The mortgage loans in a trust fund will in most cases contain
due-on-sale clauses. These clauses permit the lender to accelerate the maturity
of the loan if the borrower sells, transfers, or conveys the property without
the prior consent of the lender. The enforceability of these clauses has been
impaired in various ways in several states by statute or decisional law. The
ability of lenders and their assignees and transferees to enforce due-on-sale
clauses was addressed by the Garn-St Germain Depository Institutions Act of
1982. This legislation, subject to exceptions, preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses.
The Garn-St Germain Act does encourage lenders to permit assumptions of loans at
the original rate of interest or at another rate less than the average of the
original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act, including federal
savings and loan associations and federal savings banks, may not exercise a
due-on-sale clause, even though a transfer of the property may have occurred.
These include intra-family transfers, some transfers by operation of law, leases
of fewer than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan in accordance with a
due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the mortgage loans related to a series and the number of
mortgage loans that may be outstanding until maturity.
TRANSFER OF MANUFACTURED HOMES UNDER MANUFACTURED HOUSING CONTRACTS
Generally, manufactured housing contracts contain provisions
prohibiting the sale or transfer of the related manufactured homes without the
consent of the obligee on the contract and permitting the acceleration of the
maturity of the contracts by the obligee on the contract upon any sale or
transfer that is not consented to. The master servicer will, to the extent it
has knowledge of the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the related manufactured
housing contract through enforcement of due-on-sale clauses, subject to
applicable state law. The transfer may be made by a delinquent obligor in order
to avoid a repossession proceeding with respect to a manufactured home.
In the case of a transfer of a manufactured home as to which the master
servicer desires to accelerate the maturity of the related manufactured housing
contract, the master servicer's ability to do so will depend on the
enforceability under state law of the due-on-sale clause. The Garn-St Germain
Act preempts, subject to exceptions and conditions, state laws prohibiting
enforcement of due-on-sale clauses applicable to the manufactured homes.
Consequently, the master servicer may be prohibited from enforcing a due-on-sale
clause in respect of those manufactured homes.
PREPAYMENT CHARGES AND PREPAYMENTS
The regulations of the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection
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with the acceleration of a loan by exercise of a due-on-sale clause. A mortgagee
to whom a prepayment in full has been tendered may be compelled to give either a
release of the mortgage or an instrument assigning the existing mortgage to a
refinancing lender.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, and, unless rents are to be paid directly to the
lender, retains a revocable license to collect the rents for so long as there is
no default. If the borrower defaults, the license terminates and the lender is
entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents. In addition, if bankruptcy or similar
proceedings are commenced by or in respect of the borrower, the lender's ability
to collect the rents may be adversely affected. In the event of borrower
default, the amount of rent the lender is able to collect from the tenants can
significantly affect the value of the lender's security interest.
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 or
any junior loan, or both, 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.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that state usury limitations shall not apply to
certain types of residential first mortgage loans originated by certain lenders
after March 31, 1980. A similar federal statute was in effect with respect to
mortgage loans made during the first three months of 1980. The statute
authorized any state to reimpose interest rate limits by adopting before April
1, 1983 a law or constitutional provision that expressly rejects 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. Several states have taken action
to reimpose interest rate limits or to limit discount points or other charges.
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The depositor has been advised by counsel that a court interpreting
Title V would hold that mortgage loans originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of the mortgage
loans, any such limitation under the state's usury law would not apply to the
mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
mortgage loans originated after the date of that state action will be eligible
for inclusion in a trust fund if the mortgage loans bear interest or provide for
discount points or charges in excess of permitted levels. No mortgage loan
originated prior to January 1, 1980 will bear interest or provide for discount
points or charges in excess of permitted levels.
Title V also provides that state usury limitations do not apply to any
loan that is secured by a first lien on specific kinds of manufactured housing
if certain conditions are met, including the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of or foreclosure with respect to
the related unit. Title V authorized any state to reimpose limitations on
interest rates and finance charges by adopting before April 1, 1983 a law or
constitutional provision which expressly rejects application of the federal law.
Fifteen states adopted such a law prior to the April 1, 1983 deadline. In
addition, even where Title V was not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on loans
covered by Title V. In any state in which application of Title V was expressly
rejected or a provision limiting discount points or other charges has been
adopted, no manufactured housing contract which imposes finance charges or
provides for discount points or charges in excess of permitted levels has been
included in the trust fund.
ALTERNATIVE MORTGAGE INSTRUMENTS
ARM Loans and home equity revolving credit loans originated by
non-federally chartered lenders have historically been subject to a variety of
restrictions. These restrictions differed from state to state, resulting in
difficulties in determining whether a particular alternative mortgage instrument
originated by a state-chartered lender complied with applicable law. These
difficulties were simplified substantially as a result of the enactment of Title
VIII of the Garn-St Germain Act. Title VIII provides that, notwithstanding any
state law to the contrary,
o state-chartered banks may originate alternative mortgage
instruments, including ARM Loans, in accordance with
regulations promulgated by the Comptroller of the Currency
with respect to origination of alternative mortgage
instruments by national banks,
o state-chartered credit unions may originate alternative
mortgage instruments in accordance with regulations
promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by
federal credit unions, and
o all other non-federally chartered housing creditors,
including, without limitation, state-chartered savings and
loan associations, savings banks and mutual savings
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banks and mortgage banking companies may originate alternative
mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor
to the Office of Thrift Supervision, with respect to
origination of alternative mortgage instruments by federal
savings and loan associations.
Title VIII further provides that any state may reject applicability of
the provisions of Title VIII by adopting prior to October 15, 1985 a law or
constitutional provision expressly rejecting the applicability of these
provisions. Several states have taken this type of action.
The depositor has been advised by counsel that a court interpreting
Title VIII would hold that ARM Loans and home equity revolving credit loans that
were originated by state-chartered lenders before the date of enactment of any
state law or constitutional provision rejecting applicability of Title VIII
would not be subject to state laws imposing restrictions or prohibitions on the
ability of state-chartered lenders to originate alternative mortgage
instruments.
The Alternative Mortgage Transactions Parity Act permits the collection
of prepayment charges in connection with some types of eligible mortgage loans,
preempting any contrary state law prohibitions. However, some states, such as
Virginia, may not recognize the preemptive authority of the Parity Act.
All of the ARM Loans and home equity revolving credit loans in a trust
fund that were originated by a state-chartered lender after the enactment of a
state law or constitutional provision rejecting the applicability of Title VIII
will have complied with applicable state law. All of the ARM Loans and home
equity revolving credit loans in a trust fund that were originated by federally
chartered lenders or that were originated by state-chartered lenders prior to
enactment of a state law or constitutional provision rejecting the applicability
of Title VIII will have been originated in compliance with all applicable
federal regulations.
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOMES
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials including components of manufactured housing such as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any loan or contract secured by a manufactured home with
respect to which a formaldehyde claim has been successfully asserted may be
liable to the obligor for the amount paid by the obligor on the related loan or
contract and may be unable to collect amounts still due under the loan or
contract. The successful assertion of this type of claim will constitute a
breach of a representation or warranty of the mortgage loan seller, and the
securityholders would suffer a loss only to the extent that:
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o the mortgage loan seller breached its obligation to repurchase
the loan or contract in the event an obligor is successful in
asserting the claim, and
o the mortgage loan seller, the depositor or the trustee were
unsuccessful in asserting any claim of contribution or
subrogation on behalf of the securityholders against the
manufacturer or other persons who were directly liable to the
plaintiff for the damages.
Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from the
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended, a borrower who enters military service after the origination of that
borrower's mortgage loan, including a borrower who was in reserve status and is
called to active duty after origination of the mortgage loan, may not be charged
interest, including fees and charges, above an annual rate of 6% during the
period of that borrower's active duty status unless a court orders otherwise
upon application of the lender. The Relief Act applies to borrowers who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard, and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to borrowers who enter military
service, including reservists who are called to active duty, after origination
of the related mortgage loan no information can be provided as to the number of
loans that may be affected by the Relief Act. Application of the Relief Act
would adversely affect, for an indeterminate period of time, the ability of the
master servicer to collect full amounts of interest on the applicable mortgage
loans. Any shortfalls in interest collections resulting from the application of
the Relief Act would result in a reduction of the amounts distributable to the
holders of the related series of securities, and would not be covered by
advances or, unless specified in the related prospectus supplement, any form of
credit support provided in connection with the securities. In addition, the
Relief Act imposes limitations that would impair the ability of the master
servicer to foreclose on an affected mortgage loan, cooperative loan or enforce
rights under a manufactured housing contract during the borrower's period of
active duty status, and, sometimes, during an additional three month period
thereafter. Thus, if the Relief Act applies to any mortgage asset that goes into
default, there may be delays in payment and losses incurred by the related
securityholders.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended, and under several state laws, a secured party
which takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property may become liable for the
costs of cleaning up hazardous substances regardless of whether they have
contaminated the property. CERCLA imposes strict as well as joint and several
liability on several classes of potentially responsible parties, including
current owners and operators of the property who did not cause or contribute to
the contamination. Furthermore, liability under CERCLA is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Lenders may be held liable under CERCLA as owners or
operators unless they
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qualify for the secured creditor exemption to CERCLA. This exemption exempts
from the definition of owners and operators those who, without participating in
the management of a facility, hold indicia of ownership primarily to protect a
security interest in the facility. What constitutes sufficient participation in
the management of a property securing a loan or the business of a borrower to
render the exemption unavailable to a lender has been a matter of interpretation
by the courts. CERCLA has been interpreted to impose liability on a secured
party even absent foreclosure where the party participated in the financial
management of the borrower's business to a degree indicating a capacity to
influence waste disposal decisions. However, court interpretations of the
secured creditor exemption have been inconsistent. In addition, when lenders
foreclose and become owners of collateral property, courts are inconsistent as
to whether that ownership renders the secured creditor exemption unavailable.
Other federal and state laws may impose liability on a secured party which takes
a deed-in-lieu of foreclosure, purchases a mortgaged property at a foreclosure
sale, or operates a mortgaged property on which contaminants other than CERCLA
hazardous substances are present, including petroleum, agricultural chemicals,
hazardous wastes, asbestos, radon, and lead- based paint. Environmental cleanup
costs may be substantial. It is possible that the cleanup costs could become a
liability of a trust fund and reduce the amounts otherwise distributable to the
holders of the related series of securities. Moreover, there are federal
statutes and state statutes that impose an environmental lien for any cleanup
costs incurred by the state on the property that is the subject of the cleanup
costs. All subsequent liens on a property generally are subordinated to an
environmental lien and in some states even prior recorded liens are subordinated
to environmental liens. In the latter states, the security interest of the trust
fund in a related parcel of real property that is subject to an environmental
lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the master servicer has
not made and will not make these kinds of evaluations prior to the origination
of the mortgage loans. Neither the master servicer nor any replacement servicer
will be required by any servicing agreement to undertake any environmental
evaluations prior to foreclosure or accepting a deed-in-lieu of foreclosure. The
master servicer will not make any representations or warranties or assume any
liability with respect to the absence or effect of contaminants on any related
real property or any casualty resulting from the presence or effect of
contaminants. The master servicer will not be obligated to foreclose on related
real property or accept a deed-in-lieu of foreclosure if it knows or reasonably
believes that there are material contaminated conditions on a property. A
failure so to foreclose may reduce the amounts otherwise available to
securityholders of the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations statute can be seized by the government if the property
was used in or purchased with the proceeds of these crimes. Under procedures
contained in the Comprehensive Crime Control Act of 1984 the government may
seize the property even before conviction. The government must publish notice of
the forfeiture proceeding and may give notice to all parties "known to have an
alleged interest in the property", including the holders of mortgage loans.
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A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was at the
time of execution of the mortgage "reasonably without cause to believe" that the
property was used in or purchased with the proceeds of illegal drug or RICO
activities.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980 and as a result, a mortgage loan that provided for
negative amortization violated New Hampshire's requirement that first mortgage
loans provide for computation of interest on a simple interest basis. The
holding was limited to the effect of DIDMC on state laws regarding the
compounding of interest and the court did not address the applicability of the
Alternative Mortgage Transaction Parity Act of 1982, which authorizes lender to
make residential mortgage loans that provide for negative amortization. The
First Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
INSTALLMENT CONTRACTS
The trust fund may also consist of installment sales contracts. Under
an installment sales contract the seller, referred to in this section as the
"lender", retains legal title to the property and enters into an agreement with
the purchaser, referred to in this section as the "borrower", for the payment of
the purchase price, plus interest, over the term of such contract. Only after
full performance by the borrower of the installment contract is the lender
obligated to convey title to the property to the purchaser. As with mortgage or
deed of trust financing, during the effective period of the installment contract
the borrower is generally responsible for maintaining the property in good
condition and for paying real estate taxes, assessments and hazard insurance
premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing or able pursuant to state statute to enforce the
contract strictly according to its terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated and the
buyer's equitable interest in the property is forfeited. The lender in such a
situation is not required to foreclose in order to obtain title to the property,
although in some cases a quiet title action is pursued if the borrower has filed
the installment contract in local land records and an ejectment action may be
necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under such statutes a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract may be reinstated upon full payment of the defaulted
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states courts in equity
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may permit a borrower with significant investment in the property under an
installment contract for the sale of real estate to share in the proceeds of
sale of the property after the indebtedness is repaid or may otherwise refuse to
enforce the forfeiture clause. Nevertheless, generally the lender's procedures
for obtaining possession and clear title under an installment contract in a
given state are simpler and less time consuming and costly than are the
procedures for foreclosing and obtaining clear title to a property subject to
one or more liens.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is the opinion of Thacher Proffitt & Wood,
counsel to the depositor, with respect to the material federal income tax
consequences of the purchase, ownership and disposition of the securities
offered under this prospectus and the prospectus supplement. This discussion is
for securityholders that hold the securities as capital assets within the
meaning of Section 1221 of the Code and does not purport to discuss all federal
income tax consequences that may be applicable to the individual circumstances
of banks, insurance companies, foreign investors, tax-exempt organizations,
dealers in securities or currencies, mutual funds, real estate investment
trusts, S corporations, estates and trusts, securityholders that hold the
securities as part of a hedge, straddle or, an integrated or conversion
transaction, or securityholders whose functional currency is not the United
States dollar.
The authorities on which this discussion and the opinion referred to
below are based are subject to change or differing interpretations which could
apply retroactively. Prospective investors should note that no rulings have been
or will be sought from the IRS with respect to any of the federal income tax
consequences discussed below, and no assurance can be given that the IRS will
not take contrary positions. Taxpayers and preparers of tax returns should be
aware that under applicable Treasury regulations a provider of advice on
specific issues of law is not considered an income tax return preparer unless
the advice (1) is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (2) is directly relevant to the determination of an
entry on a tax return. Accordingly, it is suggested that taxpayers consult their
own tax advisors and tax return preparers regarding the preparation of any item
on a tax return, even where the anticipated tax treatment has been discussed in
this prospectus. In addition to the federal income tax consequences described in
this prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
securities. SEE "STATE AND OTHER TAX CONSEQUENCES."
The following discussion addresses securities of five general types:
o REMIC Certificates representing interests in a trust fund, or a
portion thereof, that the trustee will elect to have treated as a
REMIC under the REMIC Provisions of the Code,
o Notes representing indebtedness of an owner trust for federal
income tax purposes,
o Grantor Trust Certificates representing interests in a Grantor
Trust Fund as to which no REMIC or FASIT election will be made,
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o Partnership Certificates representing interests in a Partnership
Trust Fund which is treated as a partnership for federal income
tax purposes, and
o Debt Certificates representing indebtedness of a Partnership
Trust Fund for federal income tax purposes.
o FASIT Securities representing interests in a trust fund, or a
portion thereof, that the trustee will elect to have treated as a
FASIT under the FASIT Provisions of the Code.
The prospectus supplement for each series of certificates will indicate whether
one or more REMIC of FASIT elections will be made for the related trust fund and
will identify all regular interests and residual interests in the REMIC or
REMICs or the "regular interests," "high yield regular interests" or "ownership
interests" in the FASIT, as the case may be. For purposes of this tax
discussion, references to a securityholder or a holder are to the beneficial
owner of a security.
The following discussion is based in part upon the OID Regulations and
in part upon REMIC Regulations. The OID Regulations do not adequately address
issues relevant to the offered securities. As described at "Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount," in some instances the
OID Regulations provide that they are not applicable to securities like the
offered securities.
REMICS
CLASSIFICATION OF REMICS. On or prior to the date of the related
prospectus supplement with respect to the issuance of each series of REMIC
Certificates, counsel to the depositor will provide its opinion that, assuming
compliance with all provisions of the related pooling and servicing agreement,
for federal income tax purposes, the related trust fund or each applicable
portion of the related trust fund will qualify as a REMIC and the offered REMIC
Certificates will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in that REMIC within the meaning of
the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for status as a REMIC during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and for later years. In that event, the entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described under "Taxation
of Owners of REMIC Regular Certificates" and "Taxation of Owners of REMIC
Residual Certificates". Although the Code authorizes the Treasury Department to
issue regulations providing relief in the event of an inadvertent termination of
REMIC status, these regulations have not been issued. If these regulations are
issued, relief in the event of an inadvertent termination may be accompanied by
sanctions, which may include the imposition of a corporate tax on all or a
portion of the REMIC's income for the period in which the requirements for
status as a REMIC are not satisfied. The pooling and servicing agreement with
respect to each REMIC will include provisions designed to maintain the trust
fund's status as a REMIC under the REMIC Provisions. It is not anticipated that
the status of any trust fund as a REMIC will be inadvertently terminated.
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CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. Except as
provided in the following sentence, the REMIC Certificates will be real estate
assets within the meaning of Section 856(c)(4)(A) of the Code and assets
described in Section 7701(a)(19)(C) of the Code in the same proportion as the
assets of the REMIC underlying the certificates. If 95% or more of the assets of
the REMIC qualify for either of the treatments described in the previous
sentence at all times during a calendar year, the REMIC Certificates will
qualify for the corresponding status in their entirety for that calendar year.
Interest, including original issue discount, on the REMIC Regular Certificates
and income allocated to the class of REMIC Residual Certificates will be
interest described in Section 856(c)(3)(B) of the Code to the extent that the
certificates are treated as real estate assets within the meaning of Section
856(c)(4)(A) of the Code. In addition, the REMIC Regular Certificates will be
qualified mortgages within the meaning of Section 860G(a)(3) of the Code if
transferred to another REMIC on its startup day in exchange for regular or
residual interests of that REMIC. The determination as to the percentage of the
REMIC's assets that constitute assets described in these sections of the Code
will be made for each calendar quarter based on the average adjusted basis of
each category of the assets held by the REMIC during the calendar quarter. The
Trustee will report those determinations to certificateholders in the manner and
at the times required by Treasury regulations.
The assets of the REMIC will include mortgage loans, payments on
mortgage loans held prior to the distribution of these payments to the REMIC
Certificates and any property acquired by foreclosure held prior to the sale of
this property, and may include amounts in reserve accounts. It is unclear
whether property acquired by foreclosure held prior to the sale of this property
and amounts in reserve accounts would be considered to be part of the mortgage
loans, or whether these assets otherwise would receive the same treatment as the
mortgage loans for purposes of all of the Code sections discussed in the
immediately preceding paragraph. The related prospectus supplement will describe
the mortgage loans that may not be treated entirely as assets described in the
sections of the Code discussed in the immediately preceding paragraph. The REMIC
Regulations do provide, however, that cash received from payments on mortgage
loans held pending distribution is considered part of the mortgage loans for
purposes of Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property
will qualify as real estate assets under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES. For a series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
trust fund as REMICs for federal income tax purposes, creating a tiered REMIC
structure. As to each series of REMIC Certificates that is a tiered REMIC
structure, in the opinion of counsel to the depositor, assuming compliance with
all provisions of the related pooling and servicing agreement, each of the
REMICs in that series will qualify as a REMIC and the REMIC Certificates issued
by these REMICs will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be real estate assets within the meaning of Section 856(c)(4)(A) of the Code,
and loans secured by an interest in real property under Section 7701(a)(19)(C)
of the Code, and whether the income on the certificates is interest described in
Section 856(c)(3)(B) of the Code, all of the REMICs in that series will be
treated as one REMIC.
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TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.
General. Except as described in "Taxation of Owners of REMIC Residual
Certificates--Possible Pass-Through of Miscellaneous Itemized Deductions," REMIC
Regular Certificates 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. Moreover, holders of REMIC Regular Certificates that ordinarily
report income under a cash method of accounting will be required to report
income for REMIC Regular Certificates under an accrual method.
Original Issue Discount. A REMIC Regular Certificate may be issued with
original issue discount within the meaning of Section 1273(a) of the Code. Any
holder of a REMIC Regular Certificate issued with original issue discount will
be required to include original issue discount in income as it accrues, in
accordance with the constant yield method, in advance of the receipt of the cash
attributable to that income if the original issue discount exceeds a DE MINIMIS
amount. In addition, Section 1272(a)(6) of the Code provides special rules
applicable to REMIC Regular Certificates and other debt instruments issued with
original issue discount. Regulations have not been issued under that section.
The Code requires that a reasonable Prepayment Assumption be used for
mortgage loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of that discount to
reflect differences between the actual prepayment rate and the Prepayment
Assumption. The Prepayment Assumption is to be determined in a manner prescribed
in Treasury regulations; as noted in the preceding paragraph, those regulations
have not been issued. The committee report indicates that the regulations will
provide that the Prepayment Assumption used for a REMIC Regular Certificate must
be the same as that used in pricing the initial offering of the REMIC Regular
Certificate. The Prepayment Assumption used in reporting original issue discount
for each series of REMIC Regular Certificates will be consistent with this
standard and will be disclosed in the related prospectus supplement. However,
none of the depositor, the master servicer or the trustee will make any
representation that the mortgage loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate
will be the excess of its stated redemption price at maturity over its issue
price. The issue price of a particular class of REMIC Regular Certificates will
be the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold, excluding sales to bond houses, brokers and
underwriters. If less than a substantial amount of a class of REMIC Regular
Certificates is sold for cash on or prior to the closing date, the issue price
for that class will be the fair market value of that class on the closing date.
Under the OID Regulations, the stated redemption price of a REMIC Regular
Certificate is equal to the total of all payments to be made on the certificate
other than qualified stated interest. Qualified stated interest is interest that
is unconditionally payable at least annually during the entire term of the
instrument at a single fixed rate, a qualified floating rate, an objective rate,
a combination of a single fixed rate and one or more qualified floating rates or
one qualified inverse floating rate, or a combination of qualified floating
rates that does not operate in a manner that accelerates or defers interest
payments on the REMIC Regular Certificate.
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In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
the REMIC Regular Certificates. If the original issue discount rules apply to
the certificates in a particular series, the related prospectus supplement will
describe the manner in which these rules will be applied with respect to the
certificates in that series that bear an adjustable interest rate in preparing
information returns to the certificateholders and the IRS.
The first interest payment on a REMIC Regular Certificate may be made
more than one month after the date of issuance, which is a period longer than
the subsequent monthly intervals between interest payments. Assuming the accrual
period for original issue discount is each monthly period that ends on the day
prior to each distribution date, as a consequence of this long first accrual
period some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
If the accrued interest to be paid on the first distribution date is
computed for a period that begins prior to the closing date, a portion of the
purchase price paid for a REMIC Regular Certificate will reflect the accrued
interest. In these cases, information returns to the certificateholders and the
IRS will take the position that the portion of the purchase price paid for the
interest accrued for periods prior to the closing date is part of the overall
cost of the REMIC Regular Certificate, and not a separate asset the cost of
which is recovered entirely out of interest received on the next distribution
date, and that portion of the interest paid on the first distribution date in
excess of interest accrued for a number of days corresponding to the number of
days from the closing date to the first distribution date should be included in
the stated redemption price of the REMIC Regular Certificate. However, the OID
Regulations state that all or a portion of the accrued interest may be treated
as a separate asset the cost of which is recovered entirely out of interest paid
on the first distribution date. It is unclear how an election to do so would be
made under the OID Regulations and whether this election could be made
unilaterally by a certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of a REMIC Regular Certificate is computed as the sum
of the amounts determined, as to each payment included in the stated redemption
price of the REMIC Regular Certificate, by multiplying (1) the number of
complete years from the issue date until that payment is expected to be made,
presumably taking into account the Prepayment Assumption, by (2) a fraction, the
numerator of which is the amount of the payment, and the denominator of which is
the stated redemption price at maturity of the REMIC Regular Certificate. Under
the OID Regulations, original issue discount of only a de minimis amount, other
than de minimis original issue discount attributable to a teaser interest rate
or an initial interest holiday, will be included in income as each payment of
stated principal is made, based on the product of the total amount of the de
minimis original issue discount attributable to that certificate and a fraction,
the numerator of which is the amount of the principal payment and the
denominator of which is the outstanding stated principal amount of the REMIC
Regular Certificate. The OID Regulations also would permit a
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certificateholder to elect to accrue de minimis original issue discount into
income currently based on a constant yield method. SEE "TAXATION OF OWNERS OF
REMIC REGULAR CERTIFICATES--MARKET DISCOUNT" FOR A DESCRIPTION OF THIS ELECTION
UNDER THE OID REGULATIONS.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of the certificate must include in ordinary
gross income the sum of the daily portions of original issue discount for each
day during its taxable year on which it held the REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as described in the following
paragraph.
An accrual period is a period that ends on the day prior to a
distribution date and begins on the first day following the immediately
preceding accrual period, except that the first accrual period begins on the
closing date. As to each accrual period, a calculation will be made of the
portion of the original issue discount that accrued during the accrual period.
The portion of original issue discount that accrues in any accrual period will
equal the excess of (1) the sum of (a) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate in future periods and (b) the distributions made on the
REMIC Regular Certificate during the accrual period of amounts included in the
stated redemption price, over (2) the adjusted issue price of the REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
assuming that distributions on the REMIC Regular Certificate will be received in
future periods based on the mortgage loans being prepaid at a rate equal to the
Prepayment Assumption, using a discount rate equal to the original yield to
maturity of the certificate and taking into account events, including actual
prepayments, that have occurred before the close of the accrual period. For
these purposes, the original yield to maturity of the certificate will be
calculated based on its issue price and assuming that distributions on the
certificate will be made in all accrual periods based on the mortgage loans
being prepaid at a rate equal to the Prepayment Assumption. The adjusted issue
price of a REMIC Regular Certificate at the beginning of any accrual period will
equal the issue price of the certificate, increased by the aggregate amount of
original issue discount that accrued with respect to the certificate in prior
accrual periods, and reduced by the amount of any distributions made on the
certificate in prior accrual periods of amounts included in the stated
redemption price. The original issue discount accruing during any accrual period
will be allocated ratably to each day during the accrual period to determine the
daily portion of original issue discount for that day.
If a REMIC Regular Certificate issued with original issue discount is
purchased at a cost, excluding any portion of the cost attributable to accrued
qualified stated interest, less than its remaining stated redemption price, the
purchaser will also be required to include in gross income the daily portions of
any original issue discount for the certificate. However, if the cost of the
certificate is in excess of its adjusted issue price, each daily portion will be
reduced in proportion to the ratio the excess bears to the aggregate original
issue discount remaining to be accrued on the REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (1) the adjusted issue price or, in the case of the first accrual period,
the issue price, of the certificate at the beginning of the accrual period which
includes that day and (2) the daily portions of original issue discount for all
days during the accrual period prior to that day.
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Market Discount. A certificateholder that purchases a REMIC Regular
Certificate at a market discount will recognize gain upon receipt of each
distribution representing stated redemption price. A REMIC Regular Certificate
issued without original issue discount will have market discount if purchased
for less than its remaining stated principal amount and a REMIC Regular
Certificate issued with original issue discount will have market discount if
purchased for less than its adjusted issue price. Under Section 1276 of the
Code, a certificateholder that purchases a REMIC Regular Certificate at a market
discount in excess of a DE MINIMIS amount will be required to allocate the
portion of each distribution representing stated redemption price first to
accrued market discount not previously included in income, and to recognize
ordinary income to that extent. A certificateholder may elect to include market
discount in income currently as it accrues rather than including it on a
deferred basis. If made, the election will apply to all market discount bonds
acquired by the certificateholder on or after the first day of the first taxable
year to which the election applies. In addition, the OID Regulations permit a
certificateholder to elect to accrue all interest and discount in income as
interest, and to amortize premium, based on a constant yield method. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that the certificateholder acquires during
the taxable year of the election or later taxable years, and possibly previously
acquired instruments. Similarly, a certificateholder that made this election for
a certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the certificateholder owns or acquires. Each of
these elections to accrue interest, discount and premium with respect to a
certificate on a constant yield method or as interest would be irrevocable,
except with the approval of the IRS. SEE "TAXATION OF OWNERS OF REMIC REGULAR
CERTIFICATES--PREMIUM" BELOW.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
the market discount is less than 0.25% of the remaining stated redemption price
of the REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. This treatment would result in discount being included
in income at a slower rate than discount would be required to be included in
income using the method described above. SEE "TAXATION OF OWNERS OF REMIC
REGULAR CERTIFICATES-- ORIGINAL ISSUE DISCOUNT" ABOVE.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, the rules
described in the committee report apply. The committee report indicates that in
each accrual period market discount on REMIC Regular Certificates should accrue,
at the certificateholder's option:
(1) on the basis of a constant yield method,
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(2) in the case of a REMIC Regular Certificate issued without
original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest
paid in the accrual period bears to the total amount of stated
interest remaining to be paid on the REMIC Regular Certificate
as of the beginning of the accrual period, or
(3) in the case of a REMIC Regular Certificate issued with original
issue discount, in an amount that bears the same ratio to the
total remaining market discount as the original issue discount
accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the
beginning of the accrual period.
Moreover, the Prepayment Assumption used in calculating the accrual of
original issue discount is also used in calculating the accrual of market
discount. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect these regulations might have
on the tax treatment of a REMIC Regular Certificate purchased at a discount in
the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which the discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of the certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of these methods,
less any accrued market discount previously reported as ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule applies. Any such deferred interest
expense would not exceed the market discount that accrues during the taxable
year and is, in general, allowed as a deduction not later than the year in which
the market discount is includible in income. If a holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by the holder in that taxable year or later taxable years,
the interest deferral rule will not apply.
Premium. A REMIC Regular Certificate purchased at a cost, excluding any
portion of the cost attributable to accrued qualified stated interest, greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of a REMIC Regular Certificate may elect under Section 171
of the Code to amortize the premium under the constant yield method over the
life of the certificate. If made, the election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID Regulations also permit certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the certificateholder as having made the election to amortize premium
generally. The committee report states that the same rules that apply to accrual
of market discount, which rules will require use of a
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Prepayment Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether the certificates have original issue
discount, will also apply in amortizing bond premium under Section 171 of the
Code. SEE "TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES--MARKET DISCOUNT"
ABOVE.
Realized Losses. Under Section 166 of the Code, both corporate holders
of the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire the certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their certificates become wholly or partially
worthless as the result of one or more realized losses on the mortgage loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until the holder's certificate
becomes wholly worthless, i.e., until its outstanding principal balance has been
reduced to zero, and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to the certificate, without
giving effect to any reduction in distributions attributable to defaults or
delinquencies on the mortgage loans or the certificate underlying the REMIC
Certificates, as the case may be, until it can be established the reduction
ultimately will not be recoverable. As a result, the amount of taxable income
reported in any period by the holder of a REMIC Regular Certificate could exceed
the amount of economic income actually realized by that holder in the period.
Although the holder of a REMIC Regular Certificate eventually will recognize a
loss or reduction in income attributable to previously accrued and included
income that as the result of a realized loss ultimately will not be realized,
the law is unclear with respect to the timing and character of this loss or
reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not subject to entity-level taxation, except with regard to
prohibited transactions and some other transactions. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the holder of the
REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates will
be subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the mortgage loans or as debt instruments issued
by the REMIC. SEE "--PROHIBITED TRANSACTIONS TAX AND OTHER TAXES" BELOW
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that the holder owned the REMIC Residual Certificate. For this
purpose, the taxable income or net loss of the REMIC will be allocated to each
day in the calendar quarter ratably using a 30 days per month/90 days per
quarter/360 days per year convention unless otherwise disclosed in the related
prospectus supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on that day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described
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below in "Taxable Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC Residual Certificates will be
portfolio income for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of passive
losses.
A holder of a REMIC Residual Certificate that purchased the certificate
from a prior holder of that certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income, or net loss, of the REMIC for each day that it holds the REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss. The committee report indicates that some modifications of
the general rules may be made, by regulations, legislation or otherwise to
reduce, or increase, the income of a REMIC Residual Certificateholder that
purchased the REMIC Residual Certificate from a prior holder of the certificate
at a price greater than, or less than, the adjusted basis, the REMIC Residual
Certificate would have had in the hands of an original holder of the
certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of the REMIC Residual Certificate will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that any of these payments would be
includible in income immediately upon its receipt, the IRS might assert that
these payments should be included in income over time according to an
amortization schedule or according to another method. Because of the uncertainty
concerning the treatment of these payments, holders of REMIC Residual
Certificates should consult their tax advisors concerning the treatment of these
payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report, or the tax liability associated with the income, may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to excess inclusions,
and noneconomic residual interests discussed at "-Noneconomic REMIC Residual
Certificates". The fact that the tax liability associated with the income
allocated to REMIC Residual Certificateholders may exceed the cash distributions
received by the REMIC Residual Certificateholders for the corresponding period
may significantly adversely affect the REMIC Residual Certificateholders'
after-tax rate of return. This disparity between income and distributions may
not be offset by corresponding losses or reductions of income attributable to
the REMIC Residual Certificateholder until subsequent tax years and, then, may
not be completely offset due to changes in the Code, tax rates or character of
the income or loss.
Taxable Income of the REMIC. The taxable income of the REMIC will equal
the income from the mortgage loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest, including original issue discount and reduced by any premium on
issuance, on the REMIC Regular Certificates, whether or not offered by the
prospectus, amortization of any premium on the mortgage loans, bad debt losses
with respect to the mortgage loans and, except as described below, for
servicing, administrative and other expenses.
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For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates, or if a class of REMIC Certificates is not sold
initially, their fair market values. The aggregate basis will be allocated among
the mortgage loans and the other assets of the REMIC in proportion to their
respective fair market values. The issue price of any offered REMIC Certificates
will be determined in the manner described above under "--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount." The issue price of a REMIC
Certificate received in exchange for an interest in the mortgage loans or other
property will equal the fair market value of the interests in the mortgage loans
or other property. Accordingly, if one or more classes of REMIC Certificates are
retained initially rather than sold, the Trustee may be required to estimate the
fair market value of the interests in order to determine the basis of the REMIC
in the mortgage loans and other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to mortgage loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates. However, a REMIC that acquires loans at a market discount must
include the market discount in income currently, as it accrues, on a constant
yield basis. See "--Taxation of Owners of REMIC Regular Certificates" above,
which describes a method for accruing discount income that is analogous to that
required to be used by a REMIC as to mortgage loans with market discount that it
holds.
A mortgage loan will be deemed to have been acquired with either
discount or premium to the extent that the REMIC's basis in the mortgage loan is
either less than or greater than its stated redemption price. Any discount will
be includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to the income, under a method similar to the method
described above for accruing original issue discount on the REMIC Regular
Certificates. It is anticipated that each REMIC will elect under Section 171 of
the Code to amortize any premium on the mortgage loans. Premium on any mortgage
loan to which the election applies may be amortized under a constant yield
method, presumably taking into account a Prepayment Assumption. This election
would not apply to any mortgage loan originated on or before September 27, 1985,
premium on which should be allocated among the principal payments on that
mortgage loan and be deductible by the REMIC as those payments become due or
upon the prepayment of the mortgage loan.
A REMIC will be allowed deductions for interest, including original
issue discount, on the REMIC Regular Certificates, whether or not offered by
this prospectus, equal to the deductions that would be allowed if these REMIC
Regular Certificates were indebtedness of the REMIC. Original issue discount
will be considered to accrue for this purpose as described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount,"
except that the de minimis rule and the adjustments for subsequent holders of
these REMIC Regular Certificates will not apply.
Issue premium is the excess of the issue price of a REMIC Regular
Certificate over its stated redemption price. If a class of REMIC Regular
Certificates is issued with issue premium, the net amount of interest deductions
that are allowed the REMIC in each taxable year for the REMIC Regular
Certificates of that class will be reduced by an amount equal to the portion of
the issue premium that is considered to be amortized or repaid in that year.
Although the matter is not entirely clear, it is likely that issue premium would
be amortized under a constant yield method in a manner
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analogous to the method of accruing original issue discount described above
under "--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount."
Subject to the exceptions described in the following sentences, the
taxable income of a REMIC will be determined in the same manner as if the REMIC
were an individual having the calendar year as its taxable year and using the
accrual method of accounting. However, no item of income, gain, loss or
deduction allocable to a prohibited transaction will be taken into account. SEE
"--PROHIBITED TRANSACTIONS TAX AND OTHER TAXES" BELOW.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code, allowing these deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income, will not be applied at the REMIC level and the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. These expenses will be allocated as a separate
item to the holders of REMIC Certificates, subject to the limitation of Section
67 of the Code. If the deductions allowed to the REMIC exceed its gross income
for a calendar quarter, the excess will be the net loss for the REMIC for that
calendar quarter. SEE "--POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED
DEDUCTIONS" BELOW.
Basis Rules, Net Losses and Distributions. The adjusted basis of a
REMIC Residual Certificate will be equal to the amount paid for the REMIC
Residual Certificate, increased by amounts included in the income of the REMIC
Residual Certificateholder and decreased, but not below zero, by distributions
made, and by net losses allocated, to the REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent the net loss exceeds the
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of the calendar quarter, determined without regard
to the net loss. Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to the same limitation, may be used only to offset income from the REMIC
Residual Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds this adjusted basis, it will be treated
as gain from the sale of the REMIC Residual Certificate. Holders of REMIC
Residual Certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC Residual
Certificates will not be sufficiently large that the distributions will be
treated as nontaxable returns of capital. Their bases in the REMIC Residual
Certificates will initially equal the amount paid for the REMIC Residual
Certificates and will be increased by the REMIC Residual Certificateholders'
allocable shares of taxable income of the REMIC. However, these bases increases
may not occur until the end of the calendar quarter, or perhaps the end of the
calendar year, with respect to which the REMIC taxable income is allocated to
the REMIC Residual Certificateholders. To the extent the REMIC Residual
Certificateholders' initial bases are less than the distributions to the REMIC
Residual Certificateholders, and increases
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in initial bases either occur after the distributions or, together with their
initial bases, are less than the amount of the distributions, gain will be
recognized by the REMIC Residual Certificateholders on these distributions and
will be treated as gain from the sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder
may not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. SEE "--SALES OF REMIC
CERTIFICATES" BELOW.
For a discussion of possible modifications of these rules that may
require adjustments to income of a holder of a REMIC Residual Certificate other
than an original holder in order to reflect any difference between the cost of
the REMIC Residual Certificate to the REMIC Residual Certificateholder and the
adjusted basis the REMIC Residual Certificate would have in the hands of an
original holder. SEE "--TAXATION OF OWNERS OF REMIC RESIDUAL
CERTIFICATES--GENERAL" ABOVE.
EXCESS INCLUSIONS. Any excess inclusions with respect to a REMIC
Residual Certificate will be subject to federal income tax in all events.
In general, the excess inclusions with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of
(1) the daily portions of REMIC taxable income allocable to the
REMIC Residual Certificate over
(2) the sum of the daily accruals for each day during the quarter
that the REMIC Residual Certificate was held by the REMIC
Residual Certificateholder.
The daily accruals of a REMIC Residual Certificateholder will be
determined by allocating to each day during a calendar quarter its ratable
portion of the product of the adjusted issue price of the REMIC Residual
Certificate at the beginning of the calendar quarter and 120% of the long-term
Federal rate in effect on the closing date. For this purpose, the adjusted issue
price of a REMIC Residual Certificate as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC Residual Certificate,
increased by the sum of the daily accruals for all prior quarters and decreased,
but not below zero, by any distributions made with respect to the REMIC Residual
Certificate before the beginning of that quarter. The issue price of a REMIC
Residual Certificate is the initial offering price to the public, excluding bond
houses and brokers, at which a substantial amount of the REMIC Residual
Certificates were sold. The long-term Federal rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS. Although it has not done so, the
Treasury has authority to issue regulations that would treat the entire amount
of income accruing on a REMIC Residual Certificate as an excess inclusion if the
REMIC Residual Certificates are considered to have significant value.
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For REMIC Residual Certificateholders, an excess inclusion:
(1) will not be permitted to be offset by deductions, losses or loss
carryovers from other activities,
(2) will be treated as unrelated business taxable income to an
otherwise tax-exempt organization and
(3) will not be eligible for any rate reduction or exemption under
any applicable tax treaty with respect to the 30% United States
withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. SEE, HOWEVER,
"--FOREIGN INVESTORS IN REMIC CERTIFICATES," BELOW.
Furthermore, for purposes of the alternative minimum tax, excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and alternative minimum taxable income may not be less
than the taxpayer's excess inclusions. The latter rule has the effect of
preventing nonrefundable tax credits from reducing the taxpayer's income tax to
an amount lower than the alternative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
Residual Certificates, as reduced, but not below zero, by the real estate
investment trust taxable income, will be allocated among the shareholders of the
trust in proportion to the dividends received by the shareholders from the
trust, and any amount so allocated will be treated as an excess inclusion with
respect to a REMIC Residual Certificate as if held directly by the shareholder.
"Real estate investment trust taxable income" is defined by Section 857(b)(2) of
the Code, and as used in the prior sentence does not include any net capital
gain. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and cooperatives; the REMIC
Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of noneconomic REMIC Residual Certificates will be disregarded for all
federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If the
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the noneconomic REMIC Residual
Certificate. The REMIC Regulations provide that a REMIC Residual Certificate is
"noneconomic" unless, based on the Prepayment Assumption and on any required or
permitted clean up calls, or required liquidation provided for in the REMIC's
organizational documents, the present value of the expected future
distributions, discounted using the applicable Federal rate for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC Residual Certificate, on the REMIC
Residual Certificate equals at least the present value of the expected tax on
the anticipated excess inclusions, and the transferor reasonably expects that
the transferee will receive distributions with respect to the REMIC Residual
Certificate at or after the time the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. Accordingly,
all transfers of REMIC Residual Certificates that may constitute noneconomic
residual interests will be subject to restrictions under the terms of the
related pooling and servicing agreement that are intended to reduce the
possibility of a transfer of REMIC Residual
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Certificates being disregarded. These restrictions will require each party to a
transfer to provide an affidavit that no purpose of the transfer is to impede
the assessment or collection of tax, including representations as to the
financial condition of the prospective transferee, for which the transferor is
also required to make a reasonable investigation to determine the transferee's
historic payment of its debts and ability to continue to pay its debts as they
come due in the future. Prior to purchasing a REMIC Residual Certificate, a
prospective purchaser should consider the possibility that a purported transfer
of the REMIC Residual Certificate by that prospective purchaser to another
purchaser at a future date may be disregarded in accordance with the rule
described in the first sentence of this paragraph, which would result in the
retention of tax liability by the purchaser.
The related prospectus supplement will disclose whether offered REMIC
Residual Certificates may be considered noneconomic residual interests under the
REMIC Regulations; provided, however, that any disclosure that a REMIC Residual
Certificate will not be considered noneconomic will be based upon assumptions,
and the depositor will make no representation that a REMIC Residual Certificate
will not be considered noneconomic for purposes of the rules described in the
preceding paragraph. SEE "--FOREIGN INVESTORS IN REMIC CERTIFICATES--REMIC
RESIDUAL CERTIFICATES" BELOW FOR ADDITIONAL RESTRICTIONS APPLICABLE TO TRANSFERS
OF REMIC RESIDUAL CERTIFICATES TO FOREIGN PERSONS.
Mark-to-Market Rules. In general, all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment, must be marked to market in accordance with the applicable
Code provision and the related regulations. However, the IRS recently issued
regulations which provide that for purposes of this mark-to-market requirement a
REMIC Residual Certificate acquired after January 4, 1995 is not treated as a
security and thus may not be marked to market. Prospective purchasers of a REMIC
Residual Certificate should consult their tax advisors regarding the possible
application of the mark-to-market requirement to REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of these fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Except as stated in the
related prospectus supplement, these fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a pass-through entity beneficially owned by one
or more individuals, estates or trusts,
o an amount equal to the individual's, estate's or trust's share of
the fees and expenses will be added to the gross income of the
holder, and
o the individual's, estate's or trust's share of the fees and
expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code.
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Section 67 of the Code permits these deductions only to the extent they
exceed in the aggregate two percent of a taxpayer's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (1) 3% of the excess of the
individual's adjusted gross income over that amount or (2) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Furthermore, in determining the alternative minimum taxable income
of a holder of a REMIC Certificate that is an individual, estate or trust, or a
pass-through entity beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for the holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of the fees and other deductions will be
included in the holder's gross income. Accordingly, these REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. Prospective investors should consult with their own tax advisors prior
to making an investment in the certificates.
SALES OF REMIC CERTIFICATES. If a REMIC Certificate is sold, the
selling Certificateholder will recognize gain or loss equal to the difference
between the amount realized on the sale and its adjusted basis in the REMIC
Certificate. The adjusted basis of a REMIC Regular Certificate generally will
be:
o equal the cost of the REMIC Regular Certificate to the
certificateholder,
o increased by income reported by such certificateholder with
respect to the REMIC Regular Certificate, including original
issue discount and market discount income, and
o reduced, but not below zero, by distributions on the REMIC
Regular Certificate received by the certificateholder and by any
amortized premium.
The adjusted basis of a REMIC Residual Certificate will be determined
as described under "--Taxation of Owners of REMIC Residual Certificates--Basis
Rules, Net Losses and Distributions." Except as provided in the following four
paragraphs, gain or loss from the sale of a REMIC Certificate will be capital
gain or loss, provided the REMIC Certificate is held as a capital asset within
the meaning of Section 1221 of the Code.
Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent the gain does
not exceed the excess, if any, of (1) the amount that would have been includible
in the seller's income with respect to the REMIC Regular Certificate assuming
that income had accrued thereon at a rate equal to 110% of the applicable
Federal rate, determined as of the date of purchase of the REMIC Regular
Certificate, over (2) the amount of ordinary income actually includible in the
seller's income prior to the sale. In addition, gain recognized on the sale of a
REMIC Regular Certificate by a seller who purchased the REMIC Regular
Certificate at a market discount will be taxable as ordinary income in an amount
not exceeding the portion of the discount that accrued during the period the
REMIC Certificate was held by the holder, reduced by any market discount
included in income under the rules described above
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under "--Taxation of Owners of REMIC Regular Certificates--Market Discount" and
"--Premium."
REMIC Certificates will be evidences of indebtedness within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which this section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that the certificate is held as part of a conversion transaction within the
meaning of Section 1258 of the Code. A conversion transaction includes a
transaction in which the taxpayer has taken two or more positions in the same or
similar property that reduce or eliminate market risk, if substantially all of
the taxpayer's return is attributable to the time value of the taxpayer's net
investment in the transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate applicable Federal rate at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires the REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a taxable mortgage pool, as defined in Section 7701(i) of the Code,
during the period beginning six months before, and ending six months after, the
date of the sale, such sale will be subject to the wash sale rules of Section
1091 of the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to the REMIC Residual Certificateholder's adjusted basis in the newly- acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. In the event a
REMIC engages in a prohibited transaction, the Code imposes a 100% tax on the
income derived by the REMIC from the prohibited transaction. A prohibited
transaction may occur upon the disposition of a mortgage loan, the receipt of
income from a source other than a mortgage loan or other permitted investments,
the receipt of compensation for services, or gain from the disposition of an
asset purchased with the payments on the mortgage loans for temporary investment
pending distribution on the REMIC Certificates. It is not anticipated that any
REMIC will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, a contribution to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition on the REMIC of
a tax equal to 100% of the value of the contributed property. Each pooling and
servicing agreement will include provisions designed to prevent the acceptance
of any contributions that would be subject to this tax.
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REMICs also are subject to federal income tax at the highest corporate
rate on net income from foreclosure property, determined by reference to the
rules applicable to real estate investment trusts. Net income from foreclosure
property generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
It is not anticipated that any REMIC will recognize net income from foreclosure
property subject to federal income tax.
To the extent permitted by then applicable laws, any tax resulting from
a prohibited transaction, tax resulting from a contribution made after the
closing date, tax on net income from foreclosure property or state or local
income or franchise tax that may be imposed on the REMIC will be borne by the
related master servicer or trustee in either case out of its own funds, provided
that the master servicer or the trustee has sufficient assets to do so, and
provided that the tax arises out of a breach of the master servicer's or the
trustee's obligations under the related pooling and servicing agreement and in
respect of compliance with applicable laws and regulations. Any of these taxes
not borne by the master servicer or the trustee will be charged against the
related trust fund resulting in a reduction in amounts payable to holders of the
related REMIC Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO
CERTAIN Organizations. If a REMIC Residual Certificate is transferred to a
disqualified organization, a tax would be imposed in an amount equal to the
product of:
o the present value, discounted using the applicable Federal rate
for obligations whose term ends on the close of the last quarter
in which excess inclusions are expected to accrue with respect to
the REMIC Residual Certificate, of the total anticipated excess
inclusions with respect to the REMIC Residual Certificate for
periods after the transfer and
o the highest marginal federal income tax rate applicable to
corporations.
The anticipated excess inclusions must be determined as of the date
that the REMIC Residual Certificate is transferred and must be based on events
that have occurred up to the time of the transfer, the Prepayment Assumption and
any required or permitted clean up calls or required liquidation provided for in
the REMIC's organizational documents. The tax would be imposed on the transferor
of the REMIC Residual Certificate, except that where the transfer is through an
agent for a disqualified organization, the tax would instead be imposed on the
agent. However, a transferor of a REMIC Residual Certificate would in no event
be liable for the tax with respect to a transfer if the transferee furnishes to
the transferor an affidavit that the transferee is not a disqualified
organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. Moreover, an entity will not
qualify as a REMIC unless there are reasonable arrangements designed to ensure
that
o residual interests in the entity are not held by disqualified
organizations and
o information necessary for the application of the tax described
herein will be made available. Restrictions on the transfer of
REMIC Residual Certificates and other provisions that are
intended to meet this requirement will be included in the pooling
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and servicing agreement, and will be discussed more fully in any
prospectus supplement relating to the offering of any REMIC
Residual Certificate.
In addition, if a pass-through entity includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in the entity, then a tax will
be imposed on the entity equal to the product of (1) the amount of excess
inclusions on the REMIC Residual Certificate that are allocable to the interest
in the pass-through entity held by the disqualified organization and (2) the
highest marginal federal income tax rate imposed on corporations. A pass-through
entity will not be subject to this tax for any period, however, if each record
holder of an interest in the pass-through entity furnishes to the pass-through
entity
o the holder's social security number and a statement under
penalties of perjury that the social security number is that of
the record holder or
o a statement under penalties of perjury that the record holder is
not a disqualified organization. Notwithstanding the preceding
two sentences, in the case of a REMIC Residual Certificate held
by an electing large partnership, as defined in Section 775 of
the Code, all interests in the partnership shall be treated as
held by disqualified organizations, without regard to whether the
record holders of the partnership furnish statements described in
the preceding sentence, and the amount that is subject to tax
under the second preceding sentence is excluded from the gross
income of the partnership allocated to the partners, in lieu of
allocating to the partners a deduction for the tax paid by the
partnership.
For these purposes, a disqualified organization means:
o the United States, any State or political subdivision thereof,
any foreign government, any international organization, or any
agency or instrumentality of the foregoing, not including,
however, instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation,
o any organization, other than a cooperative described in Section
521 of the Code, that is exempt from federal income tax, unless
it is subject to the tax imposed by Section 511 of the Code or
o any organization described in Section 1381(a)(2)(C) of the Code.
For these purposes, a pass-through entity means any regulated
investment company, real estate investment trust, trust, partnership or other
entity described in Section 860E(e)(6)(B) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to the interest, be treated as a pass-through entity.
TERMINATION. A REMIC will terminate immediately after the distribution
date following receipt by the REMIC of the final payment in respect of the
mortgage loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
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instrument. In the case of a REMIC Residual certificate, if the last
distribution on the REMIC Residual Certificate is less than the REMIC Residual
Certificateholder's adjusted basis in the Certificate, the REMIC Residual
Certificateholder should, but may not, be treated as realizing a loss equal to
the amount of the difference, and the loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
The Trustee or other party specified in the related prospectus supplement will
file REMIC federal income tax returns on behalf of the related REMIC, and under
the terms of the related Agreement, will either (1) be irrevocably appointed by
the holders of the largest percentage interest in the related REMIC Residual
Certificates as their agent to perform all of the duties of the tax matters
person with respect to the REMIC in all respects or (2) will be designated as
and will act as the tax matters person with respect to the related REMIC in all
respects and will hold at least a nominal amount of REMIC Residual Certificates.
The Trustee, as the tax matters person or as agent for the tax matters
person, subject to notice requirements and various restrictions and limitations,
generally will have the authority to act on behalf of the REMIC and the REMIC
Residual Certificateholders in connection with the administrative and judicial
review of items of income, deduction, gain or loss of the REMIC, as well as the
REMIC's classification. REMIC Residual Certificateholders generally will be
required to report such REMIC items consistently with their treatment on the
REMIC's tax return and may be bound by a settlement agreement between the
Trustee, as either tax matters person or as agent for the tax matters person,
and the IRS concerning any REMIC item subject to that settlement agreement.
Adjustments made to the REMIC tax return may require a REMIC Residual
Certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from an audit, could
result in an audit of a REMIC Residual Certificateholder's return. Any person
that holds a REMIC Residual Certificate as a nominee for another person may be
required to furnish the REMIC, in a manner to be provided in Treasury
regulations, with the name and address of the person and other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC regular
interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and some other non-individuals will be
provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a REMIC Regular Certificate issued with
original issue discount to disclose on its face the amount of original issue
discount and the issue date, and requiring the information to be reported to the
IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
The REMIC Regular Certificate information reports will include a
statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the
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reports will include information required by regulations with respect to
computing the accrual of any market discount. Because exact computation of the
accrual of market discount on a constant yield method would require information
relating to the holder's purchase price that the REMIC may not have, Treasury
regulations only require that information pertaining to the appropriate
proportionate method of accruing market discount be provided. SEE "--TAXATION OF
OWNERS OF REMIC REGULAR CERTIFICATES--MARKET DISCOUNT."
The responsibility for complying with the foregoing reporting rules
will be borne by the Trustee or other party designated in the related prospectus
supplement.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES. Payments of
interest and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the backup withholding tax under Section 3406 of
the Code at a rate of 31% if recipients of the payments fail to furnish to the
payor information including their taxpayer identification numbers, or otherwise
fail to establish an exemption from the backup withholding tax. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against the recipient's federal income tax. Furthermore, penalties may be
imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. A REMIC Regular
Certificateholder that is not a United States Person and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate, will
not be subject to United States federal income or withholding tax in respect of
a distribution on a REMIC Regular Certificate, provided that the holder complies
to the extent necessary with identification requirements including delivery of a
statement signed by the certificateholder under penalties of perjury, certifying
that the certificateholder is not a United States Person and providing the name
and address of the certificateholder. The IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC Regular Certificate held by a
REMIC Residual Certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC Residual Certificates. If the holder does not
qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to the holder may be subject to a
tax rate of 30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on the
United States shareholder's allocable portion of the interest income received by
the controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, it is suggested that
certificateholders who are non-resident alien individuals consult their tax
advisors concerning this question.
Except as stated in the related prospectus supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related pooling and servicing agreement.
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NEW WITHHOLDING REGULATIONS
The IRS has issued new regulations which make certain modifications to
the withholding, backup withholding and information reporting rules described
above. The new regulations attempt to unify certification requirements and
modify reliance standards. These regulations will generally be effective for
payments made after December 31, 2000, subject to transition rules. Prospective
investors are urged to consult their tax advisors regarding these regulations.
NOTES
On or prior to the date of the related prospectus supplement with
respect to the proposed issuance of each series of notes, counsel to the
depositor will provide its opinion that, assuming compliance with all provisions
of the indenture, owner trust agreement and other related documents, for federal
income tax purposes (1) the notes will be treated as indebtedness and (2) the
issuer, as created under the owner trust agreement, will not be characterized as
an association or publicly traded partnership taxable as a corporation or as a
taxable mortgage pool. For purposes of this tax discussion, references to a
noteholder or a holder are to the beneficial owner of a note.
STATUS AS REAL PROPERTY LOANS
Notes held by 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); and notes held by a real estate
investment trust will not constitute real estate assets within the meaning of
Code section 856(c)(4)(A) and interest on notes will not be considered "interest
on obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, except that (1) income reportable on the
notes is not required to be reported under the accrual method unless the holder
otherwise uses the accrual method and (2) the special rule treating a portion of
the gain on sale or exchange of a REMIC Regular Certificate as ordinary income
is inapplicable to the notes. SEE "--REMICS --TAXATION OF OWNERS OF REMIC
REGULAR CERTIFICATES" AND "-- SALES OF REMIC CERTIFICATES."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
On or prior to the date of the related prospectus supplement with
respect to the proposed issuance of each series of Grantor Trust Certificates,
counsel to the depositor will provide its opinion that, assuming compliance with
all provisions of the related pooling and servicing agreement, the related
Grantor Trust Fund will be classified as a grantor trust under subpart E, part I
of subchapter J of Chapter 1 of the Code and not as a partnership or an
association taxable as a corporation.
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CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, except as disclosed in the related
prospectus supplement, counsel to the depositor will provide its opinion that
Grantor Trust Fractional Interest Certificates will represent interests in
"loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; "obligation[s] (including any
participation or certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Code; and real estate assets within the meaning of
Section 856(c)(4)(A) of the Code. In addition, counsel to the depositor will
deliver its opinion that interest on Grantor Trust Fractional Interest
Certificates will to the same extent be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code.
The assets constituting certain Grantor Trust Funds may include buydown
mortgage loans. The characterization of an investment in buydown mortgage loans
will depend upon the precise terms of the related buydown agreement, but to the
extent that the buydown mortgage loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the preceding paragraph. No directly applicable precedents exist with respect
to the federal income tax treatment or the characterization of investments in
buydown mortgage loans. Accordingly, holders of Grantor Trust Certificates
should consult their own tax advisors with respect to the characterization of
investments in Grantor Trust Certificates representing an interest in a Grantor
Trust Fund that includes buydown mortgage loans.
GRANTOR TRUST STRIP CERTIFICATES. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of mortgage
loans that are "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code, and real estate assets within
the meaning of Section 856(c)(4)(A) of the Code, and the interest on the
mortgage loans is "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, it is unclear
whether the Grantor Trust Strip Certificates, and income from the Grantor Trust
Certificates will be characterized the same way. However, the policies
underlying these sections, to encourage or require investments in mortgage loans
by thrift institutions and real estate investment trusts, suggest that this
characterization is appropriate. Counsel to the depositor will not deliver any
opinion on these questions. It is suggested that prospective purchasers to which
the characterization of an investment in Grantor Trust Strip Certificates is
material consult their tax advisors regarding whether the Grantor Trust Strip
Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or certificate of beneficial ownership therein) which . .
.[are] principally secured by an interest in real property" within the meaning
of Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the mortgage loans, including amounts used to
pay reasonable servicing fees and other expenses, and will be entitled to deduct
their shares of any reasonable servicing fees and other expenses. Because of
stripped interests,
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market or original issue discount, or premium, the amount includible in income
on account of a Grantor Trust Fractional Interest Certificate may differ
significantly from the amount distributable on the same certificate representing
interest on the mortgage loans. Under Section 67 of the Code, an individual,
estate or trust holding a Grantor Trust Fractional Interest Certificate directly
or through some pass-through entities will be allowed a deduction for the
reasonable servicing fees and expenses only to the extent that the aggregate of
the holder's miscellaneous itemized deductions exceeds two percent of the
holder's adjusted gross income. In addition, Section 68 of the Code provides
that the amount of itemized deductions otherwise allowable for an individual
whose adjusted gross income exceeds a specified amount will be reduced by the
lesser of (1) 3% of the excess of the individual's adjusted gross income over
the amount or (2) 80% of the amount of itemized deductions otherwise allowable
for the taxable year. The amount of additional taxable income reportable by
holders of Grantor Trust Fractional Interest Certificates who are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Further, certificateholders other than corporations subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining the
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates, including Grantor Trust Strip Certificates, are issued, the fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it is intended to base information returns or reports to the
IRS and certificateholders on a method that allocates the expenses among classes
of Grantor Trust Certificates with respect to each period on the distributions
made to each class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
stripped bond rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (1) a class of Grantor
Trust Strip Certificates is issued as part of the same series of certificates or
(2) the depositor or any of its affiliates retains, for its own account or for
purposes of resale, a right to receive a specified portion of the interest
payable on the mortgage loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established safe harbors. The servicing fees paid
with respect to the mortgage loans for a series of Grantor Trust Certificates
may be higher than those safe harbors and, accordingly, may not constitute
reasonable servicing compensation. The related prospectus supplement will
include information regarding servicing fees paid to the master servicer, any
subservicer or their respective affiliates necessary to determine whether the
safe harbor rules apply.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with original issue discount within the meaning of Section 1273(a) of the
Code, subject, however, to the discussion in the sixth following paragraph
regarding the possible treatment of stripped bonds as market discount bonds and
the discussion regarding DE MINIMIS market discount. SEE "--TAXATION OF OWNERS
OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES-- DISCOUNT" BELOW.
Under the stripped bond rules, the holder of a Grantor Trust Fractional
Interest Certificate, whether a cash or accrual method taxpayer, will be
required to report interest income from its
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Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on the certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of the certificate's stated redemption price over
its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by the purchaser
for the Grantor Trust Fractional Interest Certificate. The stated redemption
price of a Grantor Trust Fractional Interest Certificate will be the sum of all
payments to be made on the certificate, other than qualified stated interest, if
any, as well as the certificate's share of reasonable servicing fees and other
expenses. SEE "--TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST
CERTIFICATES-- STRIPPED BOND RULES DO NOT APPLY" FOR A DEFINITION OF QUALIFIED
STATED INTEREST.
In general, the amount of the income that accrues in any month would
equal the product of the holder's adjusted basis in the Grantor Trust Fractional
Interest Certificate at the beginning of the month, see "Sales of Grantor Trust
Certificates", and the yield of the Grantor Trust Fractional Interest
Certificate to the holder. This yield is equal to a rate that, compounded based
on the regular interval between distribution dates and used to discount the
holder's share of future payments on the mortgage loans, causes the present
value of those future payments to equal the price at which the holder purchased
the certificate. In computing yield under the stripped bond rules, a
certificateholder's share of future payments on the mortgage loans will not
include any payments made in respect of any ownership interest in the mortgage
loans retained by the depositor, the master servicer, any subservicer or their
respective affiliates, but will include the certificateholder's share of any
reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, Section 1272(a)(6) of the Code requires (1)
the use of a reasonable Prepayment Assumption in accruing original issue
discount and (2) adjustments in the accrual of original issue discount when
prepayments do not conform to the Prepayment Assumption. It is unclear whether
those provisions would be applicable to the Grantor Trust Fractional Interest
Certificates that do not represent an interest in any pool of debt instruments
the yield on which may be affected by reason of prepayments, or whether use of a
reasonable Prepayment Assumption may be required or permitted without reliance
on these rules. It is also uncertain, if a Prepayment Assumption is used,
whether the assumed prepayment rate would be determined based on conditions at
the time of the first sale of the Grantor Trust Fractional Interest Certificate
or, for a particular holder, at the time of purchase of the Grantor Trust
Fractional Interest Certificate by that holder. It is suggested that
Certificateholders consult their own tax advisors concerning reporting original
issue discount with respect to Grantor Trust Fractional Interest Certificates
and, in particular, whether a Prepayment Assumption should be used in reporting
original issue discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the mortgage loans allocable to the
certificate, the use of a Prepayment Assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a price less than or greater than the principal amount of the
certificate, that is, at a discount or a
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premium, the use of a reasonable Prepayment Assumption would increase or
decrease the yield, and thus accelerate or decelerate, respectively, the
reporting of income.
If a Prepayment Assumption is not used, then when a mortgage loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a discount or a premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the mortgage loan that is allocable to the certificate and the portion of the
adjusted basis of the certificate that is allocable to the certificateholder's
interest in the mortgage loan. If a Prepayment Assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. It is unclear whether any
other adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments. SEE "--REMICS--TAXATION OF
OWNERS OF REMIC REGULAR CERTIFICATES--ORIGINAL ISSUE DISCOUNT."
It is intended to base information reports or returns to the IRS and
certificateholders in transactions subject to the stripped bond rules on a
Prepayment Assumption that will be disclosed in the related prospectus
supplement and on a constant yield computed using a representative initial
offering price for each class of certificates. However, none of the depositor,
the master servicer or the trustee will make any representation that the
mortgage loans will in fact prepay at a rate conforming to the Prepayment
Assumption or any other rate and certificateholders should bear in mind that the
use of a representative initial offering price will mean that the information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial certificateholders of each series
who bought at that price.
Under Treasury regulation Section 1.1286-1, stripped bonds may to be
treated as market discount bonds and any purchaser of a stripped bond treated as
a market discount bond is to account for any discount on the bond as market
discount rather than original issue discount. This treatment only applies,
however, if immediately after the most recent disposition of the bond by a
person stripping one or more coupons from the bond and disposing of the bond or
coupon (1) there is no, or only a de minimis amount of, original issue discount
or (2) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan, before subtracting any servicing fee or any stripped
coupon. If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the mortgage loans, the related prospectus supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the mortgage loans, then that original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "--Characteristics of
Investments in Grantor Trust Certificates-- If Stripped Bond Rules Do Not Apply"
and "--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below
on original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the
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certificateholder will be required to report its share of the interest income on
the mortgage loans in accordance with the certificateholder's normal method of
accounting. The original issue discount rules will apply to a Grantor Trust
Fractional Interest Certificate to the extent it evidences an interest in
mortgage loans issued with original issue discount.
The original issue discount, if any, on the mortgage loans will equal
the difference between the stated redemption price of the mortgage loans and
their issue price. Under the OID Regulations, the stated redemption price is
equal to the total of all payments to be made on the mortgage loan other than
qualified stated interest. Qualified stated interest is interest that is
unconditionally payable at least annually at a single fixed rate, a qualified
floating rate, an objective rate, a combination of a single fixed rate and one
or more qualified floating rates or one qualified inverse floating rate, or a
combination of qualified floating rates that does not operate in a manner that
accelerates or defers interest payments on the mortgage loan. In general, the
issue price of a mortgage loan will be the amount received by the borrower from
the lender under the terms of the mortgage loan, less any points paid by the
borrower, and the stated redemption price of a mortgage loan will equal its
principal amount, unless the mortgage loan provides for an initial below-market
rate of interest or the acceleration or the deferral of interest payments. The
determination as to whether original issue discount will be considered to be de
minimis will be calculated using the same test described in the REMIC
discussion. SEE "--TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES--ORIGINAL
ISSUE DISCOUNT" ABOVE.
In the case of mortgage loans bearing adjustable or variable interest
rates, the related prospectus supplement will describe the manner in which the
rules will be applied with respect to those mortgage loans by the master
servicer or the trustee in preparing information returns to the
certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a mortgage loan will be required to be
accrued and reported in income each month, based on a constant yield. Section
1272(a)(6) of the Code requires that a Prepayment Assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by these pools, it is intended to base information reports and returns to the
IRS and certificateholders on the use of a Prepayment Assumption. However, in
the case of certificates not backed by these pools, it currently is not intended
to base the reports and returns on the use of a Prepayment Assumption. It is
suggested that certificateholders consult their own tax advisors concerning
whether a Prepayment Assumption should be used in reporting original issue
discount with respect to Grantor Trust Fractional Interest Certificates.
Certificateholders should refer to the related prospectus supplement with
respect to each series to determine whether and in what manner the original
issue discount rules will apply to mortgage loans in the series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases the Grantor Trust Fractional Interest Certificate at a cost less than
the certificate's allocable portion of the aggregate remaining stated redemption
price of the mortgage loans held in the related trust fund will also be required
to include in gross income the certificate's daily portions of any original
issue discount with respect to the mortgage loans. However, the daily portion
will be reduced, if the cost of the Grantor Trust Fractional Interest
Certificate to the purchaser is in excess of the certificate's allocable portion
of the aggregate adjusted issue prices of the mortgage loans held in the related
trust
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fund, approximately in proportion to the ratio the excess bears to the
certificate's allocable portion of the aggregate original issue discount
remaining to be accrued on the mortgage loans. The adjusted issue price of a
mortgage loan on any given day equals the sum of (1) the adjusted issue price,
or, in the case of the first accrual period, the issue price, of the mortgage
loan at the beginning of the accrual period that includes that day and (2) the
daily portions of original issue discount for all days during the accrual period
prior to that day. The adjusted issue price of a mortgage loan at the beginning
of any accrual period will equal the issue price of the mortgage loan, increased
by the aggregate amount of original issue discount with respect to the mortgage
loan that accrued in prior accrual periods, and reduced by the amount of any
payments made on the mortgage loan in prior accrual periods of amounts included
in its stated redemption price.
In addition to its regular reports, the master servicer or the trustee,
except as provided in the related prospectus supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
the holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. SEE
"GRANTOR TRUST REPORTING" BELOW.
MARKET DISCOUNT. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a mortgage loan is considered to have been purchased at a market
discount, that is, in the case of a mortgage loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price,
or in the case of a mortgage loan issued with original issue discount, at a
purchase price less than its adjusted issue price. If market discount is in
excess of a de minimis amount, the holder generally will be required to include
in income in each month the amount of the discount that has accrued through the
month that has not previously been included in income, but limited, in the case
of the portion of the discount that is allocable to any mortgage loan, to the
payment of stated redemption price on the mortgage loan that is received by, or,
in the case of accrual basis certificateholders, due to, the trust fund in that
month. A certificateholder may elect to include market discount in income
currently as it accrues under a constant yield method based on the yield of the
certificate to the holder rather than including it on a deferred basis under
rules similar to those described in "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until regulations are issued by the Treasury Department, rules described in the
committee report will apply. Under those rules, in each accrual period market
discount on the mortgage loans should accrue, at the certificateholder's option:
(1) on the basis of a constant yield method, (2) in the case of a mortgage loan
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total stated interest remaining to be paid on the
mortgage loan as of the beginning of the accrual period, or (3) in the case of a
mortgage loan issued with original issue discount, in an amount that bears the
same ratio to the total remaining market discount as the original issue discount
accrued in the accrual period bears to the total original issue discount
remaining at the beginning of the accrual period. The Prepayment Assumption, if
any, used in calculating the accrual of original issue discount is to be used in
calculating the accrual of market discount. The effect of using a Prepayment
Assumption could be to accelerate the reporting of the discount income. Because
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the regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect the regulations might have on the tax treatment
of a mortgage loan purchased at a discount in the secondary market.
Because the mortgage loans will provide for periodic payments of stated
redemption price, the market discount may be required to be included in income
at a rate that is not significantly slower than the rate at which the discount
would be included in income if it were original issue discount.
Market discount with respect to mortgage loans may be considered to be
de minimis and, if so, will be includible in income under de minimis rules
similar to those described above in "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" with the exception that it is
less likely that a Prepayment Assumption will be used for purposes of these
rules with respect to the mortgage loans.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the mortgage loans.
PREMIUM. If a certificateholder is treated as acquiring the underlying
mortgage loans at a premium, that is, at a price in excess of their remaining
stated redemption price, the certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of the premium
allocable to mortgage loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to mortgage loans originated before September 28, 1985 or to mortgage
loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the mortgage loan and be allowed as a
deduction as these payments are made, or, for a certificateholder using the
accrual method of accounting, when the payments of stated redemption price are
due.
It is unclear whether a Prepayment Assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a Prepayment Assumption and a
mortgage loan prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the mortgage
loan that is allocable to the certificate and the portion of the adjusted basis
of the certificate that is allocable to the mortgage loan. If a Prepayment
Assumption is used to amortize this premium, it appears that this loss would be
unavailable. Instead, if a Prepayment Assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. It is unclear whether any other adjustments would be required to
reflect differences between the Prepayment Assumption used, and the actual rate
of prepayments. SEE "REMICS--TAXATION OF OWNERS OF REMIC REGULAR
CERTIFICATES--ORIGINAL ISSUE DISCOUNT."
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TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The stripped
coupon rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "Characterization of Investments in
Grantor Trust Certificates--If Stripped Bond Rules Apply," no regulations or
published rulings under Section 1286 of the Code have been issued and
uncertainty exists as to how it will be applied to securities like the Grantor
Trust Strip Certificates. Accordingly, it is suggested that holders of Grantor
Trust Strip Certificates consult their own tax advisors concerning the method to
be used in reporting income or loss with respect to the certificates.
The OID Regulations do not apply to stripped coupons, although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "--Application of Contingent Payment Rules" and assumes that
the holder of a Grantor Trust Strip Certificate will not own any Grantor Trust
Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of the holder's adjusted basis in the Grantor Trust
Strip Certificate at the beginning of that month and the yield of the Grantor
Trust Strip Certificate to the holder. The yield would be calculated based on
the price paid for that Grantor Trust Strip Certificate by its holder and the
payments remaining to be made thereon at the time of the purchase, plus an
allocable portion of the servicing fees and expenses to be paid with respect to
the mortgage loans. SEE "CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST
CERTIFICATES--STRIPPED BOND RULES APPLY" ABOVE.
As noted, Section 1272(a)(6) of the Code requires that a Prepayment
Assumption be used in computing the accrual of original issue discount with
respect to some categories of debt instruments, and that adjustments be made in
the amount and rate of accrual of the discount when prepayments do not conform
to the Prepayment Assumption. To the extent the Grantor Trust Strip Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, those provisions apply to Grantor Trust Strip
Certificates. It is unclear whether those provisions would be applicable to the
Grantor Trust Strip Certificates that do not represent an interest in any such
pool, or whether use of a Prepayment Assumption may be required or permitted in
the absence of these provisions. It is also uncertain, if a Prepayment
Assumption is used, whether the assumed prepayment rate would be determined
based on conditions at the time of the first sale of the Grantor Trust Strip
Certificate or, with respect to any subsequent holder, at the time of purchase
of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a Prepayment Assumption is permitted to be made than if
yield is computed assuming no prepayments.
It currently is intended to base information returns or reports to the IRS and
certificateholders on the Prepayment Assumption disclosed in the related
prospectus supplement and on a constant yield computed using a representative
initial offering price for each class of certificates. However, none of the
depositor, the master servicer or the trustee will make any representation that
the mortgage loans will in fact prepay at a rate conforming to the Prepayment
Assumption or at any other rate and certificateholders should bear in mind that
the use of a representative initial offering price will mean
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that the information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates should consult their own tax
advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
mortgage loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument rather than an interest in discrete mortgage loans and the effect of
prepayments is taken into account in computing yield with respect to the Grantor
Trust Strip Certificate, it appears that no loss may be available as a result of
any particular prepayment unless prepayments occur at a rate faster than the
Prepayment Assumption. However, if a Grantor Trust Strip Certificate is treated
as an interest in discrete mortgage loans, or if the Prepayment Assumption is
not used, then, when a mortgage loan is prepaid, the holder of a Grantor Trust
Strip Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of the Grantor Trust Strip Certificate that is allocable to
the mortgage loan.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments on
the Grantor Trust Strip Certificates would cease if the mortgage loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to be
debt instruments providing for contingent payments. Under the OID Regulations,
debt instruments providing for contingent payments are not subject to the same
rules as debt instruments providing for noncontingent payments. Regulations were
promulgated on June 14, 1996, regarding contingent payment debt instruments, the
"Contingent Payment Regulations", but it appears that Grantor Trust Strip
Certificates, to the extent subject to Section 1272(a)(6) of the Code as
described above, or due to their similarity to other mortgage-backed securities,
such as REMIC regular interests and debt instruments subject to Section
1272(a)(6) of the Code, that are expressly excepted from the application of the
Contingent Payment Regulations, are or may be excepted from these regulations.
Like the OID Regulations, the Contingent Payment Regulations do not specifically
address securities, like the Grantor Trust Strip Certificates, that are subject
to the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the Contingent Payment
Regulations were to apply, the holder of a Grantor Trust Strip Certificate would
be required to apply the noncontingent bond method. Under the noncontingent bond
method, the issuer of a Grantor Trust Strip Certificate determines a projected
payment schedule on which interest will accrue. Holders of Grantor Trust Strip
Certificates are bound by the issuer's projected payment schedule. The projected
payment schedule consists of all noncontingent payments and a projected amount
for each contingent payment based on the projected yield of the Grantor Trust
Strip Certificate.
The projected amount of each payment is determined so that the
projected payment schedule reflects the projected yield. The projected amount of
each payment must reasonably reflect the relative expected values of the
payments to be received by the holder of a Grantor Trust Strip Certificate. The
projected yield referred to above is a reasonable rate, not less than the
applicable Federal rate that, as of the issue date, reflects general market
conditions, the credit quality of the issuer, and the terms and conditions of
the mortgage loans. The holder of a Grantor Trust Strip Certificate would be
required to include as interest income in each month the adjusted issue price of
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the Grantor Trust Strip Certificate at the beginning of the period multiplied by
the projected yield, and would add to, or subtract from, the income any
variation between the payment actually received in that month and the payment
originally projected to be made in that month.
Assuming that a Prepayment Assumption were used, if the Contingent
Payment Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis recognized on the sale or exchange of a
Grantor Trust Certificate by an investor who holds the Grantor Trust Certificate
as a capital asset will be capital gain or loss, except to the extent of accrued
and unrecognized market discount, which will be treated as ordinary income, and,
in the case of banks and other financial institutions, except as provided under
Section 582(c) of the Code. The adjusted basis of a Grantor Trust Certificate
generally will equal its cost, increased by any income reported by the seller,
including original issue discount and market discount income, and reduced, but
not below zero, by any previously reported losses, any amortized premium and by
any distributions with respect to the Grantor Trust Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in some circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust Certificate is held as part of a conversion
transaction within the meaning of Section 1258 of the Code. A conversion
transaction generally is one in which the taxpayer has taken two or more
positions in the same or similar property that reduce or eliminate market risk,
if substantially all of the taxpayer's return is attributable to the time value
of the taxpayer's net investment in the transaction. The amount of gain realized
in a conversion transaction that is recharacterized as ordinary income generally
will not exceed the amount of interest that would have accrued on the taxpayer's
net investment at 120% of the appropriate applicable Federal rate at the time
the taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction. Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for that taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
GRANTOR TRUST REPORTING. The master servicer or the trustee will
furnish to each holder of a Grantor Trust Fractional Interest Certificate with
each distribution a statement setting forth the amount of the distribution
allocable to principal on the underlying mortgage loans and to interest thereon
at the related pass-through rate. In addition, the master servicer or the
trustee will furnish, within a reasonable time after the end of each calendar
year, to each holder of a Grantor Trust Certificate who was a holder at any time
during that year, information regarding the amount of any servicing compensation
received by the master servicer and subservicer and any other customary
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factual information as the master servicer or the trustee deems necessary or
desirable to enable holders of Grantor Trust Certificates to prepare their tax
returns and will furnish comparable information to the IRS as and when required
by law to do so. Because the rules for accruing discount and amortizing premium
with respect to the Grantor Trust Certificates are uncertain in various
respects, there is no assurance the IRS will agree with the trust fund's
information reports of these items of income and expense. Moreover, these
information reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial certificateholders that bought
their certificates at the representative initial offering price used in
preparing the reports.
Except as disclosed in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the master servicer or the trustee.
BACKUP WITHHOLDING. In general, the rules described in
"--REMICS--Backup Withholding with Respect to REMIC Certificates" will also
apply to Grantor Trust Certificates.
FOREIGN INVESTORS. In general, the discussion with respect to REMIC
Regular Certificates in "REMICS--Foreign Investors in REMIC Certificates"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, except as disclosed in the related prospectus supplement, be eligible for
exemption from U.S. withholding tax, subject to the conditions described in the
discussion, only to the extent the related mortgage loans were originated after
July 18, 1984 and only to the extent such mortgage loans have not been converted
to real property.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a certificateholder's trade or business in the United States, the Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of a non- resident alien individual.
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS. With respect to each series
of Partnership Certificates, counsel to the depositor will provide its opinion
that the trust fund will not be a taxable mortgage pool or an association, or
publicly traded partnership, taxable as a corporation for federal income tax
purposes. This opinion will be based on the assumption that the terms of the
related pooling and servicing agreement and related documents will be complied
with, and on counsel's conclusions that the nature of the income of the trust
fund will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
If the trust fund were taxable as a corporation for federal income tax
purposes, the trust fund would be subject to corporate income tax on its taxable
income. The trust fund's taxable income would include all its income on the
related mortgage loans, possibly reduced by its interest expense on any
outstanding debt securities. Any corporate income tax could materially reduce
cash available to make distributions on the Partnership Certificates and
certificateholders could be liable for any tax that is unpaid by the trust fund.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP CERTIFICATES. For
federal income tax purposes,
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(1) Partnership Certificates held by a thrift institution taxed as a
domestic building and loan association will not constitute "loans
... secured by an interest in real property" within the meaning
of Code Section 7701(a)(19)(C)(v);
(2) Partnership Certificates held by a real estate investment trust
will constitute real estate assets within the meaning of Code
Section 856(c)(4)(A) and interest on Partnership Certificates
will 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), based on the real estate
investments trust's proportionate interest in the assets of the
Partnership Trust Fund based on capital accounts; and
(3) Partnership Certificates held by a regulated investment company
will not constitute Government securities within the meaning of
Code Section 851(b)(3)(A)(i).
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP. If specified
in the prospectus supplement, the depositor will agree, and the
certificateholders will agree by their purchase of Certificates, to treat the
Partnership Trust Fund as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Partnership
Trust Fund, the partners of the partnership being the certificateholders,
including the depositor. However, the proper characterization of the arrangement
involving the Partnership Trust Fund, the Partnership Certificates and the
depositor is not clear, because there is no authority on transactions closely
comparable to that contemplated in the prospectus.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Certificates have certain
features characteristic of debt, the Partnership Certificates might be
considered debt of the depositor or the Partnership Trust Fund. Any alternative
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Partnership Certificates as equity in a partnership. The following discussion
assumes that the Partnership Certificates represent equity interests in a
partnership.
PARTNERSHIP TAXATION. As a partnership, the Partnership Trust Fund will
not be subject to federal income tax. Rather, each Certificateholder will be
required to separately take into account the holder's allocated share of income,
gains, losses, deductions and credits of the Partnership Trust Fund. It is
anticipated that the Partnership Trust Fund's income will consist primarily of
interest earned on the mortgage loans, including appropriate adjustments for
market discount, original issue discount and bond premium, as described above
under "-- Grantor Trust Funds -- Taxation of Owners of Grantor Trust Fractional
Interest Certificates - If Stripped Bond Ruled Do Not Apply--", "-- Market
Discount" and "--Premium", and any gain upon collection or disposition of
mortgage loans. The Partnership Trust Fund's deductions will consist primarily
of interest accruing with respect to any outstanding debt securities, servicing
and other fees, and losses or deductions upon collection or disposition of any
outstanding debt securities.
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The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement,
which will include a pooling and servicing agreement and related documents. The
pooling and servicing agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Partnership Trust
Fund for each due period equal to the sum of (1) the interest that accrues on
the Partnership Certificates in accordance with their terms for the due period,
including interest accruing at the applicable pass-through rate for the due
period and interest on amounts previously due on the Partnership Certificates
but not yet distributed; (2) any Partnership Trust Fund income attributable to
discount on the mortgage loans that corresponds to any excess of the principal
amount of the Partnership Certificates over their initial issue price; and (3)
any other amounts of income payable to the certificateholders for the due
period. The allocation will be reduced by any amortization by the Partnership
Trust Fund of premium on mortgage loans that corresponds to any excess of the
issue price of Partnership Certificates over their principal amount. All
remaining taxable income of the Partnership Trust Fund will be allocated to the
depositor. Based on the economic arrangement of the parties, this approach for
allocating Partnership Trust Fund income should be permissible under applicable
Treasury regulations, although no assurance can be given that the IRS would not
require a greater amount of income to be allocated to certificateholders.
Moreover, even under that method of allocation, certificateholders may be
allocated income equal to the entire pass-through rate plus the other items
described under that method even though the Trust Fund might not have sufficient
cash to make current cash distributions of these amounts. Thus, cash basis
holders will in effect be required to report income from the Partnership
Certificates on the accrual basis and certificateholders may become liable for
taxes on Partnership Trust Fund income even if they have not received cash from
the Partnership Trust Fund to pay these taxes.
All of the taxable income allocated to a certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity,
including an individual retirement account, will constitute unrelated business
taxable income generally taxable to that holder under the Code.
A share of expenses of the Partnership Trust Fund, including fees of
the master servicer but not interest expense, allocable to an individual, estate
or trust certificateholder would be miscellaneous itemized deductions subject to
the limitations described above under "--Grantor Trust Funds -- Taxation of
Owners of Grantor Trust Fractional Interest Certificates." Accordingly,
deductions for these expenses might be disallowed to the individual in whole or
in part and might result in that holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the Partnership Trust Fund.
Discount income or premium amortization with respect to each mortgage
loan would be calculated in a manner similar to the description under "--
Grantor Trust Funds -- Taxation of Owners of Grantor Trust Fractional Interest
Certificates - If Stripped Bond Rules Do Not Apply." Notwithstanding this
description, it is intended that the Partnership Trust Fund will make all tax
calculations relating to income and allocations to certificateholders on an
aggregate basis for all mortgage loans held by the Partnership Trust Fund rather
than on a mortgage loan-by-mortgage loan basis. If the IRS were to require that
these calculations be made separately for each mortgage loan, the Partnership
Trust Fund might be required to incur additional expense, but it is believed
that there would not be a material adverse effect on certificateholders.
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DISCOUNT AND PREMIUM. Unless indicated otherwise in the applicable
prospectus supplement, it is not anticipated that the mortgage loans will have
been issued with original issue discount and, therefore, the Partnership Trust
Fund should not have original issue discount income. However, the purchase price
paid by the Partnership Trust Fund for the mortgage loans may be greater or less
than the remaining principal balance of the mortgage loans at the time of
purchase. If so, the mortgage loans will have been acquired at a premium or
discount, as the case may be. As stated in the previous paragraph, the
Partnership Trust Fund intends to make any calculation of original issue
discount on an aggregate basis, but might be required to recompute it on a
mortgage loan-by-mortgage loan basis. SEE "--GRANTOR TRUST FUNDS -- TAXATION OF
OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES -- MARKET DISCOUNT" AND
"PREMIUM."
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
stated in the second preceding paragraph, a portion of the market discount
income or premium deduction may be allocated to certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Partnership
Trust Fund will be deemed to terminate for federal income tax purposes if 50% or
more of the capital and profits interests in the Partnership Trust Fund are sold
or exchanged within a 12-month period. A 50% or greater transfer would cause a
deemed contribution of the assets of a Partnership Trust Fund, the old
partnership, to a new Partnership Trust Fund, the new partnership, in exchange
for interests in the new partnership. These interests would be deemed
distributed to the partners of the old partnership in liquidation thereof, which
would not constitute a sale or exchange.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Partnership Certificates in an amount equal to the
difference between the amount realized and the seller's tax basis in the
Partnership Certificates sold. A certificateholder's tax basis in an Partnership
Certificate will generally equal the holder's cost increased by the holder's
share of Partnership Trust Fund income includible in income and decreased by any
distributions received with respect to the Partnership Certificate. In addition,
both the tax basis in the Partnership Certificates and the amount realized on a
sale of an Partnership Certificate would include the holder's share of any
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Certificates, and, upon sale or other
disposition of some of the Partnership Certificates, allocate a portion of the
aggregate tax basis to the Partnership Certificates sold, rather than
maintaining a separate tax basis in each Partnership Certificate for purposes of
computing gain or loss on a sale of that Partnership Certificate.
Any gain on the sale of an Partnership Certificate attributable to the
holder's share of unrecognized accrued market discount on the mortgage loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
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If a certificateholder is required to recognize an aggregate amount of
income, not including income attributable to disallowed itemized deductions,
over the life of the Partnership Certificates that exceeds the aggregate cash
distributions with respect thereto, the excess will generally give rise to a
capital loss upon the retirement of the Partnership Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Partnership Trust Fund's taxable income and losses will be determined each due
period and the tax items for a particular due period will be apportioned among
the certificateholders in proportion to the principal amount of Partnership
Certificates owned by them as of the close of the last day of such due period.
As a result, a holder purchasing Partnership Certificates may be allocated tax
items which will affect its tax liability and tax basis attributable to periods
before the actual transaction.
The use of a due period convention may not be permitted by existing
regulations. If a due period convention is not allowed or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the Partnership Trust Fund might be reallocated among the certificateholders.
The depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
SECTION 731 DISTRIBUTIONS. In the case of any distribution to a
certificateholder, no gain will be recognized to that certificateholder to the
extent that the amount of any money distributed with respect to the Partnership
Certificate exceeds the adjusted basis of the certificateholder's interest in
the Partnership Certificate. To the extent that the amount of money distributed
exceeds the certificateholder's adjusted basis, gain will be currently
recognized. In the case of any distribution to a certificateholder, no loss will
be recognized except upon a distribution in liquidation of a certificateholder's
interest. Any gain or loss recognized by a certificateholder will be capital
gain or loss.
SECTION 754 ELECTION. In the event that a certificateholder sells its
Partnership Certificates at a profit, the purchasing certificateholder will have
a higher basis in the Partnership Certificates than the selling
certificateholder had. An opposite result will follow if the Partnership
Certificate is sold at a loss. The tax basis of the Partnership Trust Fund's
assets would not be adjusted to reflect that higher or lower basis unless the
Partnership Trust Fund were to file an election under Section 754 of the Code.
In order to avoid the administrative complexities that would be involved in
keeping accurate accounting records, as well as potentially onerous information
reporting requirements, the Partnership Trust Fund will not make such election.
As a result, a certificateholder might be allocated a greater or lesser amount
of Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or have kept
complete and accurate books of the Partnership Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of the Partnership Trust Fund will be the calendar year. The trustee
will file a partnership information return, IRS Form 1065, with the IRS for each
taxable year of the Partnership Trust Fund and will report each
certificateholder's allocable share of items of Partnership Trust Fund income
and expense to holders and the IRS on Schedule K-1. The trustee will provide the
Schedule K-1 information to nominees that fail to provide the Partnership Trust
Fund with the information statement described below and the nominees will be
required to
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forward this information to the beneficial owners of the Partnership
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing information on
the nominee, the beneficial owners and the Partnership Certificates so held.
Such information includes (1) the name, address and taxpayer identification
number of the nominee and (2) as to each beneficial owner (x) the name, address
and identification number of that person, (y) whether that person is a United
States Person, a tax-exempt entity or a foreign government, an international
organization, or any wholly-owned agency or instrumentality of either of the
foregoing, and (z) information relating to Partnership Certificates that were
held, bought or sold on behalf of that person throughout the year. In addition,
brokers and financial institutions that hold Partnership Certificates through a
nominee are required to furnish directly to the trustee information as to
themselves and their ownership of Partnership Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
information statement to the Partnership Trust Fund. The information referred to
above for any calendar year must be furnished to the Partnership Trust Fund on
or before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Partnership Trust Fund with the information described
above may be subject to penalties.
The depositor will be designated as the tax matters partner in the
pooling and servicing agreement and will be responsible for representing the
certificateholders in any dispute with the IRS.
The Code provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire until three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the Partnership Trust Fund by
the appropriate taxing authorities could result in an adjustment of the returns
of the certificateholders, and a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a certificateholder's
returns and adjustments of items not related to the income and losses of the
Partnership Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether
the Partnership Trust Fund would be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes with
respect to non-United States Persons, because there is no clear authority
dealing with that issue under facts substantially similar to those in this case.
Although it is not expected that the Partnership Trust Fund would be engaged in
a trade or business in the United States for these purposes, the Partnership
Trust Fund will withhold as if it were so engaged in order to protect the
Partnership Trust Fund from possible adverse consequences of a failure to
withhold. The Partnership Trust Fund expects to withhold on the portion of its
taxable income that is allocable to foreign certificateholders pursuant to
Section 1446 of the Code as if this income were effectively connected to a U.S.
trade or business, at a rate of 35% for foreign holders that are taxable as
corporations and 39.6% for all other foreign holders. Amounts withheld will be
deemed distributed to the foreign certificateholders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the Partnership Trust Fund to change its withholding procedures. In
determining a holder's withholding status, the Partnership Trust Fund
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may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return, including, in the case of a corporation, the branch
profits tax, on its share of the Partnership Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit that
number to the Partnership Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be entitled to
file with the IRS a claim for refund with respect to taxes withheld by the
Partnership Trust Fund, taking the position that no taxes were due because the
Partnership Trust Fund was not engaged in a U.S. trade or business. However,
interest payments made or accrued to a certificateholder who is a foreign person
generally will be considered guaranteed payments to the extent such payments are
determined without regard to the income of the Partnership Trust Fund. If these
interest payments are properly characterized as guaranteed payments, then the
interest will not be considered portfolio interest. As a result,
certificateholders who are foreign persons will be subject to United States
federal income tax and withholding tax at a rate of 30 percent, unless reduced
or eliminated pursuant to an applicable treaty. In that event, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the Partnership Certificates
and proceeds from the sale of the Partnership Certificates will be subject to a
backup withholding tax of 31% if the certificateholder fails to comply with
certain identification procedures, unless the holder is an exempt recipient
under applicable provisions of the Code.
It is suggested that prospective purchasers consult their tax advisors
with respect to the tax consequences to them of the purchase, ownership and
disposition of REMIC Certificates, Notes, Grantor Trust Certificates and
Partnership Certificates, including the tax consequences under state, local,
foreign and other tax laws and the possible effects of changes in federal or
other tax laws.
FASIT SECURITIES
General. The FASIT Provisions were enacted by the Small Business Job
Protection Act of 1996 and create a new elective statutory vehicle for the
issuance of mortgage-backed and asset- backed securities. Although the FASIT
Provisions became effective on September 1, 1997, no Treasury regulations or
other administrative guidance has been issued with respect to the FASIT
Provisions. Accordingly, definitive guidance cannot be provided with respect to
many aspects of the tax treatment of holders of FASIT securities. With respect
to each series of FASIT securities, the related prospectus supplement will
provide a detailed discussion regarding the federal income tax consequences
associated with the particular transaction.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion described under "Federal
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Income Tax Consequences" does not purport to describe any aspect of the tax laws
of any state or other jurisdiction. Therefore, prospective investors should
consult their own tax advisors with respect to the various tax consequences of
investments in the securities offered hereunder.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
INVESTORS AFFECTED
A federal law called the Employee Retirement Income Security Act of
1974, as amended, the Code and a variety of state laws may affect your decision
whether to invest in the securities if you are investing for:
o a pension or other employee benefit plan of employers in the
private sector that are regulated under ERISA, referred to as an
ERISA plan,
o an individual retirement account or annuity, called an IRA, or a
pension or other benefit plan for self-employed individuals,
called a Keogh plan,
o a pension and other benefit plan for the employees of state and
local governments, called a government plan, or
o an insurance company general or separate account, a bank
collective investment fund or other pooled investment vehicle
which includes the assets of ERISA plans, IRAs, Keogh plans,
and/or government plans.
A summary of the effects of those laws follows.
FIDUCIARY STANDARDS FOR ERISA PLANS AND RELATED INVESTMENT VEHICLES
ERISA imposes standards of fiduciary conduct on those who are
responsible for operating ERISA plans or investing their assets. These standards
include requirements that fiduciaries act prudently in making investment
decisions and diversify investments so as to avoid large losses unless under the
circumstances it is clearly prudent not to do so. If you are a fiduciary of an
ERISA plan, you are subject to these standards in deciding whether to invest the
plan's assets in securities. You may find the full text of the applicable
standards of fiduciary conduct in section 404 of ERISA. If you are a fiduciary
of an ERISA Plan, you should consult with your advisors concerning your
investment decision in the context of section 404 of ERISA.
PROHIBITED TRANSACTION ISSUES FOR ERISA PLANS, KEOGH PLANS, IRAS AND RELATED
INVESTMENT VEHICLES
GENERAL. Transactions involving the assets of an ERISA plan, a Keogh
plan or an IRA, called prohibited transactions, may result in the imposition of
excise taxes and, in the case of an ERISA plan, civil money penalties and
certain other extraordinary remedies. A prohibited transaction occurs when a
person with a pre-existing relationship to an ERISA plan, a Keogh plan or IRA,
known as a party in interest or a disqualified person, engages in a transaction
involving the assets of the plan or IRA. You may find the laws applicable to
prohibited transactions in section 406
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of ERISA and section 4975 of the Code. There are statutory and regulatory
prohibited transaction exemptions, as well as administrative exemptions granted
by the United States Department of Labor.
Prohibited transactions exemptions waive the excise taxes, civil money penalties
and other remedies for certain prohibited transactions which are structured to
satisfy prescribed conditions.
PURCHASE AND SALE OF SECURITIES. If an ERISA plan, a Keogh plan, an IRA
or a related investment vehicle acquires securities from, or sells securities
to, a party in interest or a disqualified person, a prohibited transaction may
occur. In such a case, the party in interest or disqualified person might be
liable for excise taxes unless a prohibited transaction exemption is available.
Where a prohibited transaction involves an ERISA plan or related investment
vehicle, the fiduciary who causes or permits the prohibited transaction may also
be liable for civil money penalties.
TRANSACTIONS INCIDENTAL TO THE OPERATION OF THE TRUST. Transactions
involving the assets of the trust may also give rise to prohibited transactions
to the extent that an investment in securities causes the assets of a trust to
be considered assets, commonly known as plan assets, of an ERISA plan, a Keogh
plan, an IRA or a related investment vehicle. Whether an investment in
securities will cause a trust's assets to be treated as plan assets depends on
whether the securities are debt or equity investments for purposes of ERISA. The
United States Department of Labor has issued regulations, commonly known as the
plan asset regulations, which define debt and equity investments. The plan asset
regulations appear at 29 C.F.R. ss.2510.3-101.
Under the plan asset regulations, a trust's assets will not be plan
assets of an ERISA plan, Keogh plan, IRA or related investment vehicle that
purchases securities if the securities are considered debt. For this purpose,
the securities will be debt only if they are treated as indebtedness under
applicable local law and do not have any substantial equity features. The term
substantial equity features has no definition under the plan asset regulations.
In the absence of such a definition, we cannot assure you that the securities,
either when they are issued or at any later date, will have no substantial
equity features. The prospectus supplement for a particular offering of
securities may tell you whether we believe the securities should be treated as
debt for ERISA purposes.
To the extent that the securities do not constitute debt for purposes
of ERISA, they will constitute equity investments. In this case, an ERISA plan,
Keogh plan, IRA or related investment vehicle that acquires securities would
also acquire an undivided interest in each asset of the trust unless (1) the
trust is an operating company or a venture capital operating company as defined
in the plan asset regulations, (2) the securities are publicly offered
securities as defined in the plan asset regulations or (3) benefit plan
investors as defined in the plan asset regulations do not own 25% or more of the
securities or any other class of equity security issued by the trust. If the
securities may be treated as an equity investment under the plan asset
regulations, the prospectus supplement may tell you whether we believe any of
these exceptions will apply.
POSSIBLE EXEMPTIVE RELIEF
The United States Department of Labor has issued prohibited transaction
exemptions, which conditionally waive excise taxes and civil money penalties
that might otherwise apply to a type of transactions.
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CLASS EXEMPTIONS. The United States Department of Labor has issued
Prohibited Transaction Class Exemptions, or PTCEs, which provide exemptive
relief to parties to any transaction which satisfies the conditions of the
exemption. A partial listing of the PTCEs which may be available for investments
in securities follows. Each of these exemptions is available only if specified
conditions are satisfied and may provide relief for some, but not all, of the
prohibited transactions that a particular transaction may cause. The prospectus
supplement for a particular offering of securities may tell you whether the
securities themselves satisfy the conditions of these exemptions. You should
consult with your advisors regarding the specific scope, terms and conditions of
an exemption as it applies to you, as an investor, before relying on that
exemption's availability.
CLASS EXEMPTIONS FOR PURCHASES AND SALES OF SECURITIES. The following
exemptions may apply to a purchase or sale of securities between an ERISA plan,
a Keogh plan, an IRA or related investment vehicle, on the one hand, and a party
in interest or disqualified person, on the other hand:
o PTCE 84-14, which exempts certain transactions approved on behalf
of the plan by a qualified professional asset manager, or QPAM.
o PTCE 86-128, which exempts certain transactions between a plan
and certain broker-dealers.
o PTCE 90-1, which exempts certain transactions entered into by
insurance company pooled separate accounts in which plans have
made investments.
o PTCE 91-38, which exempts certain transactions entered into by
bank collective investment funds in which plans have made
investments.
o PTCE 96-23, which exempts certain transaction approved on behalf
of a plan by an in-house investment manager, or INHAM.
These exemptions do not expressly address prohibited transactions that
might result from transactions incidental to the operation of a trust. We cannot
assure you that a purchase or sale of securities in reliance on one of these
exemptions will not give rise to indirect, non-exempt prohibited transactions.
CLASS EXEMPTIONS FOR PURCHASES AND SALES OF SECURITIES AND TRANSACTIONS
INCIDENTAL TO THE OPERATION OF THE TRUST. The following exemptions may apply to
a purchase or sale of securities between an ERISA plan, a Keogh plan, an IRA or
related investment vehicle, on the one hand, and a party in interest or
disqualified person, on the other hand, and may also apply to prohibited
transactions that may result from transactions incident to the operation of the
trust:
o PTCE 95-60, which exempts certain transactions involving
insurance company general accounts.
o PTCE 83-1, which exempts certain transactions involving the
purchase of pass- through certificates in mortgage pool
investment trusts from, and the sale of such certificates to, the
pool sponsor, as well as transactions in connection with the
servicing and operation of the pool.
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ADMINISTRATIVE EXEMPTION FOR OFFERINGS MANAGED BY CERTAIN UNDERWRITERS.
The DOL has also issued exemptions to several underwriters of securities, for
specific offerings in which that underwriter or any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with that underwriter is an underwriter, placement agent or
a manager or co-manager of the underwriting syndicate or selling group where the
trust and the offered certificates meet specified conditions. This is called the
Underwriters' Exemption. An amendment to the Underwriters' Exemptions may be
found at 62 Fed. Reg. 39021 (July 21, 1997). The Underwriters' Exemptions, as
amended, provides a partial exemption for transactions involving certificates
representing a beneficial interest in a trust and entitling the holder to
pass-through payments of principal, interest and/or other payments with respect
to the trust's assets. When applicable, the Underwriters' Exemptions applies to
the initial purchase, holding and subsequent resale of certificates, and certain
transactions incidental to the servicing and operation of the assets of such a
trust.
In order for the Underwriters' Exemptions to be available to a purchase
of securities, the trust's assets must consist solely of certain types of
assets, including obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family residential and
commercial property (including certain obligations secured by leasehold
interests on commercial property); fractional undivided interests in any of
these obligations; property which had secured any of these obligations;
undistributed cash; rights under any insurance policies, third-party guarantees,
contracts of suretyship or other credit support arrangements with respect to any
of the these obligations; and a pre-funding account.
CONDITIONS FOR PRE-FUNDING ACCOUNTS. If the trust includes a
pre-funding account, the following conditions also apply:
o The ratio of the amount allocated to the pre-funding account to
the total principal amount of the securities being offered must
be less than or equal to 25%.
o All additional obligations transferred to the trust after the
closing date of the offering of securities must meet the same
terms and conditions of eligibility for inclusion in the trust as
the obligations placed in the trust at or prior to the closing
date, and these terms and conditions must have been approved by
Standard & Poor's Structured Rating Group, Moody's Investors
Service, Inc. or Fitch, Inc., called the Exemption Rating
Agencies. These terms and conditions may be changed if the
changes receive prior approval of either an Exemption Rating
Agency or a majority vote of outstanding certificateholders.
o After the transfer of additional obligations to the trust, the
securities must have a credit rating from one of the Exemption
Rating Agencies at least a high as the rating assigned at the
time of the initial issuance of the securities.
o The use of pre-funding does not, in and of itself, cause a
reduction of 100 basis points or more in the weighted average
annual percentage interest rate of all of the obligations
included in the trust between the time of initial issuance of the
securities and the end of the pre-funding period.
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o Either the characteristics of the obligations added to the trust
during the pre- funding period must be monitored by an
independent insurer or other independent credit support provider,
or an independent accountant must furnish a letter, prepared
using the same type of procedures as were applicable to the
obligations which were transferred to the trust as of the closing
date of the initial offering of securities, stating whether or
not the characteristics of the additional obligations conform to
the characteristics described in the prospectus or prospectus
supplement.
o The pre-funding period must end no later than three months, or 90
days if later, after the closing date of the initial issuance of
securities, or earlier in certain circumstances if the unused
balance in the pre-funding account falls below a specified
minimum level or an event of default occurs.
o Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in investments which are described in the pooling
and servicing agreement, are permitted by the Exemption Rating
Agencies rating the securities and have been rated, or the
obligor has been rated, in one of the three highest generic
rating categories by one of the Exemption Rating Agencies or else
are either direct obligations of, or obligations fully guaranteed
as to timely payment of principal and interest by, the United
States or any agency or instrumentality thereof, provided that
such obligations are backed by the full faith and credit of the
United States.
o The prospectus or prospectus supplement must describe the
duration of the pre- funding period.
o The trustee, or any agent with which the trustee contracts to
provide trust services, must be a substantial financial
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities and liabilities with
ERISA and the trustee, as legal owner of the assets of the trust,
must enforce all the rights created in favor of Securityholders
of the trust, including ERISA plans.
ADDITIONAL CONDITIONS FOR THE UNDERWRITERS' EXEMPTION. If the
requirements applicable to the trust and pre-funding account are met, the
Underwriters' Exemption will apply to a particular transaction only if the
transaction meets the following additional conditions:
o The acquisition of securities by an ERISA Plan, a Keogh Plan, an
IRA or a related investment vehicle is on terms, including price,
that are at least as favorable to the buyer as they would be in
an arm's-length transaction with an unrelated party.
o The rights and interests evidenced by the securities acquired by
the ERISA Plan, Keogh Plan, IRA or related investment vehicle are
not subordinated to the rights and interests evidenced by other
securities of the same trust.
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o The securities acquired by the ERISA Plan, Keogh Plan, IRA or
related investment vehicle have received a rating that is in one
of three highest generic rating categories from the Exemption
Rating Agencies.
o The trustee of the trust is not an affiliate of the trust
sponsor, any servicer, any underwriter, any insurer or any
obligor with respect to obligations or receivables constituting
more than 5% of the aggregate unamortized principal balance of
the assets in the trust, determined on the date of initial
issuance of securities, or any affiliate of any of these
entities.
o The sum of all payments made to and retained by the
underwriter(s) or selling agents must represent not more than
reasonable compensation for underwriting the securities; the sum
of all payments made to and retained by the sponsor pursuant to
the assignment of the assets to the trust must represent not more
than the fair market value of such obligations; and the sum of
all payments made to and retained by all servicers must represent
not more than reasonable compensation for such persons' services
and reimbursement of such person's reasonable expenses in
connection with such services.
o The investing ERISA plan, Keogh plan, IRA or related investment
vehicle must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities
Act of 1933, as amended.
LIMITS ON SCOPE OF THE UNDERWRITERS' EXEMPTIONS. The Underwriters'
Exemptions will not provide complete exemptive relief even where a trust
satisfies all of the conditions applicable to the trust and all of the general
conditions are met. It does not provide relief for the purchase of securities
from, or the sale of securities to, a party in interest or disqualified person
where the party in interest or disqualified person is a fiduciary of the
purchaser or seller in which the fiduciary receives consideration for its
personal account from any party other than the purchaser or the seller.
The Underwriters' Exemptions also will not provide exemptive relief for
the purchase and holding of securities by a fiduciary on behalf of a plan
sponsored by the trust's sponsor, the trustee, any insurer, any servicer, any
obligor with respect to obligations or receivables included in the trust
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the trust, determined on the date of initial issuance of the
securities, and any affiliate of any of these entities. The Underwriters'
Exemptions generally provides exemptive relief in other cases for the purchase
of securities from, or the sale of securities to, a party in interest or
disqualified person where the party in interest or disqualified person is a
fiduciary of the purchaser or seller and is also an obligor with respect to 5%
or less of the fair market value of obligations or receivables contained in the
trust or an affiliate only when the following additional conditions are met:
o The purchaser or seller is not an ERISA plan, an IRA or a Keogh
plan that is sponsored by an underwriter or selling agent, a
trust's sponsor, the trustee, any insurer, any servicer or any
obligor with respect to obligations or receivables included in
the trust constituting more than 5% of the aggregate unamortized
principal balance of the assets in the trust, determined on the
date of initial issuance of the securities, or any affiliate of
any of these entities.
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o Solely in the case of initial issuance of securities, at least
50% of each class of securities issued by the trust is acquired
by persons independent of the underwriters or selling agents, the
trust's sponsor, the trustee, any insurer, any servicer, any
obligor with respect to obligations or receivables included in
the trust constituting more than 5% of the aggregate unamortized
principal balance of the assets in the trust, determined on the
date of initial issuance of the securities, and any affiliate of
any of these entities.
o The purchaser's investment in each class of securities issued by
the trust does not exceed 25% of all of the securities in such
class outstanding at the time of the issuance.
o Immediately after the acquisition, no more than 25% of the
purchaser's assets are invested in securities issued by trusts
containing assets sold or serviced by an entity that has
discretionary authority over the purchaser or renders investment
advice to the purchaser for a fee.
The Underwriters' Exemptions provide relief for transactions in
connection with the servicing, operation and management of a trust only if:
o The transactions are carried out in accordance with the terms of
a binding pooling and servicing agreement.
o The pooling and servicing agreement is provided to, or fully
described in the prospectus or offering memorandum provided to,
investing ERISA plans, Keogh plans, IRAs and related investment
vehicles before they purchase securities issued by the trust.
STATUTORY EXEMPTION FOR INSURANCE COMPANY GENERAL ACCOUNTS. In addition
to the PTCEs and the Underwriters' Exemptions, a temporary statutory exemption
may be available if you are investing on behalf of an insurance company general
account that includes plan assets. This exemption appears in section 401(c) of
ERISA. Section 401(c) of ERISA requires the United States Department of Labor to
issue regulations defining when an insurance company general account will be
deemed to include plan assets and, hence, be subject to the ERISA prohibited
transaction rules. Generally, until 18 months after the issuance of such
regulations, no person will be subject to liability for prohibited transactions
that result from the inclusion of plan assets in an insurance company general
account. If you are investing on behalf of an insurance company general account,
section 401(c) generally provides an exemption for your purchases and sales of
securities, as well as prohibited transactions resulting from transactions
incident to the operation of the trust, until 18 months after the issuance of
regulations. This will be the case as long as you have not acted to avoid the
regulations or committed a breach of fiduciary responsibilities which would also
constitute a violation of federal or state criminal law. If you are investing on
behalf of an insurance company general account, we cannot assure that the
purchase or sale of securities, the continued holding of securities previously
purchased, or transactions incidental to the operation of the trust, more than
18 months after the issuance of final regulations would qualify for further
statutory exemptive relief.
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CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with
respect to any particular Plan that acquires the securities or, even if all the
conditions specified therein were satisfied, that any such exemption would apply
to transactions involving the trust fund. Prospective Plan investors should
consult with their legal counsel concerning the impact of ERISA and the Code and
the potential consequences to their specific circumstances prior to making an
investment in the securities. Neither the Depositor, the Trustee, the Servicer
nor any of their respective affiliates will make any representation to the
effect that the securities satisfy all legal requirements with respect to the
investment therein by Plans generally or any particular Plan or to the effect
that the securities are an appropriate investment for Plans generally or any
particular Plan.
GOVERNMENT PLANS
Government plans are generally not subject to the fiduciary
standards of ERISA or the prohibited transaction rules of ERISA or the Code.
However, many states have enacted laws which established standards of fiduciary
conduct, legal investment rules, or other requirements for investment
transactions involving the assets of government plans. If you are considering
investing in securities on behalf of a government plan, you should consult with
your advisors regarding the requirements of applicable state law.
REQUIRED DEEMED REPRESENTATIONS OF INVESTORS
If so provided in the prospectus supplement for a series, a purchaser
of the one or more classes of the related securities may be required to
represent or may be deemed to have represented that either (a) it is not an
ERISA Plan, an IRA or a Keogh Plan and is not purchasing such securities by or
on behalf of or with plan assets of an ERISA Plan, an IRA or a Keogh Plan or (b)
the purchase of any such securities by or on behalf of or with plan assets of an
ERISA Plan, an IRA or a Keogh Plan is permissible under applicable law, will not
result in any non-exempt prohibited transaction under ERISA or Section 4975 of
the Code and will not subject the Servicer, the Depositor or the Trustee to any
obligation in addition to those undertaken in the related Agreement. A fiduciary
of a Plan or any person investing plan assets to purchase securities must make
its own determination that the conditions for purchase will be satisfied with
respect to such securities.
THIS DISCUSSION IS A GENERAL DISCUSSION OF SOME OF THE RULES WHICH
APPLY TO ERISA PLANS, KEOGH PLANS, IRAS, GOVERNMENT PLANS AND THEIR RELATED
INVESTMENT VEHICLES. PRIOR TO MAKING AN INVESTMENT IN SECURITIES, PROSPECTIVE
PLAN INVESTORS SHOULD CONSULT WITH THEIR LEGAL AND OTHER ADVISORS CONCERNING THE
IMPACT OF ERISA AND THE CODE AND, PARTICULARLY IN THE CASE OF GOVERNMENT PLANS
AND RELATED INVESTMENT VEHICLES, ANY ADDITIONAL STATE LAW CONSIDERATIONS, AND
THE POTENTIAL CONSEQUENCES IN THEIR SPECIFIC CIRCUMSTANCES.
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LEGAL INVESTMENT
The prospectus supplement for each series of securities will specify
which classes of securities of the series, if any, will constitute mortgage
related securities for purposes of the Secondary Mortgage Market Enhancement Act
of 1984. Any class of securities that is not rated in one of the two highest
rating categories by one or more nationally recognized statistical rating
agencies or that represents an interest in a trust fund that includes junior
mortgage loans will not constitute mortgage related securities for purposes of
SMMEA Mortgage related securities are legal investments to the same extent that,
under applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities, including depository
institutions, insurance companies and pension funds created pursuant to or
existing under the laws of the United States or of any state, the authorized
investments of which are subject to state regulation. Under SMMEA, if a state
enacted legislation prior to October 3, 1991 specifically limiting the legal
investment authority of any entities with respect to mortgage related
securities, the securities would constitute legal investments for entities
subject to that legislation only to the extent provided in that legislation.
SMMEA provides, however, that in no event will the enactment of any legislation
of this kind affect the validity of any contractual commitment to purchase, hold
or invest in mortgage related securities, or require the sale or other
disposition of such securities, so long as that contractual commitment was made
or the securities were acquired prior to the enactment of that 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
with mortgage related securities without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in those
securities, and national banks may purchase those securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to
regulations as the applicable federal regulatory authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination
Council issued a revised supervisory policy statement applicable to all
depository institutions, setting forth guidelines for investments in high-risk
mortgage securities. The 1998 policy statement has been adopted by the Federal
Reserve Board, the Office of the Comptroller of the Currency, the FDIC, the
National Credit Union Administration and the Office of Thrift Supervision with
an effective date of May 26, 1998. The 1998 policy statement rescinds a 1992
policy statement that had required, prior to purchase, a depository institution
to determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and, if so, that the proposed acquisition would reduce
the institution's overall interest rate risk. The 1998 policy statement
eliminates former constraints on investing in certain high-risk mortgage
derivative products and substitutes broader guidelines for evaluating and
monitoring investment risk.
On December 1, 1998, the Office of Thrift Supervision issued Thrift
Bulletin 13a, entitled, "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities", which is applicable to thrift
institutions regulated by the OTS. Thrift Bulletin 13a has an effective date of
December 1, 1998. One of the primary purposes of Thrift Bulletin 13a is to
require thrift institutions, prior to taking any investment position, to (1)
conduct a pre-purchase portfolio
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sensitivity analysis for any significant transaction involving securities or
financial derivatives and (2) conduct a pre-purchase price sensitivity analysis
of any complex security or financial derivative. For the purposes of Thrift
Bulletin 13a, complex security includes among other things any collateralized
mortgage obligation or REMIC security, other than any plain vanilla mortgage
pass-through security, that is, securities that are part of a single class of
securities in the related pool, that are non-callable and do not have any
special features. Accordingly, the offered securities may be viewed as complex
securities. The OTS recommends that while a thrift institution should conduct
its own in-house pre- acquisition analysis, it may rely on an analysis conducted
by an independent third-party as long as management understands the analysis and
its key assumptions. Further, Thrift Bulletin 13a recommends that the use of
complex securities with high price sensitivity be limited to transactions and
strategies that lower a thrift institution's portfolio interest rate risk.
Thrift Bulletin 13a warns that an investment in complex securities by thrift
institutions that do not have adequate risk measurement, monitoring and control
systems may be viewed by the OTS examiners as an unsafe and unsound practice.
Prospective investors in the securities, including in particular the
classes of securities that do not constitute mortgage related securities for
purposes of SMMEA should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets. INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS IN DETERMINING WHETHER
AND TO WHAT EXTENT THE SECURITIES CONSTITUTE LEGAL INVESTMENTS FOR THOSE
INVESTORS OR ARE SUBJECT TO INVESTMENT, CAPITAL OR OTHER RESTRICTIONS, AND, IF
APPLICABLE, WHETHER SMMEA HAS BEEN OVERRIDDEN IN ANY JURISDICTION RELEVANT TO
THAT INVESTOR.
METHODS OF DISTRIBUTION
The securities offered hereby and by the related prospectus supplements
will be offered in series through one or more of the methods described in the
paragraph below. The prospectus supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the depositor from the sale.
The depositor intends that securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the securities of
a particular series may be made through a combination of two or more of these
methods. These methods are as follows:
1. By negotiated firm commitment or best efforts underwriting
and public re-offering by underwriters;
2. By placements by the depositor with institutional investors
through dealers; and
3. By direct placements by the depositor with institutional
investors.
If underwriters are used in a sale of any securities, other than in
connection with an underwriting on a best efforts basis, the securities will be
acquired by the underwriters for their own
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account and may be resold from time to time in one or more transactions,
including negotiated transactions, at fixed public offering prices or at varying
prices to be determined at the time of sale or at the time of commitment
therefor. The underwriters may be broker-dealers affiliated with the depositor
whose identities and relationships to the depositor will be as set forth in the
related prospectus supplement. The managing underwriter or underwriters with
respect to the offer and sale of the securities of a particular series will be
set forth on the cover of the prospectus supplement relating to the series and
the members of the underwriting syndicate, if any, will be named in the
prospectus supplement.
In connection with the sale of the securities offered, underwriters may
receive compensation from the depositor or from purchasers of such securities in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the securities may be deemed to be
underwriters in connection with the securities, and any discounts or commissions
received by them from the depositor and any profit on the resale of offered
securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the
sale of offered securities of any series will provide that the obligations of
the underwriters will be subject to conditions precedent, that the underwriters
will be obligated to purchase all the securities if any are purchased, other
than in connection with an underwriting on a best efforts basis, and that, in
limited circumstances, the depositor will indemnify the several underwriters and
the underwriters will indemnify the depositor against certain civil liabilities,
including liabilities under the Securities Act of 1933 or will contribute to
payments required to be made in respect thereof.
The prospectus supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of the
offering and any agreements to be entered into between the depositor and
purchasers of offered securities of the series.
The depositor anticipates that the securities offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of offered securities, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be underwriters
within the meaning of the Securities Act of 1933 in connection with reoffers and
sales by them of the offered securities. Holders of offered securities should
consult with their legal advisors in this regard prior to any reoffer or sale.
LEGAL MATTERS
Certain legal matters in connection with the securities will be passed
upon for the depositor by Thacher Proffitt & Wood, New York, New York.
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FINANCIAL INFORMATION
The depositor has determined that its financial statements are not
material to the offering made hereby. Any prospective purchaser that desires to
review financial information concerning the depositor will be provided by the
depositor on request with a copy of the most recent financial statements of the
depositor.
RATING
It is a condition to the issuance of any class of securities that they
shall have been rated not lower than investment grade, that is, in one of the
four highest rating categories, by at least one nationally recognized
statistical rating organization.
Any ratings on the securities address the likelihood of receipt by the
holders thereof of all collections on the underlying mortgage assets to which
such holders are entitled. These ratings address the structural, legal and
issuer-related aspects associated with the securities, the nature of the
underlying mortgage assets and the credit quality of the guarantor, if any. The
ratings do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which prepayments might differ from
those originally anticipated. As a result, securityholders might suffer a lower
than anticipated yield, and, in addition, holders of Strip Securities in extreme
cases might fail to recoup their initial investments.
AVAILABLE INFORMATION
The depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission. Reports and other
information filed by the depositor can be inspected and copied at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and its Regional
Offices located as follows: Chicago Regional Office, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of this material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's Web site (http:\\www.sec.gov). The depositor does not intend to
send any financial reports to securityholders.
This prospectus does not contain all of the information set forth in
the registration statement, of which this prospectus forms a part, and exhibits
thereto which the depositor has filed with the Commission under the securities
Act of 1933 and to which reference is hereby made.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated into this prospectus by reference all documents
and reports filed or caused to be filed by the depositor with respect to a trust
fund under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, prior to the termination of the offering of securities offered hereby
evidencing interest in a trust fund. The depositor will provide or cause to be
provided without charge to each person to whom this prospectus is delivered in
connection with the offering
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of one or more classes of securities offered hereby, a copy of any or all
documents or reports incorporated herein by reference, in each case to the
extent those documents or reports relate to one or more of the classes of those
offered securities, other than the exhibits to those documents (unless the
exhibits are specifically incorporated by reference in the documents). Requests
to the depositor should be directed in writing to its principal executive office
at 1100 Town & Country Road, Orange, California 92868, Attention: Secretary, or
by telephone at (714) 541-5378. The depositor has determined that its financial
statements are not material to the offering of any securities offered hereby.
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GLOSSARY
ACCRUAL SECURITIES: A class of securities as to which accrued interest or a
portion thereof will not be distributed but rather will be added to the
principal balance of the security on each distribution date in the manner
described in the related prospectus supplement.
APPLICABLE FEDERAL RATE: A rate based on the average of current yields on
Treasury securities, which rate is computed and published monthly by the IRS.
ARM LOAN: A mortgage loan with an interest rate that adjusts periodically, with
a corresponding adjustment in the amount of the monthly payment, to equal the
sum of a fixed percentage amount and an index.
CALL CLASS: The holder of a non-offered class of securities that has the right,
at its discretion, to terminate the related trust fund on and effect early
retirement of the securities of such series in the manner described under
"Description of the Securities--Termination" in this prospectus.
CERCLA: The Comprehensive Environmental Response, Compensation and Liability
Act, as amended.
CLEAN-UP CALL: The right of the party entitled to effect a termination of a
trust fund upon the aggregate principal balance of the outstanding trust fund
assets for the series at that time being less than the percentage, as specified
in the related prospectus supplement, of the aggregate principal balance of the
trust fund assets at the cut-off date for that series and which percentage will
be between 25% and 0%.
CLOSING DATE: With respect to any series of securities, the date on which the
securities are issued.
CODE: The Internal Revenue Code of 1986, as amended.
COMMISSION: The Securities and Exchange Commission.
CPR: The Constant Prepayment Rate model, which assumes that the outstanding
principal balance of a pool of mortgage loans prepays at a specified constant
annual rate. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate.
CRIME CONTROL ACT: The Comprehensive Crime Control Act of 1984.
DIDMC: The Depository Institutions Deregulation and Monetary Control Act of
1980.
DOL: The U.S. Department of Labor.
DOL REGULATIONS: The regulations promulgated by the U.S. Department of Labor at
29 C.F.R. ss.2510. 3-101
DUE PERIOD: The second day of the month immediately preceding the month in which
the distribution date occurs, or the day after the cut-off date in the case of
the first Due Period, and
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ending on the first day of the month of the related distribution date, unless
the prospectus supplement specifies otherwise.
EQUITY CERTIFICATES: Where the issuer is an owner trust, the certificates
evidencing ownership of the trust fund.
ERISA PERMITTED INVESTMENTS: The types of investments permitted by the rating
agencies named in the Underwriter's Exemption issued by the DOL in which funds
in a pre-funding account may be invested.
FASIT: A financial asset securitization investment trust as defined in Sections
860H through 860L of the Code.
FASIT PROVISIONS: Sections 860H through 860L of the Code.
FASIT SECURITIES: Securities evidencing interests in a trust fund as to which a
FASIT election has been made.
FTC RULE: The "Holder in the Due Course" Rule of the Federal Trade Commission.
GARN-ST. GERMAIN ACT: The Garn-St. Germain Depositor Institutions Act of 1982.
GRANTOR TRUST CERTIFICATE: A certificate representing an interest in a Grantor
Trust Fund.
GRANTOR TRUST FRACTIONAL CERTIFICATE: A Grantor Trust Certificate representing
an undivided equitable ownership interest in the principal of the mortgage loans
constituting the related Grantor Trust Fund, together with interest on the
Grantor Trust Certificates at a pass-through rate.
GRANTOR TRUST STRIP CERTIFICATE: A certificate representing ownership of all or
a portion of the difference between interest paid on the mortgage loans
constituting the related Grantor Trust Fund (net of normal administration fees
and any retained interest of the depositor) and interest paid to the holders of
Grantor Trust Fractional Interest Certificates issued with respect to the
Grantor Trust Fund. A Grantor Trust Strip Certificate may also evidence a
nominal ownership interest in the principal of the mortgage loans constituting
the related Grantor Trust Fund.
GRANTOR TRUST FUND: A trust fund as to which no REMIC election will be made and
which qualifies as a grantor trust within the meaning of Subpart E, part I,
subchapter J of Chapter 1 of the Code.
HIGH COST LOAN: A mortgage loan subject to the Home Ownership and Equity
Protection Act of 1994.
HIGH LTV LOAN: Mortgage loans with loan-to-value ratios in excess of 80% and as
high as 150% and which are not insured by a primary insurance policy.
HOMEOWNERSHIP ACT: The Home Ownership and Equity Protection Act of 1994.
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INSURANCE PROCEEDS: Proceeds received with respect to a mortgage loan under any
hazard insurance policy, special insurance policy, primary insurance policy, FHA
insurance policy, VA guarantee, bankruptcy bond or mortgage pool insurance
policy, to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with normal servicing
procedures.
LIQUIDATED LOAN: A defaulted mortgage loan that is finally liquidated, through
foreclosure sale or otherwise.
LIQUIDATION PROCEEDS: All amounts, other than Insurance Proceeds, received and
retained in connection with the liquidation of a defaulted mortgage loan, by
foreclosure or otherwise.
LOCKOUT DATE: The date of expiration of the Lockout Period with respect to a
mortgage loan.
LOCKOUT PERIOD: The period specified in a mortgage note during which prepayment
of the mortgage loan is prohibited.
MORTGAGE: The mortgage, deed of trust or similar instrument securing a mortgage
loan.
NBRC: The National Bankruptcy Review Commission.
NCUA: The National Credit Union Administration.
NONRECOVERABLE ADVANCE: An advance made or to be made with respect to a mortgage
loan which the master servicer determines is not ultimately recoverable from
Related Proceeds.
OID REGULATIONS: The rules governing original issue discount that are set forth
in Sections 1271-1273 and 1275 of the Code and in the related Treasury
regulations.
PARTNERSHIP CERTIFICATE: A certificate representing an interest in a Partnership
Trust Fund.
PARTNERSHIP TRUST FUND: A trust fund as to which no REMIC election will be made
and which qualifies as a partnership within the meaning of subchapter K of
Chapter 1 of the Code.
PLANS: Employee pension and welfare benefit plans subject to ERISA and
tax-qualified retirement plans described in Section 401(a) of the Code or
Individual Retirement Accounts described in Section 408 of the Code.
PREPAYMENT ASSUMPTION: With respect to a REMIC Regular Certificate or a Grantor
Trust Certificate, the assumption as to the rate of prepayments of the principal
balances of mortgage loans held by the trust fund used in pricing the initial
offering of that security.
PREPAYMENT PERIOD: The calendar month immediately preceding the month in which
the distribution date occurs, unless the prospectus supplement specifies
otherwise.
PTCE: Prohibited Transaction Class Exemption
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PURCHASE PRICE: As to any mortgage loan, an amount equal to the sum of (1) the
unpaid principal balance of the mortgage loan, (2) unpaid accrued interest on
the Stated Principal Balance at the rate at which interest accrues on the
mortgage loan, net of the servicing fee and any retained interest, from the date
as to which interest was last paid to the calendar month in which the relevant
purchase is to occur, (3) any unpaid servicing fees and unreimbursed servicing
expenses payable or reimbursable to the master servicer with respect to that
mortgage loan, (4) any unpaid retained interest with respect to that mortgage
loan, (5) any realized losses incurred with respect to that mortgage loan and
(6) if applicable, any expenses reasonably incurred or to be incurred by the
master servicer or the trustee in respect of the breach or defect giving rise to
a purchase obligation.
RECORD DATE: The last business day of the month preceding the month in which a
distribution date occurs, unless the prospectus supplement specifies otherwise.
RELATED PROCEEDS: Recoveries on a mortgage loan related to amounts which the
master servicer has previously advanced to the related trust fund.
RELIEF ACT: The Soldiers' and Sailors' Civil Relief Act of 1940.
REMIC: A real estate mortgage investment conduit as defined in Sections 860A
through 860G of the Code.
REMIC CERTIFICATES: Certificates evidencing interests in a trust fund as to
which a REMIC election has been made.
REMIC PROVISIONS: Sections 860A through 860G of the Code.
----------------
REMIC REGULAR CERTIFICATE: A REMIC Certificate designated as a regular interest
in the related REMIC.
REMIC RESIDUAL CERTIFICATE: A REMIC Certificate designated as a residual
interest in the related REMIC.
REMIC REGULATIONS: The REMIC Provisions and the related Treasury regulations.
RETAINED INTEREST: A portion of the interest payments on a trust fund asset that
may be retained by the depositor or any previous owner of the asset.
RICO: The Racketeer Influenced and Corrupt Organizations statute.
SAIF: The Savings Association Insurance Fund.
SCHEDULED PRINCIPAL BALANCE: As to any mortgage loan or manufactured housing
contract, the unpaid principal balance thereof as of the date of determination,
reduced by the principal portion of all monthly payments due but unpaid as of
the date of determination.
SENIOR/SUBORDINATE SERIES: A series of securities of which one or more classes
is senior in right of payment to one or more other classes to the extent
described in the related prospectus supplement.
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SINGLE FAMILY PROPERTIES: One- to four-family residential properties including
detached and attached dwellings, townhouses, rowhouses, individual condominium
units, individual units in planned-unit developments and individual units in de
minimus planned-unit developments.
SPECIAL HAZARD SUBORDINATION AMOUNT: The amount of any Special Hazard Realized
Loss that is allocated to the subordinate securities of a series.
STATED PRINCIPAL BALANCE: As to any mortgage loan or manufactured housing
contract, the principal balance of the mortgage loan or manufactured housing
contract as of the cut-off date, after application of all scheduled principal
payments due on or before the cut-off date, whether or not received, reduced by
all amounts, including advances by the master servicer, allocable to principal
that are distributed to securityholders on or before the date of determination,
and as further reduced to the extent that any realized loss thereon has been, or
had it not been covered by a form of credit support, would have been, allocated
to one or more classes of securities on or before the determination date.
STRIP SECURITIES: A class of securities which are entitled to (a) principal
distributions, with disproportionate, nominal or no interest distributions, or
(b) interest distributions, with disproportionate, nominal or no principal
distributions.
STRIPPED INTEREST: The distributions of interest on a Strip Security with no or
a nominal principal balance.
UNITED STATES PERSON: A citizen or resident of the United States; a corporation
or partnership, including an entity treated as a corporation or partnership for
federal income tax purposes, created or organized in, or under the laws of, the
United States or any state thereof or the District of Columbia, except, in the
case of a partnership, to the extent provided in Treasury regulations; an estate
whose income is subject to United States federal income tax regardless of its
source; or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust. To the extent prescribed in regulations by the Secretary of the Treasury,
which have not yet been issued, a trust which was in existence on August 20,
1996, other than a trust treated as owned by the grantor under subpart E of part
I of subchapter J of chapter 1 of the Code, and which was treated as a United
States person on August 20, 1996 may elect to continue to be treated as a United
States person notwithstanding the previous sentence.
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$980,000,000 (APPROXIMATE)
LONG BEACH MORTGAGE LOAN TRUST 2000-1
LONG BEACH SECURITIES CORP.
DEPOSITOR
SELLER AND MASTER SERVICER
ASSET-BACKED CERTIFICATES, SERIES 2000-1
--------------------
PROSPECTUS SUPPLEMENT
--------------------
DEUTSCHE BANC ALEX. BROWN
BANC OF AMERICA SECURITIES LLC CHASE SECURITIES INC.
CREDIT SUISSE FIRST BOSTON GREENWICH CAPITAL MARKETS, INC.
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 Asset-Backed Certificates, Series 2000-1 in any state
where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Asset-Backed Certificates, Series 2000-1 and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
Asset-Backed Certificates, Series 2000-1 will be required to deliver a
prospectus supplement and prospectus for ninety days following the date of this
prospectus supplement.
December 12, 2000
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