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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 001-11914
THORNBURG MORTGAGE ASSET CORPORATION
(Exact name of Registrant as specified in its Charter)
MARYLAND 85-0404134
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
119 E. MARCY STREET
SANTA FE, NEW MEXICO 87501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (505) 989-1900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
- ---------------------------------------- --------------------------------------
Common Stock ($.01 par value) New York Stock Exchange
Series A 9.68% Cumulative Convertible
Preferred Stock ($.01 par value) New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 9, 1999, the aggregate market value of the voting stock held by
non-affiliates was $199,887,825, based on the closing price of the common stock
on the New York Stock Exchange.
Number of shares of Common Stock outstanding at March 9 , 1999: 21,489,663
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement dated March 29,
1999, issued in connection with the Annual Meeting of Shareholders of the
Registrant to be held on April 29, 1999, are incorporated by reference into
Parts I and III.
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THORNBURG MORTGAGE ASSET CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
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ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . 17
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS. . . . . . . . . . . 18
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . 20
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISKS . . . . . . . . . . . . . . . . . 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . 39
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . 39
ITEM 11.EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . 39
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . 39
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . 39
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . 40
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . F-1
SIGNATURES
EXHIBIT INDEX
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PART I
ITEM 1. BUSINESS
GENERAL
Thornburg Mortgage Asset Corporation and subsidiaries (the "Company") is a
mortgage acquisition company that primarily invests in adjustable-rate mortgage
("ARM") assets comprised of ARM securities and ARM loans, thereby indirectly
providing capital to the single family residential housing market. In 1998, the
Company began investing in hybrid ARM assets ("Hybrid ARMs") which are included
in the Company's references to ARM securities and ARM loans. Hybrid ARMs have a
fixed rate of interest for an initial period, generally 3 to 5 years, and then
convert to an adjustable-rate for the balance of the term of the Hybrid ARM and
are funded with long-term debt obligations such that the debt obligations mature
within one year of the first interest rate reset date of the Hybrid ARMs. ARM
securities represent interests in pools of ARM loans, which often include
guarantees or other credit enhancements against losses from loan defaults.
While the Company is not a bank or savings and loan, its business purpose,
strategy, method of operation and risk profile are best understood in comparison
to such institutions. The Company leverages its equity capital using borrowed
funds, invests in ARM assets and seeks to generate income based on the
difference between the yield on its ARM assets portfolio and the cost of its
borrowings. The corporate structure of the Company differs from most lending
institutions in that the Company is organized for tax purposes as a real estate
investment trust ("REIT") and therefore generally passes through substantially
all of its earnings to shareholders without paying federal or state income tax
at the corporate level. See "Federal Income Tax Considerations -- Requirements
for Qualification as a REIT". During 1998, in connection with the Company's
issuance of $1.1 billion of callable AAA notes, the Company formed two REIT
qualified subsidiaries. These subsidiaries are consolidated in the Company's
financial statements and federal and state tax returns.
OPERATING POLICIES AND STRATEGIES
Investment Strategies
The Company's investment strategy is to purchase ARM securities and ARM loans
originated and serviced by other mortgage lending institutions. Increasingly,
mortgage lending is being conducted by mortgage lenders who specialize in the
origination and servicing of mortgage loans and then sell these loans to other
mortgage investment institutions, such as the Company. The Company believes it
has a competitive advantage in the acquisition and investment of these mortgage
securities and mortgage loans because of the low cost of its operations relative
to traditional mortgage investors like banks and savings and loans. Like
traditional financial institutions, the Company seeks to generate income for
distribution to its shareholders primarily from the difference between the
interest income on its ARM assets and the financing costs associated with
carrying its ARM assets.
The Company purchases ARM assets from broker-dealers and financial institutions
that regularly make markets in these assets. The Company also purchases ARM
assets from other mortgage suppliers, including mortgage bankers, banks, savings
and loans, investment banking firms, home builders and other firms involved in
originating, packaging and selling mortgage loans.
The Company's mortgage assets portfolio may consist of either agency or
privately issued securities (generally publicly registered) mortgage
pass-through securities, multiclass pass-through securities, collateralized
mortgage obligations ("CMOs"), collateralized bond obligations ("CBOs"),
generally backed by high quality mortgage backed securities, ARM loans, Hybrid
ARMs or short-term investments that either mature within one year or have an
interest rate that reprices within one year. The Company will not invest more
than 30% of its ARM assets in Hybrid ARMs and will limit its interest rate
repricing mismatch (the difference between the remaining fixed-rate period of a
Hybrid ARM and the maturity of the fixed-rate liability funding a Hybrid ARM) to
no more than one year.
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The Company's investment policy is to invest at least 70% of total assets in
High Quality adjustable and variable rate mortgage securities and short-term
investments. High Quality means:
(1) securities that are unrated but are guaranteed by the U.S. Government or
issued or guaranteed by an agency of the U.S. Government;
(2) securities which are rated within one of the two highest rating
categories by at least one of either Standard & Poor's or Moody's Investors
Service, Inc. (the "Rating Agencies"); or
(3) securities that are unrated or whose ratings have not been updated but
are determined to be of comparable quality (by the rating standards of at least
one of the Rating Agencies) to a High Quality rated mortgage security, as
determined by the Manager (as defined below) and approved by the Company's Board
of Directors; or
(4) the portion of ARM or hybrid loans that have been deposited into a trust
and have received a credit rating of AA or better from at least one Rating
Agency.
The remainder of the Company's ARM portfolio, comprising not more than 30% of
total assets, may consist of Other Investment assets, which may include:
(1) adjustable or variable rate pass-through certificates, multi-class
pass-through certificates or CMOs backed by loans on single-family,
multi-family, commercial or other real estate-related properties so long as they
are rated at least Investment Grade at the time of purchase. "Investment
Grade" generally means a security rating of BBB or Baa or better by at least one
of the Rating Agencies;
(2) ARM loans secured by first liens on single-family residential
properties, generally underwritten to "A" quality standards, and acquired for
the purpose of future securitization (see description of "A" quality in
"Portfolio of Mortgage Assets - ARM and Hybrid ARM Loans"); or
(3) a limited amount, currently $70 million as authorized by the Board of
Directors, of less than investment grade classes of ARM securities that are
created as a result of the Company's loan acquisition and securitization
efforts.
Since inception, the Company has generally invested less than 15%, currently
approximately 4%, of its total assets in Other Investment assets, excluding
loans held for securitization. Despite the generally higher yield, the Company
does not expect to significantly increase its investment in Other Investment
securities. This is primarily due to the difficulty of financing such assets at
reasonable financing terms and values through all economic cycles. Since the
Company has never had a large investment in Other Investment securities and
believes it has always been very selective and cautious regarding these
investments, this adjustment to the Company's investment strategy is not
expected to have a material impact on the Company's operating results.
The Company does not invest in REMIC residuals or other CMO residuals and,
therefore does not create excess inclusion income or unrelated business taxable
income for tax exempt investors. Therefore, the Company is a mortgage REIT
eligible for purchase by tax exempt investors, such as pension plans, profit
sharing plans, 401(k) plans, Keogh plans and Individual Retirement Accounts
("IRAs").
Acquisition of ARM and Hybrid ARM Loans
The Company acquires existing pools of ARM loans and intends to begin acquiring
individual loans directly from loan originators for future securitization.
Acquiring ARM loans for future securitization is expected to benefit the Company
by providing: (i) greater control over the types of ARM loans originated; (ii)
the ability to acquire ARM loans at lower prices so that the amount of the
premium to be amortized will be reduced in the event of prepayment; (iii)
additional sources of new whole-pool ARM assets; and (iv) potentially higher
yielding investments in its portfolio.
The Company acquires residential ARM and Hybrid ARM whole loans utilizing two
processes which the Company calls the Bulk Acquisition Method ("Bulk Method")
and the Flow Acquisition Method ("Flow Method"). The Bulk Method, which the
Company began utilizing in 1997, involves a number of the Company's established
relationships with mortgage originators, or mortgage aggregators, who sell the
Company pools of whole loans at market prices, with the servicing rights,
generally, remaining with the originator or seller. In cases where the Company
buys the servicing rights along with the loans, the Company contracts with a
qualified loan servicer to perform the loan servicing function for a fee. In
this Bulk Method, the loans are originated using the seller's loan products and
programs, and the credit review of the borrower and the appraisal of the
property and the quality control procedures are performed by the originators.
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The Company only considers the purchase of loans when all of the borrowers have
had their incomes verified, their credit checked, their assets verified and
appraisals of the properties have been obtained. The Company then obtains an
independent underwriter's review, performed by a third party for the benefit of
the Company, which entails a review of the processes and closing method used by
the originators in verifying the borrower credit as well as a review of the
property valuation. In addition, the Company will, at the request of the third
party credit review providers, utilize its own personnel to re-review some of
the individual loans in order to insure the highest possible loan quality. The
Company generally selects loans for underwriting review based upon specific
criteria such as property location, loan size, effective loan-to-value ratios,
borrowers' credit scoring and other criteria the Company believes to be
important indicators of credit risk. Additionally, prior to the purchase of
loans, the Company obtains representations and warranties from each seller
stating that each loan meets the Company's underwriting standards and other
requirements. The breach of such representations and warranties in regards to a
loan can result in the seller having an obligation to repurchase the loan.
In the Flow Method, which the Company will begin utilizing in the first half of
1999, the Company acquires mortgage loans using the Company's specific loan
programs and underwriting criteria. This means that the originator/seller
originates the individual loans using the Company's established credit and
program guidelines. All program participants, (originators/sellers), are
screened by the Company as to their financial strength as well as to their own
established in-house mortgage procedures. The credit of each borrower and the
value of each property is underwritten by the originators and are subject to the
quality control procedures of the originators. This is the same process used by
originators/sellers in the Bulk Method except that all of the credit and
appraisal guidelines have been developed and designed by the Company to meet the
Company's own credit criteria and portfolio requirements. All of the loans are
then subjected to further credit review by mortgage insurance companies that
also use the Company's guidelines to insure product quality and compliance to
the Company's guidelines. The three mortgage insurance companies chosen by the
Company to perform this function use a two-step loan approval process. After
the credit review and quality control review are performed by the
originator/seller, but prior to the purchase of the loans by the Company, all of
the loans are placed through an automated underwriting system created by the
Federal National Mortgage Association ("Fannie Mae") called "Desktop
Underwriter." This is the same system used by Fannie Mae in connection with
all of their own loan purchases. Secondly, all loans that pass the Desktop
Underwriter test are then screened by the mortgage insurance company personnel
as to their compliance to the Company's guidelines. A select number of these
loans are then subjected to an additional quality control procedure performed by
a third party. Additionally, all of the loans acquired through the Flow Method
are assigned a "Risk Evaluation Score" or "Mortgage Score" by each of the
mortgage insurance companies. The risk score evaluates not only the borrower's
credit but also the geographic location of the property, the economic viability
of the area, the general market conditions and the loan product chosen by the
borrower. The Company believes that obtaining risk scores will help in reducing
the Company's securitization costs by insuring that the Company purchases the
highest quality mortgage loans with the lowest risk possible. As in the Bulk
Method, mortgage loans acquired through the Flow Method are acquired, generally,
with the servicing rights remaining with the originator/seller. As with the
Bulk Method, in cases where the Company buys the servicing rights along with the
loans, the Company contracts with a qualified loan servicer to perform the loan
servicing function for a fee. The Company obtains representations and
warranties from each seller or program participant stating that each loan meets
the Company's underwriting standards and other requirements. As in the Bulk
Method, the breach of such representations and warranties in regards to a loan
can result in the seller having an obligation to repurchase the loan.
In both methods the Company uses its in-house staff as well as third party due
diligence providers to verify the credit quality of the borrowers as well as the
soundness of the mortgage collateral securing the individual loans. As added
security, the Company uses the services of a third party document custodian to
insure the quality and accuracy of all individual mortgage loan documents which
are then held in safekeeping with the third-party document custodian. As a
result, all of the original individual loan documents that are signed by the
borrower, other than the original credit verification documents, are examined
and verified by the custodian.
Securitization of ARM and Hybrid ARM Loans
The Company acquires ARM and Hybrid ARM loans for its portfolio with the
intention of securitizing them in such a way as to maximize the amount of high
quality assets that can be created from an accumulation of the ARM and Hybrid
ARM loans. In order to facilitate the securitization of its loans, the Company
intends to create and retain a subordinate interest in the loans, to provide a
limited amount of credit enhancement, and then to purchase an insurance policy
from a third party financial guarantor that will "wrap" the remaining balance of
the loans to a credit rating of AA or better. Upon securitization, the Company
then plans to either own the high quality ARM certificates and the subordinate
certificates in its portfolio and finance the high quality certificates in the
repurchase agreement market, or to utilize such ARM assets to collateralize
capital markets issued debt obligations with a credit rating of AA or better
from a Rating Agency as an alternative financing source to the repurchase
agreement market.
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Financing Strategies
The Company employs a leveraging strategy to increase its assets by borrowing
against its ARM assets and then using the proceeds to acquire additional ARM
assets. By leveraging its portfolio in this manner, the Company expects to
maintain an equity-to-assets ratio between 8% to 10%, when measured on a
historical cost basis. The Company believes that this level of capital is
sufficient to allow the Company to continue to operate in interest rate
environments in which the Company's borrowing rates might exceed its portfolio
yield. These conditions could occur when the interest rate adjustments on the
ARM assets lag the interest rate increases in the Company's variable rate
borrowings or when the interest rate of the Company's variable rate borrowings
are mismatched with the interest rate indices of the Company's ARM assets. The
Company also believes that this capital level is adequate to protect the Company
from having to sell assets during periods when the value of its ARM assets are
declining. During the fourth quarter of 1998, the Company did sell some assets
in order to increase its equity ratio from approximately 8% to over 9%, which
under the market conditions at the time was a more appropriate level. If the
ratio of the Company's equity-to-total assets, measured on a historical cost
basis, falls below 8%, the Company will take action to increase its
equity-to-assets ratio to 8% of total assets or greater, when measured on a
historical cost basis, through normal portfolio amortization, raising equity
capital, sale of assets or other steps as necessary.
The Company's ARM assets are financed primarily at short-term borrowing rates
and can be financed utilizing reverse repurchase agreements, dollar-roll
agreements, borrowings under lines of credit and other secured or unsecured
financings which the Company may establish with approved institutional lenders.
Prior to 1998, reverse repurchase agreements had been the primary source of
financing utilized by the Company to finance its ARM assets. In 1998, the
Company issued $1.1 billion of callable AAA rated notes in addition to utilizing
reverse repurchase agreements to finance its assets. Generally, upon repayment
of each reverse repurchase agreement, the ARM assets used to collateralize the
financing will immediately be pledged to secure a new reverse repurchase
agreement. The Company has established lines of credit and collateralized
financing agreements with twenty-four different financial institutions.
Reverse repurchase agreements take the form of a simultaneous sale of pledged
assets to a lender at an agreed upon price in return for the lender's agreement
to resell the same assets back to the borrower at a future date (the maturity of
the borrowing) at a higher price. The price difference is the cost of borrowing
under these agreements. In the event of the insolvency or bankruptcy of a
lender during the term of a reverse repurchase agreement, provisions of the
Federal Bankruptcy Code, if applicable, may permit the lender to consider the
agreement to resell the assets to be an executory contract that, at the lender's
option, may be either assumed or rejected by the lender. If a bankrupt lender
rejects its obligation to resell pledged assets to the Company, the Company's
claim against the lender for the damages resulting therefrom may be treated as
one of many unsecured claims against the lender's assets. These claims would be
subject to significant delay and, if and when payments are received, they may be
substantially less than the damages actually suffered by the Company. To
mitigate this risk the Company enters into collateralized borrowings with only
financially sound institutions approved by the Board of Directors, including a
majority of unaffiliated directors, and monitors the financial condition of such
institutions on a regular, periodic basis.
The Company, commencing in 1998, also utilizes capital market transactions by
issuing debt collateralized by specific pools of ARM assets that are placed in a
trust. The financing of ARM assets in this way eliminates the risk of margin
calls on the financing of those ARM assets and limits the Company's exposure to
credit risk on the ARM and Hybrid ARM loans collateralizing such debt. The
Company receives a credit rating on the debt based on the quality of the ARM
assets, amount of any credit enhancement obtained and subordination levels of
the debt proscribed by the rating agency(ies), all of which affects the interest
rate at which the debt can be issued. The principal and interest payments on
the debt are paid by the trust out of the cash flows received on the collateral.
By utilizing such a structure, the Company can issue either floating rate debt
indexed to various indices that more closely matches the characteristics of the
collateralized ARM assets, depending upon market constraints and conditions, or
fixed rate debt that corresponds to the characteristics of collateralized Hybrid
ARM loans.
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The Company also enters into financing facilities for whole loans. The Company
uses these credit lines to finance its acquisition of whole loans while it is
accumulating loans for securitization or until more permanent financing is
arranged in a capital markets collateralized debt transaction. In 1998, the
Company utilized two whole loan financing facilities that provided the Company
with uncommitted lines of credit based on the market value of its whole loans.
Uncommitted lines of credit are generally less expensive than a committed line
of credit, but during periods of market turmoil, uncommitted lines of credit can
be terminated by the counterparty with little notice to the Company and at a
time when the Company would have difficulty in replacing the line of credit.
Therefore, beginning in 1999, the Company has decided to negotiate and pay a fee
for committed facilities as well as continue to utilize uncommitted facilities.
During January 1999, the Company entered into one committed facility in the
amount of $150,000,000, which the Company can increase to $300,000,000 for an
additional fee, and is negotiating a number of other committed and uncommitted
facilities.
The Company mitigates its interest-rate risk from borrowings by selecting
maturities that approximately match the interest-rate adjustment periods on its
ARM assets. Accordingly, borrowings bear variable or short-term fixed (one year
or less) interest rates. Generally, the borrowing agreements require the
Company to deposit additional collateral in the event the market value of
existing collateral declines, which, in dramatically rising interest rate
markets, could require the Company to sell assets to reduce the borrowings.
The Company's Bylaws limit borrowings, excluding the collateralized borrowings
in the form of reverse repurchase agreements, dollar-roll agreements and other
forms of collateralized borrowings discussed above, to no more than 300% of the
Company's net assets, on a consolidated basis, unless approved by a majority of
the unaffiliated directors. This limitation generally applies only to unsecured
borrowings of the Company. For this purpose, the term "net assets" means the
total assets (less intangibles) of the Company at cost, before deducting
depreciation or other non-cash reserves, less total liabilities, as calculated
at the end of each quarter in accordance with generally accepted accounting
principles. Accordingly, the 300% limitation on unsecured borrowings does not
affect the Company's ability to finance its total assets with collateralized
borrowings.
Hedging Strategies
The Company makes use of hedging transactions to mitigate the impact of certain
adverse changes in interest rates on its net interest income. In general, ARM
assets have a maximum lifetime interest rate cap, or ceiling, meaning that each
ARM asset contains a contractual maximum rate. The borrowings incurred by the
Company to finance its ARM assets portfolio are not subject to equivalent
interest rate caps. Accordingly, the Company purchases interest rate cap
agreements ("Cap Agreements") to prevent the Company's borrowing costs from
exceeding the lifetime maximum interest rate on its ARM assets. These Cap
Agreements have the effect of offsetting a portion of the Company's borrowing
costs if prevailing interest rates exceed the rate specified in the Cap
Agreement. A Cap Agreement is a contractual agreement for which the Company
pays a fee, which may at times be financed, typically to either a commercial
bank or investment banking firm. Pursuant to the terms of the Cap Agreements
owned as of December 31, 1998, the Company will receive cash payments if the
one-month, three-month or six-month LIBOR index increases above certain
specified levels, which range from 7.50% to 13.00% and average approximately
10.10%. The fair value of these Cap Agreements also tends to increase when
general market interest rates increase and decrease when market interest rates
decrease, helping to partially offset changes in the fair value of the Company's
ARM assets.
In addition, ARM assets are generally subject to periodic caps. Periodic caps
generally limit the maximum interest rate coupon change on any interest rate
coupon adjustment date to either a maximum of 1% per semiannual adjustment or 2%
per annual adjustment. The borrowings incurred by the Company do not have
similar periodic caps. The Company generally does not hedge against the risk of
its borrowing costs rising above the periodic interest rate cap level on the ARM
assets because the contractual future interest rate adjustments on the ARM
assets will cause their interest rates to increase over time and reestablish the
ARM assets' interest rate to a spread over the then current index rate. The
Company attempts to mitigate the effect of periodic caps in several ways.
First, the yield on the Company's ARM assets can change by more that the 1% or
2% per periodic interest rate adjustment limitation depending upon how
prepayment activity changes as interest rates change. Secondly, during 1998,
the Company began to acquired variable rate CMOs and CBOs ("Floaters"), Hybrid
ARMs and certain other ARM loans that do not have a periodic cap. As of
December 31, 1998, approximately $622.9 million of the Company's ARM securities
and $909.2 million of the Company's ARM loans did not have periodic caps or were
Hybrid ARMs, representing approximately 36% of total ARM assets.
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The Hybrid ARMs have an initial fixed rate period, generally 3 to 5 years.
Since the Company's borrowings are generally short-term, the Company enters into
interest rate swap agreements that hedge a portion of the fixed rate period, so
that the unhedged fixed rate period is no more than one year. In accordance
with the terms of these swap agreements, the Company pays a fixed rate of
interest during the term of the agreements, and receives a payment that varies
monthly with the one month LIBOR Index. Due to the longer term nature of these
agreements and because the hedged Hybrid ARMs are amortizing based on homeowner
scheduled payments and unscheduled prepayments, the Company generally enters
into both a swap that amortizes at an agreed upon single prepayment rate and an
additional swap that amortizes at a prepayment rate which the Company has the
option to change monthly within a range of rates.
The Company also enters into interest rate swap agreements to manage the average
interest rate reset period on its borrowings. In accordance with the terms of
the swap agreements, the Company pays a fixed rate of interest during the term
of the agreements and receives a payment that varies monthly with the one month
LIBOR Index. These agreements have the effect of fixing the Company's borrowing
costs on a similar amount of swaps owned by the Company and, as a result, the
Company reduces the interest rate variability of its borrowings. The Company
may also use interest rate swap agreements from time to time to change from one
interest rate index to another interest rate index and thus decrease further the
basis risk between the Company's interest yielding assets and the financing of
such assets.
The ARM assets held by the Company were generally purchased at prices greater
than par. The Company is amortizing the premiums paid for these assets over
their expected lives using the level yield method of accounting. To the extent
that the prepayment rate on the Company's ARM assets differs from expectations,
the Company's net interest income will be affected. Prepayments generally
increase when mortgage interest rates fall below the interest rates on ARM
loans. To the extent there is an increase in prepayment rates, resulting in a
shortening of the expected lives of the Company's ARM assets, the Company's net
income and, therefore, the amount available for dividends could be adversely
affected. To mitigate the adverse effect of an increase in prepayments on the
Company's ARM assets, the Company has purchased ARM assets at prices at or below
par, however the Company's portfolio of ARM assets is currently held at a net
premium. The Company may also purchase limited amounts of "principal only"
mortgage derivative assets backed by either fixed-rate mortgages or ARM assets
as a hedge against the adverse effect of increased prepayments. To date, the
Company has not purchased any "principal only" mortgage derivative assets.
The Company may enter into other hedging-type transactions designed to protect
its borrowings costs or portfolio yields from interest rate changes. Such
transactions may include the purchase or sale of interest rate futures contracts
or options on interest rate futures contracts. The Company may also purchase
"interest only" mortgage derivative assets or other derivative products for
purposes of mitigating risk from interest rate changes. The Company has not, to
date, entered into these types of transactions, but may do so in the future.
The Company will not invest in any futures transactions unless the Company and
Thornburg Mortgage Advisory Corporation (the "Manager") are exempt from the
registration requirements of the Commodities Exchange Act or otherwise comply
with the provisions of that Act.
Hedging transactions currently utilized by the Company generally are designed to
protect the Company's net interest income during periods of rising market
interest rates. The Company does not intend to hedge for speculative purposes.
Further, no hedging strategy can completely insulate the Company from risk, and
certain of the federal income tax requirements that the Company must satisfy to
qualify as a REIT limit the Company's ability to hedge, particularly with
respect to hedging against periodic cap risk. The Company carefully monitors
and may have to limit its hedging strategies to ensure that it does not realize
excessive hedging income, or hold hedging assets having excess value in relation
to total assets. See "Federal Income Tax Considerations - Requirements for
Qualification as a REIT".
Operating Restrictions
The Board of Directors has established the Company's operating policies and any
revisions in the operating policies and strategies require the approval of the
Board of Directors, including a majority of the unaffiliated directors. Except
as otherwise restricted, the Board of Directors has the power to modify or alter
the operating policies without the consent of shareholders. Developments in the
market which affect the operating policies and strategies mentioned herein or
which change the Company's assessment of the market may cause the Board of
Directors (including a majority of the unaffiliated directors) to revise the
Company's operating policies and financing strategies.
In the event the rating of an ARM security held by the Company is reduced by the
Rating Agencies to below Investment Grade after acquisition by the Company, the
asset may be retained in the Company's investment portfolio if the Manager
recommends that it be retained and the recommendation is approved by the Board
of Directors (including a majority of the unaffiliated directors).
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The Company has elected to qualify as a REIT for tax purposes. The Company has
adopted certain compliance guidelines which include restrictions on the
acquisition, holding and sale of assets. Prior to the acquisition of any asset,
the Company determines whether such asset will constitute a "Qualified REIT
Asset" as defined by the Internal Revenue Code of 1986, as amended (the "Code").
Substantially all the assets that the Company has acquired and will acquire for
investment are expected to be Qualified REIT Assets. This policy limits the
investment strategies that the Company may employ.
The Company closely monitors its purchases of ARM assets and the income from
such assets, including from its hedging strategies, so as to ensure at all times
that it maintains its qualification as a REIT. The Company developed certain
accounting systems and testing procedures with the help of qualified accountants
and tax experts to facilitate its ongoing compliance with the REIT provisions of
the Code. See "Federal Income Tax Considerations - Requirements for
Qualification as a REIT". No changes in the Company's investment policies and
operating policies and strategies, including credit criteria for mortgage asset
investments, may be made without the approval of the Company's Board of
Directors, including a majority of the unaffiliated directors.
The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act of 1940.
The Investment Company Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate" ("Qualifying Interests"). Under current
interpretation of the staff of the SEC, in order to qualify for this exemption,
the Company must maintain at least 55% of its assets directly in Qualifying
Interests. In addition, unless certain mortgage assets represent all the
certificates issued with respect to an underlying pool of mortgages, such
mortgage assets may be treated as assets separate from the underlying mortgage
loans and, thus, may not be considered Qualifying Interests for purposes of the
55% requirement. The Company closely monitors its compliance with this
requirement and intends to maintain its exempt status. Up to the present, the
Company has been able to maintain its exemption through the purchase of whole
pool government agency and privately issued ARM securities and loans that
qualify for the exemption. See "Portfolio of Mortgage Assets - Pass-Through
Certificates - Privately Issued ARM Pass-Through Certificates".
The Company does not purchase any assets from or enter into any servicing or
administrative agreements (other than the Management Agreement) with any
entities affiliated with the Manager. Any changes in this policy would be
subject to approval by the Board of Directors, including a majority of the
unaffiliated directors.
PORTFOLIO OF MORTGAGE ASSETS
As of December 31, 1998, ARM assets comprised approximately 98% of the Company's
total assets. The Company has invested in the following types of mortgage
assets in accordance with the operating policies established by the Board of
Directors and described in "Business - Operating Policies and Strategies -
Operating Restrictions".
PASS-THROUGH CERTIFICATES
The Company's investments in mortgage assets are concentrated in High Quality
ARM pass-through certificates which account for approximately 90% of ARM assets
held. These High Quality ARM pass-through certificates consist of Agency
Certificates and privately issued ARM pass-through certificates that meet the
High Quality credit criteria. These High Quality ARM pass-through certificates
acquired by the Company represent interests in ARM loans which are secured
primarily by first liens on single-family (one-to-four units) residential
properties, although the Company may also acquire ARM pass-through certificates
secured by liens on other types of real estate-related properties. The Company
also includes in this category of assets a portion of the ARM and Hybrid ARM
loans that have been deposited in a trust and held as collateral for its AAA
notes payable in the amount equivalent to the AAA portion of the debt issued by
the trust. The ARM pass-through certificates, including the ARM and Hybrid ARM
loans collateralizing AAA notes payable, acquired by the Company are generally
subject to periodic interest rate adjustments, as well as periodic and lifetime
interest rate caps which limit the amount an ARM security's interest rate can
change during any given period.
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The following is a discussion of each type of pass-through certificate held by
the Company as of December 31, 1998:
FHLMC ARM Programs
FHLMC is a shareholder-owned government sponsored enterprise created pursuant to
an Act of Congress on July 24, 1970. The principal activity of FHLMC consists
of the purchase of first lien, conventional residential mortgages, including
both whole loans and participation interests in such mortgages and the resale of
the loans and participations in the form of guaranteed mortgage assets. During
1998, FHLMC issued $7.2 billion of FHLMC ARM certificates and as of December 31,
1998, there was $37.5 billion of all types of FHLMC ARM certificates
outstanding, of which FHLMC held $9.8 billion in its own portfolio.
Each FHLMC ARM Certificate issued to date has been issued in the form of a
pass-through certificate representing an undivided interest in a pool of ARM
loans purchased by FHLMC. The ARM loans included in each pool are fully
amortizing, conventional mortgage loans with original terms to maturity of up to
40 years secured by first liens on one-to-four unit family residential
properties or multi-family properties. The interest rate paid on FHLMC ARM
Certificates adjust periodically on the first day of the month following the
month in which the interest rates on the underlying mortgage loans adjust.
FHLMC guarantees to each holder of its ARM Certificates the timely payment of
interest at the applicable pass-through rate and ultimate collection of all
principal on the holder's pro rata share of the unpaid principal balance of the
related ARM loans, but does not guarantee the timely payment of scheduled
principal of the underlying mortgage loans. The obligations of FHLMC under its
guarantees are solely those of FHLMC and are not backed by the full faith and
credit of the U.S. Government. If FHLMC were unable to satisfy such
obligations, distributions to holders of FHLMC ARM Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC ARM Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
FNMA ARM Programs
FNMA is a federally chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association Charter Act. FNMA
provides funds to the mortgage market primarily by purchasing home mortgage
loans from mortgage loan originators, thereby replenishing their funds for
additional lending. FNMA established its first ARM programs in 1982 and
currently has several ARM programs under which ARM certificates may be issued,
including programs for the issuance of assets through REMICs under the Code.
During 1998, FNMA issued $14.0 billion of FNMA ARM certificates and as of
December 31, 1998, there was $59.0 billion of all types of FNMA ARM certificates
outstanding, of which FNMA held $11.9 billion in its own portfolio.
Each FNMA ARM Certificate issued to date has been issued in the form of a
pass-through certificate representing a fractional undivided interest in a pool
of ARM loans formed by FNMA. The ARM loans included in each pool are fully
amortizing conventional mortgage loans secured by a first lien on either
one-to-four family residential properties or multi-family properties. The
original terms to maturities of the mortgage loans generally do not exceed 40
years. FNMA has issued several different series of ARM Certificates. Each
series bears an initial interest rate and margin tied to an index based on all
loans in the related pool, less a fixed percentage representing servicing
compensation and FNMA's guarantee fee.
FNMA guarantees to the registered holder of a FNMA ARM Certificate that it will
distribute amounts representing scheduled principal and interest (at the rate
provided by the FNMA ARM Certificate) on the mortgage loans in the pool
underlying the FNMA ARM Certificate, whether or not received, and the full
principal amount of any such mortgage loan foreclosed or otherwise finally
liquidated, whether or not the principal amount is actually received. The
obligations of FNMA under its guarantees are solely those of FNMA and are not
backed by the full faith and credit of the U.S. Government. If FNMA were unable
to satisfy such obligations, distributions to holders of FNMA ARM Certificates
would consist solely of payments and other recoveries on the underlying mortgage
loans and, accordingly, monthly distributions to holders of FNMA ARM
Certificates would be affected by delinquent payments and defaults on such
mortgage loans.
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Privately Issued ARM Pass-Through Certificates
Privately issued ARM Pass-Through Certificates are structured similar to the
Agency Certificates discussed above but are issued by originators of, and
investors in, mortgage loans, including savings and loan associations, savings
banks, commercial banks, mortgage banks, investment banks and special purpose
subsidiaries of such institutions. Privately issued ARM pass-through
certificates are usually backed by a pool of non-conforming conventional
adjustable-rate mortgage loans and are generally structured with one or more
types of credit enhancement, including pool insurance, guarantees, or
subordination. Accordingly, the privately issued ARM pass-through certificates
typically are not guaranteed by an entity having the credit status of FHLMC or
FNMA.
Privately issued ARM pass-through certificates credit enhanced by mortgage pool
insurance provide the Company with an alternative source of ARM assets (other
than Agency ARM assets) that meet the Qualifying Interests test for purposes
maintaining the Company's exemption under the Investment Company Act of 1940.
Since the inception of the Company in 1993, most of the providers of mortgage
pool insurance have stopped providing such insurance. Therefore, the Company
has increased its investment in Agency ARM securities and in whole loans as its
primary sources of Qualifying Interests in real estate.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"), COLLATERALIZED BOND OBLIGATIONS
("CBOS") AND MULTICLASS PASS-THROUGH ASSETS
CMOs are debt obligations, ordinarily issued in series and most commonly backed
by a pool of fixed rate mortgage loans or pass-through certificates, each of
which consists of several serially maturing classes. The CBOs acquired by the
Company, like CMOs, are debt obligations, but, in the case of CBOs, are secured
by security interests in portfolios of high quality, low duration,
mortgage-backed, asset-backed and other fixed and floating rate securities
managed by third-parties. The Company only acquires CBO's that have portfolios
that consist primarily of either real estate qualifying assets or high quality
mortgage backed securities. Multiclass pass-through securities are equity
interests in a trust composed of similar underlying mortgage assets. Generally,
principal and interest payments received on the underlying mortgage-related
assets securing a series of CMOs or multiclass pass-through securities are
applied to principal and interest due on one or more classes of the CMOs of such
series or to pay scheduled distributions of principal and interest on multiclass
pass-throughs. In a CBO transaction, principal and interest payments are used
to pay current period interest and any excess is reinvested into the portfolio.
CBOs typically don't amortize monthly, rather they mature on a specific maturity
date. Scheduled payments of principal and interest on the mortgage-related
assets and other collateral securing a series of CMOs, CBOs or multiclass
pass-throughs are intended to be sufficient to make timely payments of principal
and interest on such issues or securities and to retire each class of such
obligations at their stated maturity.
Multiclass pass-through securities backed by ARM assets or ARM loans owned by
the Company are typically structured into classes designated as senior classes,
mezzanine classes and subordinated classes. The Company also owns variable rate
classes of CMOs and CBOs that are backed by both fixed- and adjustable-rate
mortgages.
The senior classes in a multiclass pass-through security generally have first
priority over all cash flows and consequently have the least amount of credit
risk since principal losses are generally covered by mortgage pool insurance
policies or are charged against the subordinated classes in order of
subordination. As a result of these features, the senior classes receive the
highest credit rating from Rating Agencies of the series of classes for each
multiclass pass-through security.
The mezzanine classes of a multiclass pass-through security generally have a
slightly greater risk of principal loss than the senior classes since they
provide some credit enhancement to the senior classes. In most, but not all,
instances, mezzanine classes participate on a pro-rata basis with senior classes
in their right to receive cash flow and have expected lives similar to the
senior classes. In other instances, mezzanine classes are subordinate in their
right to receive cash flow and have average lives that are longer than the
senior classes. However, in all cases, a mezzanine class has a similar or
slightly lower credit rating than the senior class from the Rating Agencies.
Generally, the mezzanine classes that the Company has acquired are rated High
Quality.
Subordinated classes are junior in the right to receive payment from the
underlying mortgages to other classes of a multiclass pass-through security.
The subordination provides credit enhancement to the senior and mezzanine
classes. Subordinated classes may be at risk for some payment failures on the
mortgage loans securing or underlying such assets and generally represent a
greater level of credit risk as they are responsible for bearing the risk of
credit loss on all of the outstanding loans underlying a CMO, CBO or multi-class
pass-through. As a result of being subject to more credit risk, subordinated
classes generally have lower credit ratings relative to the senior and mezzanine
classes.
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The Subordinated classes which the Company has acquired were all rated at least
Investment Grade at the time of purchase by one of the Rating Agencies, and in
certain cases are High Quality, or were created as part of the Company's process
of securitizing whole loans. The Subordinated classes acquired by the Company
in the open market are limited in amount and bear yields which the Company
believes are commensurate with the increased risks involved. In general, the
Company acquires subordinated classes when they are seasoned and when the more
senior classes of the multi-class security have been paid down to levels that
mitigate the risk of non-payment on the subordinate classes.
The market for Subordinated classes is not extensive and at times may be
illiquid. In addition, the Company's ability to sell Subordinated classes is
limited by the REIT Provisions of the Code. The Company has not purchased any
Subordinated classes that are not Qualified REIT Assets. The Subordinated
classes acquired by the Company, which are not High Quality, together with the
Company's other investments in Other Investment assets, may not, in the
aggregate, comprise more than 30% of the Company's total assets, in accordance
with the Company's investment policy.
The variable rate classes of CMOs and CBOs, or Floaters, owned by the Company
generally float at a spread to the one-month LIBOR index and are backed by
mortgages that are either fixed-rate or are adjustable-rate mortgages indexed to
the one-year U. S. Treasury yield or a Cost of Funds index.
ARM AND HYBRID ARM LOANS
The ARM and Hybrid ARM loans the Company has acquired are all first mortgages on
single-family residential properties. Some have additional collateral in the
form of pledged financial assets that provides the Company with additional
credit protection in exchange for a simpler application and approval process.
The Company acquires loans are underwritten to "A" quality standards. The
Company considers loans to be "A" quality when they are underwritten in such a
way as to assure that the mortgages are protected by adequate borrower income to
make the required loan payment, adequate verifiable equity in the underlying
property, and by the borrower's willingness and ability to repay the mortgage as
demonstrated by a good credit history. As a result, the loans are generally
fully documented loans to borrowers with good credit histories, adequate income
to support the monthly mortgage payment, adequate assets to close the loan, with
80% or lower effective loan-to-value ratios based on independently appraised
property values or are seasoned loans with over five years or more of good
payment history.
When acquiring ARM and Hybrid ARM loans, either originated specifically for the
Company or when the Company acquires pools of loans in bulk, the Company focuses
its attention on key aspects of a borrower's profile and the characteristics of
a mortgage loan product that the Company believes are most important in insuring
excellent loan performance and minimal credit exposure. The Company's loan
programs focus on larger down payments, excellent borrower credit history (as
measured by a credit report and a credit score) and a conservative appraisal
process. If an ARM or Hybrid ARM loan acquired has a loan to property value
that is above 80%, then the borrower is required to pay for private mortgage
insurance providing additional protection to the Company against credit risk.
The loans acquired have original maturities of forty years or less. The ARM
and Hybrid ARM loans are either fully amortizing or are interest only for up to
ten years and fully amortizing thereafter. All ARM loans acquired bear an
interest rate that is tied to an interest rate index and some have periodic and
lifetime constraints on how much the loan interest rate can change on any
predetermined interest rate reset date. In general, the interest rate on each
ARM loan resets at a frequency that is either monthly, semi-annually or
annually. The indices the ARM loans are tied to are generally a U.S. Treasury
Bill index, LIBOR, Certificate of Deposit, a Cost of Funds index or Prime. The
Hybrid ARM loans have an initial fixed rate period, generally 3 to 5 years, and
then they convert to an ARM loan with the features of an ARM loan described
above.
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RISK FACTORS
FORWARD-LOOKING STATEMENTS
In accordance with the Private Securities Litigation Reform Act of 1995
(the "1995 Act"), the Company can obtain a "Safe Harbor" for forward-looking
statements by identifying those statements and by accompanying those statements
with cautionary statements which identify factors that could cause actual
results to differ from those in the forward-looking statements. Accordingly,
the following information contains or may contain forward-looking statements:
(1) information included in this Annual Report on Form 10-K, including, without
limitation, statements made regarding investments in ARM securities and ARM
loans, and Hybrid ARM loans, hedging, leverage, interest rates and statements in
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, (2) information included in future filings by the Company with
the Securities and Exchange Commission including, without limitation, statements
with respect to growth, projected revenues, earnings, returns and yields on its
portfolio of mortgage assets, the impact of interest rates, costs, and business
strategies and plans, and (3) information contained in the Company's Annual
Report or other written material, releases and oral statements issued by or on
behalf of, the Company, including, without limitation, statements with respect
to growth, projected revenues, net income, returns and yields on its portfolio
of mortgage assets, the impact of interest rates, costs and business strategies
and plans.
The following is a summary of the factors the Company believes important
and that could cause actual results to differ from the Company's expectations.
The Company is publishing these factors pursuant to the 1995 Act. Such factors
should not be construed as exhaustive or as an admission regarding the adequacy
of disclosure made by the Company prior to the effective date of the 1995 Act.
Readers should understand that many factors govern whether any forward-looking
statement will be or can be achieved. Any one of those factors could cause
actual results to differ materially from those projected. No assurance is or
can be given that any important factor set forth below will be realized in a
manner so as to allow the Company to achieve the desired or projected results.
The words "believe," "except," "anticipate," "intend," "aim," "will," and
similar words identify forward-looking statements. The Company cautions readers
that the following important factors, among others, could affect the Company's
actual results and could cause the Company's actual consolidated results to
differ materially from those expressed in any forward-looking statements made by
or on behalf of the Company.
- - A Dramatic Increase in Short-term Interest Rates
- - The Effectiveness of Using Various Interest Rate Derivative Instruments
for Hedging ARM Assets or Borrowing Costs
- - The Ability to Acquire Attractively Priced and Underwritten ARM and Hybrid
ARM Loans and Securities
- - Interest Rate Repricing Mismatch Between Asset Yields and Borrowing Rates
- - A Decline in the Market Value of ARM Securities, Which Would Result in
Margin Calls
- - Unanticipated Levels of Prepayment Rates
- - A Flattening or Inversion of the Yield Curve Between Short and Long-Term
Interest Rates
- - The Use of Substantial Borrowed Funds to Enhance Returns
- - Risk of Credit Loss Associated with Acquiring, Accumulating and
Securitizing ARM Loans
- - Interest Rate Risks Associated with any Future Unhedged Portion of the
Fixed Term of Hybrid ARMs
- - The Loss of Key Personnel
- - Fundamental Changes in Investment Policies and Strategies
- - Fluctuations or Variability of Dividend Distributions
- - Capital Stock Price Volatility
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COMPETITION
In acquiring ARM assets, the Company competes with other mortgage REITs,
investment banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, other lenders, FNMA, FHLMC and other
entities purchasing ARM assets, many of which have greater financial resources
than the Company. The existence of these competitive entities, as well as the
possibility of additional entities forming in the future, may increase the
competition for the acquisition of ARM assets resulting in higher prices and
lower yields on such mortgage assets.
EMPLOYEES
As of December 31, 1998, the Company had no employees. Thornburg Mortgage
Advisory Corporation (the "Manager") carries out the day to day operations of
the Company, subject to the supervision of the Board of Directors and under the
terms of a management agreement discussed below.
THE MANAGEMENT AGREEMENT
On June 17, 1994, the Company renewed its management agreement with Thornburg
Mortgage Advisory Corporation (the "Management Agreement"), the Manager, for a
term of five years, with an annual review required each year. On December 15,
1995, the Agreement was amended to provide that in the event a person or entity
obtains more than 20% of the Company's common stock, if the Company is combined
with another entity, or if the Company terminates the Agreement other than for
cause, the Company is obligated to acquire substantially all of the assets of
the Manager through an exchange of shares with a value based on a formula tied
to the Manager's net profits. The Company has the right to terminate the
Management Agreement upon the occurrence of certain specific events, including a
material breach by the Manager of any provision contained in the Management
Agreement.
The Manager at all times is subject to the supervision of the Company's Board of
Directors and has only such functions and authority as the Company may delegate
to it. The Manager is responsible for the day-to-day operations of the Company
and performs such services and activities relating to the assets and operations
of the Company as may be appropriate.
The Manager receives a per annum base management fee on a declining scale based
on average shareholders' equity, adjusted for liabilities that are not incurred
to finance assets ("Average Shareholders' Equity" or "Average Net Invested
Assets" as defined in the Agreement), payable monthly in arrears. The Manager
is also entitled to receive, as incentive compensation for each fiscal quarter,
an amount equal to 20% of the Net Income of the Company, before incentive
compensation, in excess of the amount that would produce an annualized Return on
Equity equal to 1% over the Ten Year U.S. Treasury Rate. For further information
regarding the base management fee, incentive compensation and applicable
definitions, see the Company's Proxy Statement dated March 29, 1999 under the
caption "Certain Relationships and Related Transactions".
Subject to the limitations set forth below, the Company pays all operating
expenses except those specifically required to be paid by the Manager under the
Management Agreement. The operating expenses required to be paid by the Manager
include the compensation of the Company's officers and the cost of office space,
equipment and other personnel required for the Company's day-to-day operations.
The expenses that will be paid by the Company will include issuance and
transaction costs incident to the acquisition, disposition and financing of
investments, regular legal and auditing fees and expenses, the fees and expenses
of the Company's directors, the costs of printing and mailing proxies and
reports to shareholders, the fees and expenses of the Company's custodian and
transfer agent, if any, and reimbursement of any obligation of the Manager for
any New Mexico Gross Receipts Tax liability. The expenses required to be paid
by the Company which are attributable to the operations of the Company shall be
limited to an amount per year equal to the greater of 2% of the Average Net
Invested Assets of the Company or 25% of the Company's Net Income for that year.
The determination of Net Income for purposes of calculating the expense
limitation will be the same as for calculating the Manager's incentive
compensation except that it will include any incentive compensation payable for
such period. Expenses in excess of such amount will be paid by the Manager,
unless the unaffiliated directors determine that, based upon unusual or
non-recurring factors, a higher level of expenses is justified for such fiscal
year. In that event, such expenses may be recovered by the Manager in
succeeding years to the extent that expenses in succeeding quarters are below
the limitation of expenses. The Company, rather than the Manager, will also be
required to pay expenses associated with litigation and other extraordinary or
non-recurring expenses. Expense reimbursement will be made monthly, subject to
adjustment at the end of each year.
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The transaction costs incident to the acquisition and disposition of
investments, the incentive compensation and the New Mexico Gross Receipts Tax
liability will not be subject to the 2% limitation on operating expenses.
Expenses excluded from the expense limitation are those incurred in connection
with the servicing of mortgage loans, the raising of capital, the acquisition of
assets, interest expenses, taxes and license fees, non-cash costs and the
incentive management fee.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The Company has elected to be treated as a REIT for federal income tax purposes.
In brief, if certain detailed conditions imposed by the REIT provisions of the
Code are met, electing entities that invest primarily in real estate investments
and mortgage loans, and that otherwise would be taxed as corporations are, with
certain limited exceptions, not taxed at the corporate level on their taxable
income that is currently distributed to their shareholders. This treatment
eliminates most of the "double taxation" (at the corporate level and then again
at the shareholder level when the income is distributed) that typically results
from the use of corporate investment vehicles.
In the event that the Company does not qualify as a REIT in any year, it would
be subject to federal income tax as a domestic corporation and the amount of the
Company's after-tax cash available for distribution to its shareholders would be
reduced. The Company believes it has satisfied the requirements for
qualification as a REIT since commencement of its operations in June 1993. The
Company intends at all times to continue to comply with the requirements for
qualification as a REIT under the Code, as described below.
REQUIREMENTS FOR QUALIFICATION AS A REIT
To qualify for tax treatment as a REIT under the Code, the Company must meet
certain tests which are described briefly below.
Ownership of Common Stock
For all taxable years after the first taxable year for which a REIT election is
made, the Company's shares of capital stock must be held by a minimum of 100
persons for at least 335 days of a 12 month year (or a proportionate part of a
short tax year). In addition, at all times during the second half of each
taxable year, no more than 50% in value of the capital stock of the Company may
be owned directly or indirectly by five or fewer individuals. The Company is
required to maintain records regarding the actual and constructive ownership of
its shares, and other information, and to demand statements from persons owning
above a specified level of the REIT's shares (as long as the Company has over
200 or more shareholders, only persons holding 1% or more of the Company's
outstanding shares of capital stock) regarding their ownership of shares. The
Company must keep a list of those shareholders who fail to reply to such a
demand.
The Company is required to use the calendar year as its taxable year for income
purposes.
Nature of Assets
On the last day of each calendar quarter at least 75% of the value of the
Company's assets must consist of Qualified REIT Assets, government assets, cash
and cash items. The Company expects that substantially all of its assets will
continue to be Qualified REIT Assets. On the last day of each calendar quarter,
of the investments in assets not included in the foregoing 75% assets test, the
value of securities issued by any one issuer may not exceed 5% in value of the
Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities. Pursuant to its compliance guidelines,
the Company intends to monitor closely the purchase and holding of its assets in
order to comply with the above assets tests.
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Sources of Income
The Company must meet the following separate income-based tests each year:
1. THE 75% TEST. At least 75% of the Company's gross income for the
taxable year must be derived from Qualified REIT Assets including interest
(other than interest based in whole or in part on the income or profits of any
person) on obligations secured by mortgages on real property or interests in
real property. The investments that the Company has made and will continue to
make will give rise primarily to mortgage interest qualifying under the 75%
income test.
2. THE 95% TEST. In addition to deriving 75% of its gross income
from the sources listed above, at least an additional 20% of the Company's gross
income for the taxable year must be derived from those sources, or from
dividends, interest or gains from the sale or disposition of stock or other
assets that are not dealer property. The Company intends to limit substantially
all of the assets that it acquires (other than stock in certain affiliate
corporations as discussed below) to Qualified REIT Assets. The policy of the
Company to maintain REIT status may limit the type of assets, including hedging
contracts and other assets, that the Company otherwise might acquire.
Distributions
The Company must distribute to its shareholders on a pro rata basis each year an
amount equal to at least (i) 95% of its taxable income before deduction of
dividends paid and excluding net capital gain, plus (ii) 95% of the excess of
the net income from foreclosure property over the tax imposed on such income by
the Code, less (iii) any "excess noncash income". The Company intends to make
distributions to its shareholders in sufficient amounts to meet this 95%
distribution requirement.
The Service has ruled that if a REIT's dividend reinvestment plan (the "DRP")
allows shareholders of the REIT to elect to have cash distributions reinvested
in shares of the REIT at a purchase price equal to at least 95% of fair market
value on the distribution date, then such cash distributions qualify under the
95% distribution test. The Company believes that its DRP complies with this
ruling.
TAXATION OF THE COMPANY'S SHAREHOLDERS
For any taxable year in which the Company is treated as a REIT for federal
income purposes, amounts distributed by the Company to its shareholders out of
current or accumulated earnings and profits will be includable by the
shareholders as ordinary income for federal income tax purposes unless properly
designated by the Company as capital gain dividends. Distributions of the
Company will not be eligible for the dividends received deduction for
corporations. Shareholders may not deduct any net operating losses or capital
losses of the Company.
If the Company makes distributions to its shareholders in excess of its current
and accumulated earnings and profits, those distributions will be considered
first a tax-free return of capital, reducing the tax basis of a shareholder's
shares until the tax basis is zero. Such distributions in excess of the tax
basis will be taxable as gain realized from the sale of the Company's shares.
The Company will withhold 30% of dividend distributions to shareholders that the
Company knows to be foreign persons unless the shareholder provides the Company
with a properly completed IRS form for claiming the reduced withholding rate
under an applicable income tax treaty.
The Clinton Administration has introduced a proposal in the fiscal 2000 federal
budget that would limit the aggregate value of businesses undertaken by a REIT
through taxable subsidiaries to 5% or less of the REIT's total assets. The
Company may from time to time hold, through one or more taxable subsidiaries,
assets that, if held directly by the Company, could otherwise generate income
that would have an adverse effect on the Company's qualification as a REIT or on
certain classes of the Company's shareholders. The Company does not reasonably
expect that the value of any such taxable subsidiaries, in the aggregate, ever
to exceed 5% of the Company's assets and therefore the Company does not
anticipate that the proposal, if enacted, would have a material effect on the
Company's operations.
The provisions of the Code are highly technical and complex. This summary is
not intended to be a detailed discussion of all applicable provisions of the
Code, the rules and regulations promulgated thereunder, or the administrative
and judicial interpretations thereof. The Company has not obtained a ruling
from the Internal Revenue Service with respect to tax considerations relevant to
its organization or operation, or to an acquisition of its common stock. This
summary is not intended to be a substitute for prudent tax planning, and each
shareholder of the Company is urged to consult its own tax advisor with respect
to these and other federal, state and local tax consequences of the acquisition,
ownership and disposition of shares of stock of the Company and any potential
changes in applicable law.
16
<PAGE>
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Santa Fe, New
Mexico and are provided by the Manager in accordance with the Management
Agreement. The Company's two subsidiaries have their principal offices in
Irvine, California.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1998, there were no pending legal proceedings to which the
Company was a party or of which any of its property was subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 1998.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
trading symbol "TMA". As of January 31, 1999, the Company had 21,989,679 shares
of common stock issued and 21,489,663 shares of common stock outstanding which
were held by 1,161 holders of record and approximately 17,355 beneficial owners.
The following table sets forth, for the periods indicated, the high, low and
closing sales prices per share of common stock as reported on the New York Stock
Exchange composite tape and the cash dividends declared per share of common
stock.
<TABLE>
<CAPTION>
Cash
Stock Prices Dividends
---------------------------- Declared
1998 High Low Close Per Share
- ---- --------- --------- ------ --------
<S> <C> <C> <C> <C>
Fourth Quarter ended December 31, 1998 9 1/2 5 5/8 7 5/8 $ 0.23
Third Quarter ended September 30, 1998 13 5/8 7 3/16 9 - (1)
Second Quarter ended June 30, 1998 . . 16 1/8 10 1/2 11 7/8 $ 0.30
First Quarter ended March 31, 1998 . . 18 1/2 14 3/4 15 7/8 $ 0.375
1997
- ----
Fourth Quarter ended December 31, 1997 22 1/4 15 7/8 16 1/2 $ 0.50
Third Quarter ended September 30, 1997 24 9/16 20 21 $ 0.50
Second Quarter ended June 30, 1997 . . 22 1/8 17 3/4 21 1/2 $ 0.49
First Quarter ended March 31, 1997 . . 22 7/8 18 3/4 19 $ 0.48
1996
- ----
Fourth Quarter ended December 31, 1996 21 1/2 16 1/8 21 3/8 $ 0.45
Third Quarter ended September 30, 1996 17 5/8 14 7/8 16 1/4 $ 0.40
Second Quarter ended June 30, 1996 . . 17 14 1/8 16 1/4 $ 0.40
First Quarter ended March 31, 1996 . . 16 5/8 14 1/8 14 3/8 $ 0.40
<FN>
- ----------------
(1) On August 17, 1998, the Company's Board of Directors announced that
dividends on common stock, in the future, would be declared after each
quarter-end rather than during the applicable quarter. The fourth quarter of
1998 dividend was declared in January 1999 and paid in February 1999.
</TABLE>
The Company intends to pay quarterly dividends and to make such distributions to
its shareholders in such amounts that all or substantially all of its taxable
income each year (subject to certain adjustments) is distributed, so as to
qualify for the tax benefits accorded to a REIT under the Code. All
distributions will be made by the Company at the discretion of the Board of
Directors and will depend on the earnings and financial condition of the
Company, maintenance of REIT status and such other factors as the Board of
Directors may deem relevant from time to time.
DIVIDEND REINVESTMENT PLAN
The Company has a Dividend Reinvestment and Stock Purchase Plan (the "DRP") that
allows both common and preferred shareholders to have their dividends reinvested
in additional shares of common stock and to purchase additional shares. The
common stock to be acquired for distribution under the DRP may be purchased at
the Company's discretion from the Company at a discount from the then prevailing
market price or in the open market. Shareholders and non-shareholders also can
make additional purchases of stock monthly, subject to a minimum of $100 ($500
for non-shareholders) and a maximum of $5,000 for each optional cash purchase.
Continental Stock Transfer & Trust Company (the "Agent"), the Company's transfer
agent, is the Trustee and administrator of the DRP. Additional information
about the details of the DRP and a prospectus are available from the Agent or
the Company. Shareholders who own stock that is registered in their own name
and want to participate must deliver a completed enrollment form to the Agent.
Forms are available from the Agent or the Company. Shareholders who own stock
that is registered in a name other than their own (e.g., broker or bank nominee)
and want to participate must either request the broker or nominee to participate
on their behalf or request that the broker or nominee re-register the stock in
the shareholder's name and deliver a completed enrollment form to the Agent.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from audited financial
statements of the Company for the years ended December 31, 1998, 1997, 1996,
1995 and 1994. The selected financial data should be read in conjunction with
the more detailed information contained in the Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" included elsewhere in this Form 10-K (Amounts in
thousands, except per share data).
<TABLE>
<CAPTION>
OPERATIONS STATEMENT HIGHLIGHTS
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net interest income . . . . . . . . . $31,040 $49,064 $30,345 $13,496 $13,055
Net income. . . . . . . . . . . . . . $22,695 $41,402 $25,737 $10,452 $11,946
Basic earnings per share. . . . . . . $ 0.75 $ 1.95 $ 1.73 $ 0.88 $ 1.02
Diluted earnings per share. . . . . . $ 0.75 $ 1.94 $ 1.73 $ 0.88 $ 1.02
Average common shares . . . . . . . . 21,488 18,048 14,874 11,927 11,759
Distributable income per common share $ 0.84 $ 1.98 $ 1.76 $ 0.92 $ 1.02
Dividends declared per common share . $ 0.905 $ 1.97 $ 1.65 $ 0.93 $ 1.00
Noninterest expense to average assets 0.13% 0.21% 0.21% 0.13% 0.11%
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET HIGHLIGHTS
As of December 31
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Adjustable-rate mortgage assets . . . . . . . . . . $4,268,417 $4,638,694 $2,727,875 $1,995,287 $1,727,469
Total assets. . . . . . . . . . . . . . . . . . . . $4,344,633 $4,691,115 $2,755,358 $2,017,985 $1,751,832
Shareholders' equity (1) . . . . . . . . . . . . . $ 395,484 $ 380,658 $ 238,005 $ 182,312 $ 180,035
Historical book value per share (2) . . . . . . . . $ 15.34 $ 15.53 $ 14.67 $ 14.96 $ 15.29
Market value adjusted book value per share (3). . . $ 11.45 $ 14.42 $ 13.70 $ 13.16 $ 10.19
Number of common shares outstanding . . . . . . . . 21,490 20,280 16,219 12,191 11,773
Yield on ARM assets . . . . . . . . . . . . . . . . 5.86% 6.38% 6.64% 6.73% 5.66%
Yield on net int.-earning assets (Portfolio Margin) 0.61% 0.96% 1.34% 1.11% 0.17%
Return on average common equity . . . . . . . . . . 4.80% 12.72% 11.68% 5.81% 6.94%
<FN>
- ---------------------------------------------------
(1) Shareholders' equity before unrealized market value adjustments.
(2) Shareholders' equity before unrealized market value adjustments, excluding preferred stock, divided by
common shares outstanding.
(3) Shareholders' equity, excluding preferred stock, divided by common shares outstanding.
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW OF FOURTH QUARTER 1998 EVENTS IN THE MORTGAGE MARKET
Like most other mortgage finance companies, the Company was affected by turmoil
in the global and domestic financial markets during the fourth quarter of 1998.
Due to turbulent market conditions, the Company saw its portfolio asset values
decline, its margin requirements for financing certain of its ARM assets
increase, especially with respect to its non-agency portfolio, and the market
value of its hedging instruments decline, which required the Company to post
additional collateral and caused the Company difficulty in financing its less
than AA rated assets at acceptable valuations. Additionally, due to the high
level of prepayments on its agency securities, which the Company must fund out
of its excess liquidity prior to receipt of payments from FNMA and FHLMC, and
the heightened sense of risk aversion on the part of the Company's lenders, the
Company's level of available excess cash and liquid securities diminished from
levels maintained in prior periods. All of these factors combined to reduce the
level of liquidity available to the Company during the fourth quarter of 1998.
The Company undertook several measures to increase its liquidity during these
difficult market conditions. First, the Company requested that its lenders not
make margin calls on its loans backed by agency securities until the applicable
payments had been received by the Company. Several lenders agreed to this
request. Second, the Company undertook the sale of certain assets in order to
reduce its asset portfolio. Accordingly, during the fourth quarter, the Company
sold $421.2 million of ARM assets and recorded a loss on sale of $4.1 million.
Of this loss amount, $3.4 million is related to $155 million of ARM securities
that are indexed to the one-year U.S. Treasury index and which, as a group,
prepaid at an annualized rate of 49% during October and had a yield below the
Company's cost of funds. The Company believes that by selecting these specific
ARM securities for sale, it not only increased its liquidity, but it improved
the future return on its ARM securities portfolio. Lastly, the Company financed
the majority of its whole loans and commitments to purchase whole loans by
issuing $1.1 billion of AAA rated notes, callable monthly, in a securitized
financing transaction in the fourth quarter of 1998. This financing benefited
the Company by providing the Company with a capital efficient method to finance
its whole loan assets over year end and allows the Company to call the
transaction and refinance the loans at a lower interest rate in early 1999 if
market conditions improve. However, the cost of this financing was greater than
current financing rates available to the Company for whole loans and therefore
adversely affected earnings in the fourth quarter of 1998 and possibly will
continue to do so during the first half of 1999. All of these measures were
successful in maintaining the Company's liquidity throughout the fourth quarter
of 1998 and the Company entered 1999 with a much improved liquidity level.
FINANCIAL CONDITION
At December 31, 1998, the Company held total assets of $4.345 billion, $4.268
billion of which consisted of ARM assets. That compares to $4.691 billion in
total assets and $4.639 billion of ARM assets at December 31, 1997. Since
commencing operations, the Company has purchased either ARM securities (backed
by agencies of the U.S. government or privately-issued, generally publicly
registered, mortgage assets, most of which are rated AA or higher by at least
one of the Rating Agencies) or ARM loans generally originated to "A" quality
underwriting standards. At December 31, 1998, 95.9% of the assets held by the
Company, including cash and cash equivalents, were High Quality assets, far
exceeding the Company's investment policy minimum requirement of investing at
least 70% of its total assets in High Quality ARM assets and cash and cash
equivalents. Of the ARM assets currently owned by the Company, 90.0% are in the
form of adjustable-rate pass-through certificates or ARM loans. The remainder
are floating rate classes of CMOs (5.8%) or investments in floating rate classes
of CBOs (4.2%) backed primarily by mortgaged-backed securities.
20
<PAGE>
The following table presents a schedule of ARM assets owned at December 31, 1998
and December 31, 1997 classified by High Quality and Other Investment assets and
further classified by type of issuer and by ratings categories.
<TABLE>
<CAPTION>
ARM ASSETS BY ISSUER AND CREDIT RATING
(Dollar amounts in thousands)
December 31, 1998 December 31, 1997
-------------------------- ---------- -----------
Carrying Portfolio Carrying Portfolio
Value Mix Value Mix
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
HIGH QUALITY:
FHLMC/FNMA . . . . . . . . $ 2,072,871 48.6% $3,117,937 67.2%
Privately Issued:
AAA/Aaa Rating . . . . . 1,398,659 (1) 32.8 476,615 10.3
AA/Aa Rating . . . . . . 597,493 14.0 782,206 16.8
-------------- ---------- ---------- ----------
Total Privately Issued 1,996,152 46.8 1,258,821 27.1
-------------- ---------- ---------- ----------
Total High Quality . . 4,069,023 95.4 4,376,758 94.3
-------------- ---------- ---------- ----------
OTHER INVESTMENT:
Privately Issued:
A Rating . . . . . . . . 40,591 1.0 115,055 2.5
BBB/Baa Rating . . . . . 88,273 2.1 17,625 0.4
BB/Ba Rating and Other . 44,120 (1) 0.9 10,269 0.2
Whole loans. . . . . . . . 26,410 0.6 118,987 2.6
-------------- ---------- ---------- ----------
Total Other Investment 199,394 4.6 261,936 5.7
-------------- ---------- ---------- ----------
Total ARM Portfolio. . $ 4,268,417 100.0% $4,638,694 100.0%
============== ========== ========== ==========
<FN>
- --------------
(1) AAA Rating category includes $1.020 billion of whole loans that have
been credit enhanced by an insurance policy purchased from a third-party and
credit support from an unrated subordinated certificate for $32.4 million
included in BB/Ba Rating and Other category and that are held as collateral for
callable AAA notes.
</TABLE>
As of December 31, 1998, the Company had reduced the cost basis of its ARM
securities by a total of $1,242,000 due to potential future credit losses (other
than temporary declines in fair value). The Company is providing for potential
future credit losses on two securities that have an aggregate carrying value of
$11.8 million, which represent less than 0.3% of the Company's total portfolio
of ARM assets. Although both of these assets continue to perform, there is only
minimal remaining credit support to mitigate the Company's exposure to potential
future credit losses.
Additionally, during 1998, the Company recorded a $762,000 provision for
potential credit losses on its loan portfolio, although no actual losses have
been realized in the loan portfolio to date. As of December 31, 1998, the
Company's ARM loan portfolio included eight loans that are considered seriously
delinquent (60 days or more delinquent) with an aggregate balance of $5.0
million. The average original effective loan-to-value ratio on these eight
delinquent loans is approximately 62%. The Company estimates that the
realizable value of each of the single family homes backing these loans to be
more than the value of the individual loans and, therefore, the Company does not
expect to realize a loss on any of these delinquent loans. The Company's credit
reserve policy regarding ARM loans is to record a monthly provision of 0.15%
(annualized rate) on the outstanding principal balance of loans (including loans
securitized by the Company for which the Company has retained first loss
exposure), subject to adjustment on certain loans or pools of loans based upon
factors such as, but not limited to, age of the loans, borrower payment history,
low loan-to-value ratios and quality of underwriting standards applied by the
originator.
21
<PAGE>
The following table classifies the Company's portfolio of ARM assets by type of
interest rate index.
<TABLE>
<CAPTION>
ARM ASSETS BY INDEX
(Dollar amounts in thousands)
December 31, 1998 December 31, 1997
---------------------- ----------------------
Carrying Portfolio Carrying Portfolio
Value Mix Value Mix
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ARM ASSETS:
INDEX:
One-month LIBOR. . . . . . . . . . . $ 556,574 13.0% $ 115,198 2.5%
Three-month LIBOR. . . . . . . . . . 181,143 4.2 31,215 0.7
Six-month LIBOR. . . . . . . . . . . 939,824 22.0 1,489,802 32.1
Six-month Certificate of Deposit . . 313,268 7.3 278,386 6.0
Six-month Constant Maturity Treasury 49,023 1.2 66,669 1.4
One-year Constant Maturity Treasury. 1,479,054 34.7 2,271,914 49.0
Cost of Funds. . . . . . . . . . . . 268,486 6.3 385,510 8.3
---------- ---------- ---------- ----------
3,787,372 88.7 4,638,694 100.0
---------- ---------- ---------- ----------
HYBRID ARM ASSETS . . . . . . . . . . . . 481,045 11.3 - -
---------- ---------- ---------- ----------
$4,268,417 100.0% $4,638,694 100.0%
========== ========== ========== ==========
</TABLE>
The ARM portfolio had a current weighted average coupon of 7.28% at December 31,
1998. This consisted of an average coupon of 6.96% on the hybrid portion of the
portfolio and an average coupon of 7.32% on the rest of the portfolio. If the
non-hybrid portion of the portfolio had been "fully indexed," the weighted
average coupon would have been approximately 6.79%, based upon the current
composition of the portfolio and the applicable indices. As of December 31,
1997, the ARM portfolio had a weighted average coupon of 7.56%. If the ARM
portfolio had been "fully indexed," the weighted average coupon would have been
approximately 7.64%, based upon the composition of the portfolio and the
applicable indices at that time. The Company did not own any hybrids as of
December 31, 1997. The lower average coupon on the ARM portfolio as of the end
of 1998 compared to 1997 is reflective of the overall lower interest rates in
the U.S. economy during these respective periods.
At December 31, 1998, the current yield of the ARM assets portfolio was 5.86%,
compared to 6.38% as of December 31, 1997, with an average term to the next
repricing date of 253 days as of December 31, 1998, compared to 110 days as of
December 31, 1997. The increase in the number of days until the next repricing
of the ARMs is primarily due to the hybrid loans acquired by the Company during
1998, which, in general, do not reprice for three to five years from their
origination date and have an average remaining fixed rate period of 4.3 years.
The current yield includes the impact of the amortization of applicable premiums
and discounts, the cost of hedging, the amortization of the deferred gains from
hedging activity and the impact of principal payment receivables.
The reduction in the yield as of December 31, 1998, compared to December 31,
1997, is primarily because of a combination of a lower average interest coupon
on the ARM portfolio by 0.28%, as stated above, and the higher rate of ARM
portfolio prepayments as of the end of 1998 compared to the end of 1997. During
the fourth quarter of 1998 the rate of prepayments had slowed to 29%, but this
was higher than the 24% experienced during the fourth quarter of 1997. The
higher level of prepayments increased the amount of premium amortization expense
and increased the impact of non-interest earning assets in the form of principal
payment receivables. Higher premium amortization and a higher balance of
principal payment receivables decreased the ARM portfolio yield by 0.24% as of
the end of 1998 compared to the end of 1997.
22
<PAGE>
The following table presents various characteristics of the Company's ARM and
Hybrid ARM loan portfolio as of December 31, 1998. This information pertains to
both the loans held for securitization and the loans held as collateral for the
callable AAA notes payable.
<TABLE>
<CAPTION>
ARM AND HYBRID ARM LOAN PORTFOLIO CHARACTERISTICS
Average High Low
--------- ----------- ------
<S> <C> <C> <C>
Unpaid principal balance. $277,276 $3,450,000 $ 278
Coupon rate on loans. . . 7.50% 9.63% 5.00%
Pass-through rate . . . . 7.15% 9.23% 4.73%
Pass-through margin . . . 2.20% 5.18% 0.48%
Lifetime cap. . . . . . . 13.04% 16.75% 9.75%
Original Term (months). . 333 480 120
Remaining Term (months) . 319 358 93
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Geographic Distribution (Top 5 States): Property type:
California . . . . . . . 21.87% Single-family 65.23%
Florida. . . . . . . . . 12.96 DeMinimus PUD 20.00
Georgia. . . . . . . . . 7.06 Condominium 9.59
New York . . . . . . . . 6.96 Other 5.18
Colorado . . . . . . . . 4.42
Occupancy status:. . . . . Loan purpose:
Owner occupied . . . . . 84.14% Purchase 57.60%
Second home. . . . . . . 11.38 Cash out refinance 23.78
Investor . . . . . . . . 4.48 Rate & term refinance 18.62
Documentation type:. . . . Periodic Cap:
Full/Alternative . . . . 95.73% None 49.04%
Other. . . . . . . . . . 4.27 2.00% 49.33
0.50% 1.63
Average effective original
loan-to-value: . . . . . . 67.55%
</TABLE>
During the year ended December 31, 1998, the Company purchased $1.502 billion of
ARM securities, 93.7% of which were High Quality assets, and $1.092 billion of
ARM loans generally originated to "A" quality underwriting standards or seasoned
loans with over five years of good payment history and/or low loan-to-value
ratios. Of the ARM assets acquired during 1998, approximately 33% were Hybrid
ARMs, 32% were indexed to LIBOR, 13% were indexed to U.S. Treasury bill rates,
12% were indexed to a Cost of Funds Index, 9% were indexed to a Certificate of
Deposit Index and the remaining 1% to other indices. During 1998, the Company
began the acquisition of Hybrid ARM assets that have an interest rate that is
fixed for an initial period of time, generally 3 to 5 years, and then convert to
an adjustable-rate for the balance of the term of the loan. The Company
emphasized purchasing assets during 1998 at substantially lower prices relative
to par in order to reduce the potential impact of future prepayments. As a
result, the Company emphasized the acquisition of ARM and Hybrid ARM loans and
high quality floating rate collateralized mortgage and bond obligations. In
doing so, the average premium paid for ARM assets acquired in 1998 was 1.09% of
par as compared to 3.29% of par in 1997 when the Company emphasized the purchase
of seasoned ARM assets.
The Company sold ARM assets in the amount of $932.3 million at a net loss of
$278,000 during 1998. As discussed earlier, a large portion of these sales
occurred in the fourth quarter during a period of time when liquidity was a
problem for the mortgage finance industry. During this period, the Company sold
$421.2 million of ARM securities at a net loss of $4.1 million. During the
prior nine months, the Company had sold $511.1 million of ARM assets at a net
gain of $3.8 million. These sales during the first nine months of 1998 reflect
the Company's desire to manage the portfolio with a view to enhancing the total
return of the portfolio. The Company monitors the performance of its individual
ARM assets and generally sells an asset when there is an opportunity to replace
it with an ARM asset that has an expected higher long-term yield or more
attractive interest rate characteristics. The Company is presented with
investment opportunities in the ARM assets market on a daily basis and
management evaluates such opportunities against the performance of its existing
portfolio. At times, the Company is able to identify opportunities that it
believes will improve the total return of its portfolio by replacing selected
assets. In managing the portfolio, the Company may realize either gains or
losses in the process of replacing selected assets.
23
<PAGE>
For the quarter ended December 31, 1998, the Company's mortgage assets paid down
at an approximate average annualized constant prepayment rate of 29% compared to
24% during the same period of 1997. The annualized constant prepayment rate
averaged approximately 31% during the full year of 1998 compared to 22% during
1997. When prepayment experience exceeds expectations due to sustained
increased prepayment activity, the Company has to amortize its premiums over a
shorter time period, resulting in a reduced yield to maturity on the Company's
ARM assets. Conversely, if actual prepayment experience is less than the
assumed constant prepayment rate, the premium would be amortized over a longer
time period, resulting in a higher yield to maturity. The Company monitors its
prepayment experience on a monthly basis in order to adjust the amortization of
the net premium, as appropriate.
The fair value of the Company's portfolio of ARM assets classified as
available-for-sale declined by 2.10% from a negative adjustment of 0.52% of the
portfolio as of December 31, 1997, to a negative adjustment of 2.62% as of
December 31, 1998. This price decline was primarily because of a decline in the
levels of liquidity in the mortgage market, the impact of market difficulties in
financing mortgage assets, a widening of credit spreads relative to treasury
yields due to uncertainties regarding future economic activity in the U.S. and
global economies and because of increased future prepayment expectations which
have the effect of shortening the average life of the Company's ARM assets and
decreasing their fair value. The amount of the negative adjustment to fair
value on the ARM assets classified as available-for-sale increased from $21.7
million as of December 31, 1997, to $83.2 million as of December 31, 1998. As
of December 31, 1998, all of the Company's ARM securities are classified as
available-for-sale and are carried at their fair value.
The Company has purchased Cap Agreements in order to limit its exposure to risks
associated with the lifetime interest rate caps of its ARM assets should
interest rates rise above specified levels. The Cap Agreements act to reduce
the effect of the lifetime or maximum interest rate cap limitation. The Cap
Agreements purchased by the Company will allow the yield on the ARM assets to
continue to rise in a high interest rate environment just as the Company's cost
of borrowings would continue to rise, since the borrowings do not have any
interest rate cap limitation. At December 31, 1998, the Cap Agreements owned by
the Company had a remaining notional balance of $4.026 billion with an average
final maturity of 2.3 years, compared to a remaining notional balance of $4.156
billion with an average final maturity of 3.1 years at December 31, 1997.
Pursuant to the terms of the Cap Agreements, the Company will receive cash
payments if the one-month, three-month or six-month LIBOR index increases above
certain specified levels, which range from 7.50% to 13.00% and average
approximately 10.10%. The fair value of these Cap Agreements also tends to
increase when general market interest rates increase and decrease when market
interest rates decrease, helping to partially offset changes in the fair value
of the Company's ARM assets. At December 31, 1998, the fair value of the Cap
Agreements was $1.5 million, $6.8 million less than the amortized cost of the
Cap Agreements.
24
<PAGE>
The following table presents information about the Company's Cap Agreement
portfolio as of December 31, 1998:
<TABLE>
<CAPTION>
CAP AGREEMENTS STRATIFIED BY STRIKE PRICE
(Dollar amounts in thousands)
Hedged Weighted Cap Agreement Weighted
ARM Assets Average Notional Average
Balance (1) Life Cap Balance (2) Strike Price Remaining Term
- ------------ --------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
$ 439,159 9.12% $ 433,261 7.50% 1.3 Years
533,267 10.13 534,804 8.00 3.3
175,811 10.70 181,896 8.50 1.2
276,916 11.22 274,910 9.00 1.0
144,468 11.38 144,819 9.50 1.8
318,654 11.78 315,879 10.00 3.4
428,068 12.09 432,183 10.50 1.9
363,355 12.48 361,297 11.00 2.9
553,091 13.06 554,112 11.50 3.5
344,475 14.20 538,616 12.00 2.1
49,410 16.41 164,969 12.50 1.4
- - 89,283 13.00 1.1
- ------------ --------- --------------- ------------- --------------
$ 3,626,674 11.70% $ 4,026,029 10.10% 2.3 Years
============ ========= =============== ============= ==============
<FN>
- ------------
(1) Excludes ARM assets that do not have life caps or are hybrids that are
match funded during a fixed rate period, in accordance with the Company's
investment policy.
(2) As of December 31, 1998, the Company was $399.4 million over hedged,
primarily because of the ARM asset sales that occurred during the fourth quarter
of 1998. The Company has retained these Cap Agreements to hedge its future
acquisitions which it expects to make during 1999. The retained Cap Agreements
have a carrying value of $0.
</TABLE>
As of December 31, 1998, the Company was a counterparty to nineteen interest
rate swap agreements ("Swaps") having an aggregate notional balance of $1.473
billion. As of year-end, these Swaps had a weighted average remaining term of
16.5 months. In accordance with these Swaps, the Company will pay a fixed rate
of interest during the term of these Swaps and receive a payment that varies
monthly with the one-month LIBOR rate. As a result of entering into these
Swaps, the Company has reduced the interest rate variability of its cost to
finance its ARM assets by increasing the average period until the next repricing
of its borrowings from 26 days to 204 days. Fourteen of these Swaps were
entered into in connection with the Company's acquisition of Hybrid ARM loans
and commitments to purchase Hybrid ARM loans. These fourteen Swaps that hedge
the fixed rate portion of the Company's Hybrid ARM loans (to within one year of
the first interest rate reset) had a notional balance of $523 million at
year-end and an average maturity of 44.0 months. The other five swaps with a
notional balance of $950 million were entered into for the purpose of
lengthening the average next re-pricing date of the Company's borrowings to more
closely match the re-pricing characteristics of the Company's ARM assets. These
five swaps mature during the first quarter of 1999.
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
For the year ended December 31, 1998, the Company's net income was $22,695,000,
or $0.75 per share (Basic EPS), based on a weighted average of 21,488,000 shares
outstanding. That compares to $41,402,000, or $1.95 per share (Basic EPS),
based on a weighted average of 18,048,000 shares outstanding for the year ended
December 31, 1997. Net interest income for the year totaled $31,040,000,
compared to $49,064,000 for the same period in 1997. Net interest income is
comprised of the interest income earned on portfolio assets less interest
expense from borrowings. During 1998, the Company recorded a net loss on the
sale of ARM securities of $278,000 as compared to a gain of $1,189,000 during
1997. Additionally, during 1998, the Company reduced its earnings and the
carrying value of its ARM assets by reserving $2,032,000 for potential credit
losses, compared to $886,000 during 1997. During 1998, the Company incurred
operating expenses of $6,035,000, consisting of a base management fee of
$4,142,000, a performance-based fee of $759,000 and other operating expenses of
$1,134,000. During 1997, the Company incurred operating expenses of $7,965,000,
consisting of a base management fee of $3,664,000, a performance-based fee of
$3,363,000 and other operating expenses of $938,000. Total operating expenses
decreased as a percentage of average assets to 0.13% for 1998, compared to 0.21%
for 1997, primarily due to the elimination of the performance-based fee during
the last three quarters of 1998.
25
<PAGE>
The Company's return on average common equity was 4.80% for the year ended
December 31, 1998 compared to 12.72% for the year ended December 31, 1997. The
primary reasons for the lower return on average common equity are the Company's
lower interest rate spread, discussed further below and the net loss recorded in
1998 on the sale of ARM securities, which were partially offset by lower
operating expenses.
The table below highlights the historical trend and the components of return on
average common equity (annualized) and the 10-year U. S. Treasury average yield
during each respective quarter which is applicable to the computation of the
performance fee:
<TABLE>
<CAPTION>
COMPONENTS OF RETURN ON AVERAGE COMMON EQUITY (1)
ROE in
Excess of
Net Gain (Loss) Net 10-Year 10-Year
Interest Provision on ARM G & A Performance Preferred Income/ US Treas. US Treas.
For The Income/ For Losses/ Sales/ Expense (2)/ Fee/ Dividend/ Equity Average Average
Quarter Ended Equity Equity Equity Equity Equity Equity (ROE) Yield Yield
- ------------- --------- ------------ ------- ------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mar 31, 1996. 13.37% - 0.03% 1.04% 1.27% - 11.08% 5.90% 5.18%
Jun 30, 1996. 13.14% - - 1.00% 0.92% - 11.22% 6.72% 4.50%
Sep 30, 1996. 13.42% 0.34% 0.88% 1.03% 1.07% - 11.86% 6.78% 5.08%
Dec 31, 1996. 14.99% 1.32% 1.38% 1.46% 1.23% - 12.37% 6.35% 6.02%
Mar 31, 1997. 18.85% 0.32% 0.01% 1.65% 1.43% 2.07% 13.40% 6.55% 6.85%
Jun 30, 1997. 19.48% 0.34% 0.03% 1.81% 1.25% 2.67% 13.45% 6.71% 6.74%
Sep 30, 1997. 17.66% 0.30% 0.45% 1.64% 1.24% 2.23% 12.70% 6.26% 6.44%
Dec 31, 1997. 15.62% 0.33% 1.06% 1.59% 1.01% 2.12% 11.63% 5.92% 5.71%
Mar 31, 1998. 14.13% 0.48% 1.89% 1.62% 0.94% 2.06% 10.91% 5.60% 5.31%
Jun 30, 1998. 9.15% 0.53% 1.76% 1.58% 0.00% 1.96% 6.83% 5.60% 1.23%
Sep 30, 1998. 6.82% 0.66% 0.89% 1.54% 0.00% 1.97% 3.54% 5.24% -1.70%
Dec 31, 1998. 7.27% 0.76% -4.88% 1.57% 0.00% 2.01% -1.95% 4.66% -6.61%
<FN>
- -------------
(1) Average common equity excludes unrealized gain (loss) on available-for-sale ARM securities.
(2) Excludes performance fees.
</TABLE>
The decline in the Company's return on common equity from the fourth quarter of
1997 to the fourth quarter of 1998 is primarily due to the decline in the net
interest spread between the Company's interest-earning assets and
interest-bearing liabilities, an increase in the Company's provision for losses
and the impact of a net loss on ARM sales as compared to a net gain on ARM
sales. This decline in net return on common equity was partially offset by the
elimination of the performance-based fee. The decline in the Company's return
on common equity from the third quarter of 1998 to the fourth quarter of 1998 is
primarily due to the impact of a net loss on ARM sales as compared to a net gain
on ARM sales and an increase in the Company's provision for losses. This
decline was partially offset by an increase in the net interest spread between
the Company's interest-earning assets and interest-bearing liabilities.
26
<PAGE>
The following table presents the components of the Company's net interest income
for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
COMPARATIVE NET INTEREST INCOME COMPONENTS
(Dollar amounts in thousands)
1998 1997
--------- ---------
<S> <C> <C>
Coupon interest income on ARM assets $335,983 $271,170
Amortization of net premium. . . . . (46,101) (21,343)
Amortization of Cap Agreements . . . (5,444) (5,313)
Amort. of deferred gain from hedging 1,889 1,992
Cash and cash equivalents. . . . . . 705 1,215
--------- ---------
Interest income. . . . . . . . . . 287,032 247,721
--------- ---------
Reverse repurchase agreements. . . . 251,462 197,006
Callable AAA notes payable . . . . . 2,811 -
Other borrowings . . . . . . . . . . 632 969
Interest rate swaps. . . . . . . . . 1,087 682
--------- ---------
Interest expense . . . . . . . . . 255,992 198,657
--------- ---------
Net interest income. . . . . . . . . $ 31,040 $ 49,064
========= =========
</TABLE>
As presented in the table above, the Company's net interest income decreased by
$18.0 million in 1998 compared to 1997, primarily because the amortization of
net premium increased by $24.8 million. In 1998 the amortization of net premium
was 13.7% of coupon interest income on ARM assets as compared to 7.9% in 1997,
reflecting, in part, the increased rate of ARM prepayments in 1998 as compared
to 1997.
The following table reflects the average balances for each category of the
Company's interest earning assets as well as the Company's interest bearing
liabilities, with the corresponding effective rate of interest annualized for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
AVERAGE BALANCE AND RATE TABLE
(Dollar amounts in thousands)
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
----------------------- ----------------------
Average Effective Average Effective
Balance Rate Balance Rate
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Earning Assets:
Adjustable-rate mortgage assets. . . . $4,800,772 5.96% $3,755,064 6.56%
Cash and cash equivalents. . . . . . . 16,214 4.35 21,774 5.57
----------- ---------- ---------- ----------
4,816,986 5.96 3,776,838 6.56
----------- ---------- ---------- ----------
Interest Bearing Liabilities:
Borrowings . . . . . . . . . . . . . . 4,430,167 5.78 3,446,913 5.76
----------- ---------- ---------- ----------
Net Interest Earning Assets and Spread . $ 386,819 0.18% $ 329,925 0.80%
=========== ========== ========== ==========
Yield on Net Interest Earning Assets (1) 0.64% 1.30%
========== ==========
<FN>
(1) Yield on Net Interest Earning Assets is computed by dividing annualized net
interest income by the average daily balance of interest earning assets.
</TABLE>
As a result of the yield on the Company's interest-earning assets declining to
5.96% during 1998 from 6.56% during 1997 and the Company's cost of funds
increasing to 5.78% during 1998 from 5.76% during 1997, net interest income
decreased by $18,024,000. This decrease in net interest income is a combination
of rate and volume variances. There was a combined unfavorable rate variance of
$23,332,000, which was almost entirely the result of a lower yield on the
Company's ARM assets portfolio and other interest-earning assets. The increased
average size of the Company's portfolio during 1998 compared to 1997 contributed
to higher net interest income in the amount of $5,310,000. The average balance
of the Company's interest-earning assets was $4.817 billion during 1998 compared
to $3.777 billion during 1997 -- an increase of 28%.
27
<PAGE>
The following table highlights the components of net interest spread and the
annualized yield on net interest-earning assets as of each applicable quarter
end:
<TABLE>
<CAPTION>
COMPONENTS OF NET INTEREST SPREAD AND YIELD ON NET INTEREST EARNING ASSETS (1)
(Dollar amounts in millions)
Average ARM Assets Yield on Yield on
----------------------------------
Interest Wgt. Avg. Weighted Interest Net Net Interest
As of the Earning Fully Indexed Average Yield Earning Cost of Interest Earning
Quarter Ended Assets Coupon Coupon Adj. (2) Assets Funds Spread Assets
- ------------- ---------- -------- -------------- -------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mar 31, 1996. $ 2,025.8 7.56% 7.48% 0.99% 6.49% 5.60% 0.89% 1.32%
Jun 30, 1996. 2,248.2 7.83% 7.28% 0.85% 6.43% 5.59% 0.84% 1.32%
Sep 30, 1996. 2,506.0 7.80% 7.31% 0.80% 6.51% 5.71% 0.80% 1.32%
Dec 31, 1996. 2,624.4 7.61% 7.57% 0.93% 6.64% 5.72% 0.92% 1.34%
Mar 31, 1997. 2,950.6 7.93% 7.53% 0.89% 6.65% 5.67% 0.98% 1.54%
Jun 30, 1997. 3,464.1 7.75% 7.57% 0.90% 6.67% 5.77% 0.90% 1.39%
Sep 30, 1997. 4,143.7 7.63% 7.65% 1.07% 6.58% 5.79% 0.79% 1.22%
Dec 31, 1997. 4,548.9 7.64% 7.56% 1.18% 6.38% 5.91% 0.47% 0.96%
Mar 31, 1998. 4,859.7 7.47% 7.47% 1.23% 6.24% 5.74% 0.50% 0.92%
Jun 30, 1998. 4,918.3 7.51% 7.44% 1.50% 5.94% 5.81% 0.13% 0.56%
Sep 30, 1998. 4,963.7 6.97% 7.40% 1.52% 5.88% 5.78% 0.09% 0.46%
Dec 31, 1998. 4,526.2 6.79% 7.28% 1.42% 5.86% 5.94% -0.08% 0.61%
<FN>
- ------------
(1) Yield on Net Interest Earning Assets is computed by dividing annualized net interest income by the
average daily balance of interest earning assets.
(2) Yield adjustments include the impact of amortizing premiums and discounts, the cost of hedging
activities, the amortization of deferred gains from hedging activities and the impact of principal payment
receivables. The following table presents these components of the yield adjustments for the dates presented
in the table above:
</TABLE>
<TABLE>
<CAPTION>
COMPONENTS OF THE YIELD ADJUSTMENTS ON ARM ASSETS
Impact of Amort. of
Premium/ Principal Deferred Gain Total
As of the Discount Payments Hedging from Hedging Yield
Quarter Ended Amort. Receivable Activity Activity Adjustment
- ------------- --------- ----------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Mar 31, 1996. 0.77% 0.11% 0.31% (0.20)% 0.99%
Jun 30, 1996. 0.67% 0.07% 0.27% (0.16)% 0.85%
Sep 30, 1996. 0.57% 0.08% 0.25% (0.10)% 0.80%
Dec 31, 1996. 0.69% 0.09% 0.23% (0.08)% 0.93%
Mar 31, 1997. 0.63% 0.13% 0.19% (0.07)% 0.89%
Jun 30, 1997. 0.66% 0.13% 0.16% (0.05)% 0.90%
Sep 30, 1997. 0.85% 0.12% 0.15% (0.05)% 1.07%
Dec 31, 1997. 0.94% 0.14% 0.14% (0.04)% 1.18%
Mar 31, 1998. 0.98% 0.16% 0.13% (0.04)% 1.23%
Jun 30, 1998. 1.24% 0.17% 0.13% (0.04)% 1.50%
Sep 30, 1998. 1.25% 0.18% 0.13% (0.04)% 1.52%
Dec 31, 1998. 1.18% 0.14% 0.14% (0.04)% 1.42%
</TABLE>
As of December 31, 1998, the Company's yield on its ARM assets portfolio,
including the impact of the amortization of premiums and discounts, the cost of
hedging, the amortization of deferred gains from hedging activity and the impact
of principal payment receivables, was 5.86%, compared to 6.38% as of December
31, 1997-- a decrease of 0.52%. The Company's cost of funds as of December 31,
1998, was 5.94%, compared to 5.91% as of December 31, 1997 -- an increase of
0.03%. As a result of these changes, the Company's net interest spread as of
December 31, 1998 was -0.08%, compared to 0.47% as of December 31, 1997. The
decline in the net interest spread is largely attributable to the decline in the
ARM portfolio yield which is primarily the result of the lower average interest
coupon and the higher level of premium amortization. The increase in the
Company's cost of funds as of year end is generally the impact of the rate on
the newly issued callable AAA notes payable. The notes were issued on December
18, 1998 at a time when finance rates are generally seasonably high, reflecting
the mortgage finance market's reluctance to finance assets over year-end, and
the notes were issued at a time when mortgage finance spreads were unusually
wide due to the liquidity crises discussed earlier. Subsequent to year-end,
the rate on the callable AAA notes, which floats with one-month LIBOR, decreased
by 0.68%.
28
<PAGE>
The Company's net interest spread declined from 0.47% as of December 31, 1997
to -0.08% as of December 31, 1998. The primary reasons for these declines
continues to be the relationship between the one-year U. S. Treasury yield and
LIBOR and the impact of the increased rate of ARM prepayments as well as the
impact of issuing the callable AAA notes close to year-end. From December 31,
1997 to December 31, 1998, the one-year U.S. Treasury yield declined by
approximately 0.98%, from 5.51% to 4.53%, while LIBOR rates applicable to the
Company's borrowings decreased by only 0.70%, from 5.77% to 5.07%, creating a
negative index spread as of December 31, 1998 of -0.54% compared to a negative
index spread as of December 31, 1997 of -0.26%. As of December 31, 1998,
approximately 35% of the Company's ARM assets were indexed to the one-year U. S.
Treasury bill yield, down from approximately 49% as of December 31, 1997, and,
therefore, the yield on such assets declined with the index. To put this in
historical perspective, the one-year U.S. Treasury bill yield had a spread of
- -0.26% to the average of the one- and three-month LIBOR rate as of December 31,
1997, compared to having a spread of -0.02% at December 31, 1996, -.06% on
average during 1997, 0.04% on average during 1996 and -0.07% on average during
1995. For the five-year period from 1993 to 1997, the average spread was 0.15%.
The average spread during the three month period ended December 31, 1998 was
- -0.93%, which was substantially worse than the average spread during the
previous quarter of -0.53% or in the second quarter of 1998 when the average
spread was -0.27%. The Company does not know when or if the relationship
between the one-year U. S. Treasury bill yield and LIBOR will return to
historical norms, but the Company's spreads are expected to improve if that
occurs. As of the middle of March 1999, the one-year U.S. Treasury bill yield
and LIBOR spread had improved back to approximately -.25%. The Company is also
continuing to decrease its exposure to the one-year U. S. Treasury/LIBOR
relationship by reducing the portion of the portfolio indexed to the one-year U.
S. Treasury rate and financed with LIBOR. The Company's ARM portfolio yield
also was lower as of December 31, 1998 compared to December 31, 1997 because of
an increase in the amortization of the net premium on ARM assets which reflects
an increase in the average rate of prepayments on the ARM portfolio. During the
fourth quarter of 1998, the average prepayment rate was 29%, compared to 24%
during the comparable period in 1997. The impact of this was to increase the
average amount of non-interest-earning assets in the form of principal payments
receivable as well as to increase the amortization expense related to writing
off the Company's premiums and discounts. The Company generally amortizes its
premiums and discounts on a monthly basis based on the most recent three-month
average of the prepayment rate of its ARM assets, thereby adjusting its
amortization to current market conditions, which is reflected in the yield of
the ARM portfolio. As of December 31, 1998, the yield adjustment related to
premium amortization amounted to 1.18% compared to 0.94% as of December 31,
1997. As discussed above, the Company's net spread of -.08% also reflects the
cost of the callable AAA notes which were issued on December 18, 1998 and had an
interest rate of 6.32% as of year-end, which has subsequently declined to a rate
of 5.64% in January and which will continue to float with one-month LIBOR.
The Company's provision for losses has increased with the acquisition of whole
loans. The provision for loan losses is based on an annualized rate of 0.15% on
the outstanding principal balance of loans as of each month-end, subject to
certain adjustments as discussed above. As of December 31, 1998, the Company's
whole loans, including those held as collateral for the AAA notes payable,
accounted for 24.5% of the Company's portfolio of ARM assets compared to 2.6% as
of December 31, 1997. To date, the Company has not experienced any actual
losses in its whole loan portfolio, but based on industry standards, losses are
expected and are being provided for as the portfolio ages.
During 1998, the Company realized a net loss from the sale of ARM securities in
the amount of $278,000 compared to a gain of $1,189,000 during 1997. The 1998
sales generally fall into two categories. During the first nine months of 1998,
the Company realized a net gain on the sale of ARM assets in the amount
$3,780,000 as part of the Company's ongoing portfolio management. These sales
reflect the Company's desire to manage the portfolio with a view to enhancing
the total return of the portfolio over the long-term while generating current
earnings during this period of fast prepayments and narrow interest spreads.
The Company monitors the performance of its individual ARM assets and
selectively sells an asset when there is an opportunity to replace it with an
ARM asset that has an expected higher long-term yield or more attractive
interest rate characteristics. The Company sold $511.8 million of ARM assets
during the first nine months of 1998, most which were either indexed to a Cost
of Funds index, the one-year U. S. Treasury index or were prepaying faster than
expected. During the first nine months of 1998 when the Company sold selected
assets, it was able to reinvest the proceeds in ARM assets that were indexed to
indices preferred by the Company and at prices that reflected current market
assumptions regarding prepayments speeds and interest rates and thus far, as a
whole, they have been performing better than the portfolio acquired before 1998.
During the fourth quarter of 1998, the Company sold assets for the primary
purpose of maintaining adequate levels of liquidity at a time when the mortgage
finance market experienced a sudden liquidity crises and, thus, was able to
avoid the forced liquidation of any of its assets by mortgage finance
counterparties. However, the Company realized a net loss of $4,059,000 on these
sales. Although the Company is never pleased when it has to sell assets at a
loss, the Company was very pleased with the response of its mortgage finance
counterparties to the high credit quality and highly liquid characteristics of
the Company's ARM portfolio in that all of the Company's counterparties, upon
review of the company's ARM portfolio and investment policies, continued to
provide financing at reasonable collateral values and reasonable requirements
for over collateralization.
29
<PAGE>
As a REIT, the Company is required to declare dividends amounting to 85% of each
year's taxable income by the end of each calendar year and to have declared
dividends amounting to 95% of its taxable income for each year by the time it
files its applicable tax return and, therefore, generally passes through
substantially all of its earnings to shareholders without paying federal income
tax at the corporate level. As of December 31, 1998, the Company had
distributed all of its cumulative taxable income to its shareholders. Since the
Company, as a REIT, pays its dividends based on taxable earnings, the dividends
may at times be more or less than reported earnings. The following table
provides a reconciliation between the Company's earnings as reported based on
generally accepted accounting principles and the Company's taxable income before
its' common dividend deduction:
<TABLE>
<CAPTION>
RECONCILIATION OF REPORTED NET INCOME TO TAXABLE NET INCOME
(Dollar amounts in thousands)
Years Ending December 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . $22,695 $41,402
Additions:
Provision for credit losses. . . . . . . . . 2,032 886
Net compensation related items . . . . . . . 165 (195)
Non-deductible capital losses. . . . . . . . 278 -
Deductions:
Dividend on Series A Preferred Shares (5,009) (6,251)
Actual credit losses on ARM securities (1,766) (96)
-------- --------
Taxable net income. . . . . . . . . . . . . . $18,395 $35,746
======== ========
</TABLE>
On August 17, 1998, the Company announced that its Board of Directors had
approved a rescheduling of the Company's quarterly board meetings and the
declaration, record and payment dates of its regular cash dividend on its common
stock. Under the new schedule, the Board of Directors will meet after the close
of each quarter end, so the Board can review actual quarterly financial results
as they consider the declaration of common dividends. This action is also
expected to provide a modest benefit to the financial results of the Company as
the Company will be able to retain earnings over each quarter end and to
leverage this additional capital for an extended period of time, generating
additional income for shareholders when the additional assets are invested at a
positive effective margin. This action does not effect the dividend dates in
connection with the Company's Series A 9.68% Cumulative Convertible Preferred
Shares.
For the year ended December 31, 1998, the Company's ratio of operating expenses
to average assets was 0.13% compared to 0.21% for 1997. The Company's expense
ratios are among the lowest of any company investing in mortgage assets, giving
the Company what it believes to be a significant competitive advantage over more
traditional mortgage portfolio lending institutions such as banks and savings
and loans. This competitive advantage enables the Company to operate with less
risk, such as credit and interest rate risk, and still generate an attractive
long-term return on equity when compared to these more traditional mortgage
portfolio lending institutions. The Company pays the Manager an annual base
management fee, generally based on average shareholders' equity, not assets, as
defined in the Management Agreement, payable monthly in arrears as follows:
1.1% of the first $300 million of Average Shareholders' Equity, plus 0.8% of
Average Shareholders' Equity above $300 million. Since this management fee is
based on shareholders' equity and not assets, this fee increases as the Company
successfully accesses capital markets and raises additional equity capital and
is, therefore, managing a larger amount of invested capital on behalf of its
shareholders. In order for the Manager to earn a performance fee, the rate of
return on the shareholders' investment, as defined in the Management Agreement,
must exceed the average ten-year U.S. Treasury rate during the quarter plus 1%.
During 1998, as the Company's return on shareholders' equity declined, compared
to 1997, the performance fee also declined, to an annualized 0.02% of average
assets compared to 0.09% during 1997. As presented in the following table, the
performance fee is a variable expense that fluctuates with the Company's return
on shareholders' equity relative to the average 10-year U.S. Treasury rate.
30
<PAGE>
The following table highlights the quarterly trend of operating expenses as a
percent of average assets:
<TABLE>
<CAPTION>
ANNUALIZED OPERATING EXPENSE RATIOS
Management Fee & Total
For The Other Expenses/ Performance Fee/ G & A Expense/
Quarter Ended Average Assets Average Assets Average Assets
- ------------- ----------------- ----------------- ---------------
<S> <C> <C> <C>
Mar 31, 1996. 0.09% 0.12% 0.21%
Jun 30, 1996. 0.10% 0.09% 0.19%
Sep 30, 1996. 0.10% 0.10% 0.20%
Dec 31, 1996. 0.13% 0.11% 0.24%
Mar 31, 1997. 0.14% 0.11% 0.25%
Jun 30, 1997. 0.13% 0.09% 0.22%
Sep 30, 1997. 0.12% 0.09% 0.21%
Dec 31, 1997. 0.12% 0.05% 0.17%
Mar 31, 1998. 0.10% 0.06% 0.16%
Jun 30, 1998. 0.10% 0.00% 0.10%
Sep 30, 1998. 0.10% 0.00% 0.10%
Dec 31, 1998. 0.11% 0.00% 0.11%
</TABLE>
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996
For the year ended December 31, 1997, the Company's net income was $41,402,000,
or $1.95 per share (Basic EPS), based on a weighted average of 18,047,955 shares
outstanding. That compares to $25,737,000, or $1.73 per share (Basic EPS),
based on a weighted average of 14,873,700 shares outstanding for the year ended
December 31, 1996. This 61% increase in earnings -- a 13% increase on a
per-share basis -- was achieved despite a 21% increase in the average number of
shares outstanding during the two periods. Net interest income for the year
totaled $49,064,000, compared to $30,345,000 for the same period in 1996, an
increase of 62%. Net interest income is comprised of the interest income earned
on mortgage investments less interest expense from borrowings. During 1997, the
Company recorded a gain on the sale of ARM securities of $1,189,000 as compared
to a gain of $1,362,000 during 1996. Additionally, during 1997, the Company
reduced its earnings and the carrying value of its ARM assets by reserving
$886,000 for potential credit losses, compared to $990,000 during 1996. During
1997, the Company incurred operating expenses of $7,965,000, consisting of a
base management fee of $3,664,000, a performance-based fee of $3,363,000 and
other operating expenses of $938,000. During 1996, the Company incurred
operating expenses of $4,980,000, consisting of a base management fee of
$1,872,000, a performance-based fee of $2,462,000 and other operating expenses
of $646,000. Total operating expenses decreased as a percentage of net interest
income to 16.2% for 1997, compared to 16.4% for 1996, thereby contributing to
the Company's improved net earnings.
The Company's return on average common equity for the year ended December 31,
1997 was 12.72%, compared to 11.68% for the same period in 1996.
31
<PAGE>
The following table presents the components of the Company's net interest income
for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
COMPARATIVE NET INTEREST INCOME COMPONENTS
(Dollar amounts in thousands)
1997 1996
--------- ---------
<S> <C> <C>
Coupon interest income on ARM assets $271,170 $165,105
Amortization of net premium. . . . . (21,343) (12,466)
Amortization of Cap Agreements . . . (5,313) (5,313)
Amort. of deferred gain from hedging 1,992 3,433
Cash and cash equivalents. . . . . . 1,215 752
--------- ---------
Interest income. . . . . . . . . . 247,721 151,511
--------- ---------
Reverse repurchase agreements. . . . 197,006 118,752
Other borrowings . . . . . . . . . . 969 1,332
Interest rate swaps. . . . . . . . . 682 1,082
--------- ---------
Interest expense . . . . . . . . . 198,657 121,166
--------- ---------
Net interest income. . . . . . . . . $ 49,064 $ 30,345
========= =========
</TABLE>
Despite the fact that the Company's cost of funds increased from 5.67% in 1996
to 5.76% in 1997, its net interest income increased during this same time
period, primarily due to the increased size of the Company's portfolio. Net
interest income increased by $18,719,000, which is a combination of rate and
volume variances. There was a combined favorable rate variance of $623,000,
which consisted of a favorable variance of $2,691,000 resulting from the higher
yield on the Company's ARM assets portfolio and other interest-earning assets
and an unfavorable variance of $2,068,000 resulting from an increase in the
Company's cost of funds. The increased average size of the Company's portfolio
during 1997 compared to 1996 contributed to higher net interest income in the
amount of $18,096,000. The average balance of the Company's interest-earning
assets was $3.777 billion during 1997 compared to $2.351 billion during 1996 --
an increase of 61%.
The Company's ARM assets portfolio generated a yield of 6.56% during 1997,
compared to 6.45% during 1996. The Company's cost of funds during 1997 was
5.76%, compared to 5.67% during 1996, primarily as a result of higher short-term
interest rates available to the Company for financing purposes. Despite the
fact that the Company's cost of funds increased, the Company's net spread
increased to 0.80% for 1997 from a spread of 0.78% for 1996 -- an increase of
0.02%. The Company's yield on net interest-earning assets, which includes the
impact of shareholders' equity, rose to 1.30% for 1997 from 1.29% for 1996.
32
<PAGE>
The following table reflects the average balances for each category of the
Company's interest-earning assets as well as the Company's interest-bearing
liabilities with the corresponding effective rate of interest annualized for the
years ended December 31, 1997, and December 31, 1996:
<TABLE>
<CAPTION>
AVERAGE BALANCE AND RATE TABLE
(Dollar amounts in thousands)
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996
----------------------- ----------------------
Average Effective Average Effective
Balance Rate Balance Rate
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Adjustable-rate mortgage assets . . . . $3,755,064 6.56% $2,336,900 6.45%
Cash and cash equivalents . . . . . . . 21,774 5.57 14,200 5.29
----------- ---------- ---------- ----------
3,776,838 6.56 2,351,100 6.45
----------- ---------- ---------- ----------
Interest-Bearing Liabilities:
Borrowings. . . . . . . . . . . . . . . 3,446,913 5.76 2,138,236 5.67
----------- ---------- ---------- ----------
Net Interest-Earning Assets and Spread . $ 329,925 0.80% $ 212,864 0.78%
=========== ========== ========== ==========
Yield on Net Interest-Earning Assets (1) 1.30% 1.29%
========== ==========
<FN>
- ----------------------------------------
(1) Yield on Net Interest-Earning Assets is computed by dividing annualized net
interest income by the average daily balance of interest-earning assets.
</TABLE>
As of the end of 1997, the Company's yield on its ARM assets portfolio,
including the impact of the amortization of premiums and discounts, the cost of
hedging, the amortization of deferred gains from hedging activity and the impact
of principal payment receivables, was 6.38%, compared to 6.64% as of the end of
1996 -- a decrease of 0.26%. The Company's cost of funds as of December 31,
1997, was 5.91%, compared to 5.72% as of December 31, 1996 -- an increase of
0.19%. This increase was primarily the result of financing a portion of the ARM
portfolio over 1997 year-end at a time when LIBOR interest rates increased
suddenly late in November due to year-end pressures. Fortunately the Company,
expecting this to occur, already had financed most of its portfolio over
year-end before the LIBOR increase and, thus, was able to avoid the full
potential impact. Subsequent to year-end, LIBOR interest rates have generally
returned to their previous level, which will be reflected in first quarter 1998
interest rate spreads. As a result of these changes, the Company's net interest
spread as of the end of 1997 was 0.47%, compared to 0.92% as of the end of 1996
- -- a decrease of 0.45%.
During 1997, the Company realized a net gain from the sale of ARM securities in
the amount of $1,189,000, compared to a gain of $1,362,000 during 1996.
Additionally, the Company recorded a provision for credit losses in the amount
of $886,000 during the year ended December 31, 1997, although the Company only
incurred actual credit losses of $96,000 during the year, compared to a
provision for credit losses in the amount of $990,000 during 1996 with no actual
credit losses. The Company provided for additional credit losses because its
review of underlying ARM collateral indicates potential for some loss on two ARM
securities, which, at December 31, 1997 were being carried at a market value of
$13.1 million, or 0.3% of the Company's ARM portfolio. The Company also has a
policy to regularly record a provision for possible credit losses on its
portfolio of ARM loans.
For both years ended December 31, 1997 and 1996, the Company's ratio of
operating expenses to average assets was 0.21%. The Company's operating expense
ratio is well below the average of other more traditional mortgage portfolio
lending institutions such as banks and savings and loans. The Company pays the
Manager an annual base management fee, generally based on average shareholders'
equity, not assets, as defined in the Management Agreement, payable monthly in
arrears as follows: 1.1% of the first $300 million of Average Shareholders'
Equity, plus 0.8% of Average Shareholders' Equity above $300 million. Since
this management fee is based on shareholders' equity and not assets, this fee
increases as the Company successfully accesses capital markets and raises
additional equity capital and is, therefore, managing a larger amount of
invested capital on behalf of its shareholders. In order for the Manager to
earn a performance fee, the rate of return on the shareholders' investment, as
defined in the Management Agreement, must exceed the average ten-year U.S.
Treasury rate during the quarter plus 1%. During 1997, the Manager earned a
performance fee of $3,363,000. During 1997, after paying this performance fee,
the Company's return on common equity was 12.72%. See Note 7 to the Financial
Statements for a discussion of the management fee formulas.
33
<PAGE>
MARKET RISKS
The market risk management discussion and the amounts estimated from the
analysis that follows are forward-looking statements regarding market risk that
assume that certain adverse market conditions occur. Actual results may differ
materially from these projected results due to changes in the Company's ARM
portfolio and borrowings mix and due to developments in the domestic and global
financial and real estate markets. The analytical methods utilized by the
Company to assess and mitigate these market risks should not be considered
projections of future events or operating performance.
As a financial institution that has only invested in U.S. dollar denominated
instruments, primarily residential mortgage instruments, and has only borrowed
money in the domestic market, the Company is not subject to foreign currency
exchange or commodity price risk, but rather the Company's market risk exposure
is limited solely to interest rate risk. Interest rate risk is defined as the
sensitivity of the Company's current and future earnings to interest rate
volatility, variability of spread relationships and the difference in repricing
intervals between the Company's assets and liabilities. Interest rate risk
impacts the Company's interest income, interest expense and the market value on
a large portion of the Company's assets and liabilities. The management of
interest rate risk attempts to maximize earnings and to preserve capital by
minimizing the negative impacts of changing market rates, asset and liability
mix and prepayment activity.
The table below presents the Company's consolidated interest rate risk using the
static gap methodology. This method reports the difference between interest
rate sensitive assets and liabilities at specific points in time as of December
31, 1998, based on the earlier of term to repricing or the term to repayment of
the of the asset or liability. The table does not include assets and
liabilities that are not interest rate sensitive such as payment receivables,
prepaid expenses, payables and accrued expenses. The table provides a projected
repricing or maturity based on scheduled rate adjustments, scheduled payments,
and estimated prepayments. For many of the Company's assets and certain of the
Company's liabilities, the maturity date is not determinable with certainty. In
general, the Company's ARM assets can be prepaid before contractual amortization
and/or maturity. Likewise, the Company's callable AAA rated notes are paid down
as the related ARM asset collateral pays down. The static gap report reflects
the Company's investment policy that allows for only the acquisition of ARM
assets that reprice within one year or Hybrids ARMs that are match funded to
within one-year of their initial repricing.
The difference between assets and liabilities repricing or maturing in a given
period is one approximate measure of interest rate sensitivity. More assets
than liabilities repricing in a period (a positive gap) implies earnings will
rise as interest rates rise and decline as interest rates decline. More
liabilities repricing than assets (a negative gap) implies declining income as
rates rise and increasing income as rates decline. The static gap analysis does
not take into consideration constraints on the repricing of the interest rate of
ARM assets in a given period resulting from periodic and lifetime cap features
nor the behavior of various indexes applicable to the Company's assets and
liabilities. Different interest rate indexes exhibit different degrees of
volatility in the same interest rate environment due to other market factors
such as, but not limited to, government fiscal policies, market concern
regarding potential credit losses, changes in spread relationships among
different indexes and global market disruptions.
The use of interest rate instruments such as Swaps and Cap Agreements are
integrated into the Company's interest rate risk management. The notional
amounts of these instruments are not reflected in the Company's balance sheet.
The Swaps are included in the static gap report for purposes of analyzing
interest rate risk because they have the affect of adjusting the repricing
characteristics of the Company's liabilities. The Cap Agreements are not
considered in a static gap report because they do not effect the timing of the
repricing of the instruments they hedge, but rather they, in effect, remove the
limit on the amount of interest rate change that can occur relative to the
applicable hedged asset.
34
<PAGE>
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAP ANALYSIS
(Dollar amounts in millions)
December 31, 1998
Over 3 Over 6
3 Months Months to Months to Over
or less 6 Months 1 Year 1 Year Total
------------ ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
ARM securities . . . . . . . . . . $ 1,722,897 $ 907,114 $620,671 $ - $3,250,682
ARM loans. . . . . . . . . . . . . 413,743 137,813 45,923 - 597,479
Hybrid ARM loans . . . . . . . . . 20,422 22,552 44,834 393,038 480,846
Cash and cash equivalents. . . . . 36,431 - - - 36,431
------------ ----------- --------- --------- ----------
Total interest-earning assets. . 2,193,493 1,067,479 711,428 393,038 4,365,438
------------ ----------- --------- --------- ----------
Interest-bearing liabilities:
Reverse repurchase agreements. . . 2,867,207 - - - 2,867,207
Callable AAA notes . . . . . . . . 1,131,007 - - - 1,131,007
Other borrowings . . . . . . . . . 83 602 712 632 2,029
Swaps. . . . . . . . . . . . . . . (1,249,843) 774,983 58,062 416,798 -
------------ ----------- --------- --------- ----------
Total interest-bearing
liabilities. . . . . . . . . . 2,748,454 775,585 58,774 417,430 4,000,243
------------ ----------- --------- --------- ----------
Interest rate sensitivity gap. . . . $ (554,961) $ 291,894 $652,654 $(24,392) $ 365,195
============ =========== ========= ========= ==========
Cumulative interest rate
sensitivity gap. . . . . . . . . . . $ (554,961) $ (263,067) $389,587 $365,195
============ =========== ========= =========
Cumulative interest rate sensitivity
gap as a percentage of total assets
before market value adjustments. . . (12.53)% (5.94)% 8.79% 8.25%
============ =========== ========= =========
</TABLE>
Although the static gap methodology is widely accepted in identifying interest
rate risk, it does not take into consideration changes that may occur such as,
but not limited to, changes in investment and financing strategies, changes in
market spreads and relationships among different indexes, changes in hedging
strategy, changes in prepayment speeds and changes in business volumes.
Accordingly, the Company makes extensive usage of an earnings simulation model
to analyze its level of interest rate risk. This analytical technique used to
measure and manage interest rate risk includes the impact of all
on-balance-sheet and off-balance-sheet financial instruments.
There are a number of key assumptions made in using the Company's earnings
simulation model. These key assumptions include changes in market conditions
that effect interest rates, the pricing of ARM products, the availability of ARM
products, the availability and the cost of financing for ARM products. Other
key assumptions made in using the simulation model include prepayment speeds,
management's investment, financing and hedging strategies and the issuance of
new equity. The Company typically runs the simulation model under a variety of
hypothetical business scenarios that may include different interest rate
scenarios, different investment strategies, different prepayment possibilities
and other scenarios that provide the Company with a range of possible earnings
outcomes in order to assess potential interest rate risk. The assumptions used
represent the Company's estimate of the likely effect of changes in interest
rates and do not necessarily reflect actual results. The earnings simulation
model takes into account periodic and lifetime caps embedded in the Company's
ARM assets in determining the earnings at risk.
At December 31, 1998, based on the earnings simulation model, the Company's
potential earnings at risk to a gradual, parallel 100 basis point rise in market
interest rates over the next twelve months was approximately 6.3% of projected
1998 net income. The assumptions used in the earnings simulation model are
inherently uncertain and as a result, the analysis cannot precisely predict the
impact of higher interest rates on net income. Actual results would differ from
simulated results due to timing, magnitude and frequency of interest rate
changes, changes in prepayment speed other than what was assumed in the model,
changes in other market conditions and management strategies to offset its
potential exposure, among other factors. This measure of risk represents the
Company's exposure to higher interest rates at a particular point in time. The
Company's actual risk is always changing. The Company continuously monitors the
Company's risk profile as it changes and alters its strategies as appropriate in
its view of the likely course of interest rates and other developments in the
Company's business.
35
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds for the year ended December 31, 1998
consisted of reverse repurchase agreements, which totaled $2.867 billion, and
callable AAA notes, which had a balance of $1.127 billion. The Company's other
significant sources of funds for the year ended December 31, 1998 consisted
primarily of payments of principal and interest from its ARM assets in the
amount of $2.1 billion and proceeds from the sale of ARM assets in the amounts
of $932.0 million. In the future, the Company expects its primary sources of
funds will consist of borrowed funds under reverse repurchase agreement
transactions with one- to twelve-month maturities, capital market financing
transactions collateralized by ARM and hybrid loans, proceeds from monthly
payments of principal and interest on its ARM assets portfolio and occasional
asset sales. The Company's liquid assets generally consist of unpledged ARM
assets, cash and cash equivalents.
Total borrowings incurred at December 31, 1998, had a weighted average interest
rate of 5.84%. The reverse repurchase agreements had a weighted average
remaining term to maturity of 2.0 months and the callable AAA notes payable had
a final maturity of January 25, 2029, but will be paid down as the ARM assets
collateralizing the notes are paid down. As of December 31, 1998, $1.147
billion of the Company's borrowings were variable-rate term reverse repurchase
agreements. Term reverse repurchase agreements are committed financings with
original maturities that range from three months to two years. The interest
rates on these term reverse repurchase agreements are indexed to either the
one-, three- or six-month LIBOR rate and reprice accordingly. The interest rate
on the callable AAA notes adjusts monthly based on changes in one-month LIBOR.
The Company has arrangements to enter into reverse repurchase agreements with 24
different financial institutions and on December 31, 1998, had borrowed funds
with 16 of these firms. Because the Company borrows money under these agreements
based on the fair value of its ARM assets and because changes in interest rates
can negatively impact the valuation of ARM assets, the Company's borrowing
ability under these agreements could be limited and lenders may initiate margin
calls in the event interest rates change or the value of the Company's ARM
assets decline for other reasons. Additionally, certain of the Company's ARM
assets are rated less than AA by the Rating Agencies (approximately 4.0%) and
have less liquidity than assets that are rated AA or higher. Other mortgage
assets which are rated AA or higher by the Rating Agencies derive their credit
rating based on a mortgage pool insurer's rating. As a result of either changes
in interest rates, credit performance of a mortgage pool or a downgrade of a
mortgage pool issuer, the Company may find it difficult to borrow against such
assets and, therefore, may be required to sell certain mortgage assets in order
to maintain liquidity. If required, these sales could be at prices lower than
the carrying value of the assets, which would result in losses. During the
fourth quarter of 1998, as discussed earlier, the Company maintained an adequate
level of liquidity by selling certain ARM securities. The Company believes it
will continue to have sufficient liquidity to meet its future cash requirements
from its primary sources of funds for the foreseeable future without needing to
sell assets.
The Company, by issuing the callable AAA notes, has financed $1.1 billion of its
ARM assets in a structure that is not subject to margin calls. In this
structure, the financing of these assets is not based on their market value or
subject to subsequent changes in mortgage credit markets as is the case of the
reverse repurchase agreement arrangements. The Company has retained a call on
both the notes and the collateral in the event the Company should choose to
refinance these ARM assets in a different manner.
As of December 31, 1998, the Company had one whole loan financing facility with
an uncommitted borrowing capacity of $250,000,000. The Company had no balance
borrowed against this facility as of year-end. This facility matured on January
8, 1999 and has been subsequently re-negotiated for an additional one year
period. Under the new agreement in effect as of January 8, 1999, the whole loan
financing facility is a committed facility in an amount of up to $150,000,000,
with an option to increase the amount to $300,000,000. The Company is also
negotiating to enter into one other committed whole loan financing facility and
three uncommitted whole loan financing facilities in order to facilitate its
acquisitions of whole loans in a prudent manner.
36
<PAGE>
In December 1996, the Company's Registration Statement on Form S-3, registering
the sale of up to $200 million of additional equity securities, was declared
effective by the Securities and Exchange Commission. This registration
statement includes the possible issuances of common stock, preferred stock,
warrants or shareholder rights. As of December 31, 1998, the Company had $109
million of its securities registered for future sale under this Registration
Statement.
On July 13, 1998, the Board of Directors approved a common stock repurchase
program of up to 500,000 shares at prices below book value, subject to
availability of shares and other market conditions. On September 18, 1998, the
Board of Directors expanded this program by approving the repurchase of up to
1,000,000 shares at prices below book value. To date, the Company has
repurchased 500,016 shares at an average price of $9.28 per share.
The Company has a Dividend Reinvestment and Stock Purchase Plan (the "DRP")
designed to provide a convenient and economical way for existing shareholders to
automatically reinvest their dividends in additional shares of common stock and
for new and existing shareholders to purchase shares at a discount to the
current market price of the common stock, as defined in the DRP. As a result of
participation in the DRP during the first half of 1998, the Company issued
1,581,550 new shares of common stock and received $24.4 million of new equity
capital. During the second half of 1998, the Company purchased shares in the
open market on behalf of the participants in its DRP instead of issuing new
shares below book value. In accordance with the terms and conditions of the
DRP, the Company pays the brokerage commission in connection with these
purchases.
EFFECTS OF INTEREST RATE CHANGES
Changes in interest rates impact the Company's earnings in various ways. While
the Company only invests in ARM assets, rising short-term interest rates may
temporarily negatively affect the Company's earnings and conversely falling
short-term interest rates may temporarily increase the Company's earnings. This
impact can occur for several reasons and may be mitigated by portfolio
prepayment activity as discussed below. First, the Company's borrowings will
react to changes in interest rates sooner than the Company's ARM assets because
the weighted average next repricing date of the borrowings is usually a shorter
time period. Second, interest rates on ARM loans are generally limited to an
increase of either 1% or 2% per adjustment period (commonly referred to as the
periodic cap) and the Company's borrowings do not have similar limitations.
Third, the Company's ARM assets lag changes in the indices due to the notice
period provided to ARM borrowers when the interest rates on their loans are
scheduled to change. The periodic cap only affects the Company's earnings when
interest rates move by more than 1% per six-month period or 2% per year.
Interest rate changes may also impact the Company's ARM assets and borrowings
differently because the Company's ARM assets are indexed to various indices
whereas the interest rate on the Company's borrowings generally move with
changes in LIBOR. Although the Company has always favored acquiring LIBOR based
ARM assets in order to reduce this risk, LIBOR based ARMs are not generally well
accepted by home owners in the U.S. As a result, the Company has acquired ARM
assets indexed to a mix of indices in order to diversify its exposure to changes
in LIBOR in contrast to changes in other indices. During times of global
economic instability, U.S. Treasury rates generally decline because foreign and
domestic investors generally consider U.S. Treasury instruments to be a safe
haven for investments. The Company's ARM assets indexed to U.S. Treasury rates
then decline in yield as U.S. Treasury rates decline, whereas the Company's
borrowings and other ARM assets may not be affected by the same pressures or to
the same degree. As a result, the Company's income can improve or decrease
depending on the relationship between the various indices that the Company's ARM
assets are indexed to compared to changes in the Company's cost of funds.
The rate of prepayment on the Company's mortgage assets may increase if interest
rates decline, or if the difference between long-term and short-term interest
rates diminishes. Increased prepayments would cause the Company to amortize the
premiums paid for its mortgage assets faster, resulting in a reduced yield on
its mortgage assets. Additionally, to the extent proceeds of prepayments cannot
be reinvested at a rate of interest at least equal to the rate previously earned
on such mortgage assets, the Company's earnings may be adversely affected.
Conversely, the rate of prepayment on the Company's mortgage assets may decrease
if interest rates rise, or if the difference between long-term and short-term
interest rates increases. Decreased prepayments would cause the Company to
amortize the premiums paid for its ARM assets over a longer time period,
resulting in an increased yield on its mortgage assets. Therefore, in rising
interest rate environments where prepayments are declining, not only would the
interest rate on the ARM assets portfolio increase to re-establish a spread over
the higher interest rates, but the yield also would rise due to slower
prepayments. The combined effect could significantly mitigate other negative
effects that rising short-term interest rates might have on earnings.
37
<PAGE>
Lastly, because the Company only invests in ARM assets and approximately 8% to
10% of such mortgage assets are purchased with shareholders' equity, the
Company's earnings over time will tend to increase following periods when
short-term interest rates have risen and decrease following periods when
short-term interest rates have declined. This is because the financed portion
of the Company's portfolio of ARM assets will, over time, reprice to a spread
over the Company's cost of funds, while the portion of the Company's portfolio
of ARM assets that are purchased with shareholders' equity will generally have a
higher yield in a higher interest rate environment and a lower yield in a lower
interest rate environment.
YEAR 2000 ISSUES
The Year 2000 issues involve both hardware design flaws in which many computer
systems, and machines that use computer chips, will not correctly recognize the
date beginning in the Year 2000 and, additionally, software applications and
compilers that do not use a four-digit reference to years which might not behave
as intended once the Year 2000 is reached. Three general areas of concern are:
1) clocks built into computers and computer chips that will rollover to 1900 or
1980 instead of 2000, 2) purchased software that does not recognize the Year
2000 as a leap year or that does not use a four-digit reference to years, and 3)
internally developed applications that do not store the year as a four-digit
year. The Company invests in assets and enters into agreements that employ the
use of dates and is, therefore, concerned about the ability of equipment and
computer programs to interpret dates or recognize dates accurately.
In consideration of the Year 2000 issues, the Manager has reviewed the ability
of its own computers and computer programs to properly recognize and handle
dates in the Year 2000. Through the normal upgrading of computer equipment, the
Manager has already replaced all computers that were not Year 2000 compliant.
The software used by the Company has been internally developed using products
that are Year 2000 compliant. The Manager has also reviewed all the date fields
embedded in its internally developed spreadsheets, databases and other programs
and has determined that all such programs are using four-digit years in
references to dates. Therefore, the Company believes that all of its equipment
and internal systems are ready for the Year 2000. To date, the Manager has
incurred all costs in order for the Company to be Year 2000 compliant.
The Company believes that most of its exposure to Year 2000 issues involves the
readiness of third parties such as, but not limited to, loan servicers, security
master servicers, security paying agents and trustees, its stock transfer agent,
its securities custodian, the counterparties on its various financing agreements
and hedging contracts and vendors. The Manager, at its expense, is conducting a
survey, which is expected to be completed during the first half of 1999, of all
such third parties to try to determine the readiness of such third parties to
handle Year 2000 dates and to try to determine the potential impact of Year 2000
issues. The Company cannot be certain that such a survey will fully identify
all Year 2000 issues or to fully access the potential problems or loss
associated with Year 2000 issues or that any failure by these other third
parties to resolve Year 2000 issues would not have an adverse effect on the
Company's operations and financial condition. The Company and the Manager
believe that they are spending the appropriate and necessary resources to try to
identify Year 2000 issues and to resolve them or to mitigate the impact of them
to the best of their ability as they are identified. The Company has not
developed likely worst case scenarios nor contingency plans for such scenarios.
OTHER MATTERS
The Company calculates its Qualified REIT Assets, as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), to be 99.1% of its total assets,
compared to the Code requirement that at least 75% of its total assets must be
Qualified REIT Assets. The Company also calculates that 99.8% of its 1998
revenue qualifies for the 75% source of income test and 100% of its 1998 revenue
qualifies for the 95% source of income test under the REIT rules. The Company
also met all REIT requirements regarding the ownership of its common stock and
the distributions of its net income. Therefore, as of December 31, 1998, the
Company believes that it will continue to qualify as a REIT under the provisions
of the Code.
The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act of 1940. If
the Company were to become regulated as an investment company, the Company's use
of leverage would be substantially reduced. The Investment Company Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under current interpretation of the staff of the SEC,
in order to qualify for this exemption, the Company must maintain at least 55%
of its assets directly in Qualifying Interests. In addition, unless certain
mortgage assets represent all the certificates issued with respect to an
underlying pool of mortgages, such mortgage assets may be treated as assets
separate from the underlying mortgage loans and, thus, may not be considered
Qualifying Interests for purposes of the 55% requirement. As of December 31,
1998, the Company calculates that it is in compliance with this requirement.
38
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 7A is incorporated by reference from the
information in Item 7 under the caption "Market Risk" set forth on pages 34
through 36 in this Form 10-K
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, the related notes and schedules to
the financial statements, together with the Independent Auditor's Report thereon
are set forth on pages F-3 through F-23 in this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference to
the definitive Proxy Statement dated March 29, 1999 pursuant to General
Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the definitive Proxy Statement dated March 29, 1999 pursuant to General
Instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
the definitive Proxy Statement dated March 29, 1999 pursuant to General
Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the definitive Proxy Statement dated March 29, 1999 pursuant to General
Instruction G(3).
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. The following Financial Statements of the Company are included
in Part II, Item 8 of this Annual Report on Form-K:
Independent Auditors' Report;
Consolidated Balance Sheets as of December 31, 1998 and 1997;
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996;
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996;
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 and
Notes to Consolidated Financial Statements.
2. Schedules to Consolidated Financial Statements:
All consolidated financial statement schedules are included in
Part II, Item 8 of this Annual Report on Form-K.
3. Exhibits:
See "Exhibit Index".
(b) Reports on Form 8-K:
None
40
<PAGE>
THORNBURG MORTGAGE ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITOR'S REPORT
For Inclusion in Form 10-K
Filed with
Securities and Exchange Commission
December 31, 1998
<PAGE>
<TABLE>
<CAPTION>
THORNBURG MORTGAGE ASSET CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Independent Auditor's Report . . . . . . . . . F-3
Consolidated Balance Sheets. . . . . . . . . . F-4
Consolidated Statements of Operations. . . . . F-5
Consolidated Statement of Shareholders' Equity F-6
Consolidated Statements of Cash Flows. . . . . F-7
Notes to Consolidated Financial Statements . . F-8
FINANCIAL STATEMENT SCHEDULE:
Schedule IV - Mortgage Loans on Real Estate. . F-22
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Thornburg Mortgage Asset Corporation
Santa Fe, New Mexico
We have audited the accompanying consolidated balance sheets of Thornburg
Mortgage Asset Corporation and subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thornburg
Mortgage Asset Corporation and subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule IV is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
New York, New York
January 20 , 1999
F-3
<PAGE>
<TABLE>
<CAPTION>
THORNBURG MORTGAGE ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Adjustable-rate mortgage ("ARM") assets (Notes 2 and 3)
ARM securities . . . . . . . . . . . . . . . . . . . . . $3,094,657 $4,519,707
Collateral for callable collateralized notes . . . . . . 1,147,350 -
ARM loans held for securitization. . . . . . . . . . . . 26,410 118,987
----------- -----------
4,268,417 4,638,694
Cash and cash equivalents (Note 3) . . . . . . . . . . . . 36,431 13,780
Accrued interest receivable. . . . . . . . . . . . . . . . 37,939 38,353
Prepaid expenses and other . . . . . . . . . . . . . . . . 1,846 289
----------- -----------
$4,344,633 $4,691,116
=========== ===========
LIABILITIES
Reverse repurchase agreements (Note 3) . . . . . . . . . . $2,867,207 $4,270,170
Callable collateralized notes (Note 3) . . . . . . . . . . 1,127,181 -
Other borrowings (Note 3). . . . . . . . . . . . . . . . . 2,029 10,018
Accrued interest payable . . . . . . . . . . . . . . . . . 31,514 39,749
Dividends payable (Note 5) . . . . . . . . . . . . . . . . 1,670 11,810
Accrued expenses and other . . . . . . . . . . . . . . . . 3,209 1,215
----------- -----------
4,032,810 4,332,962
----------- -----------
COMMITMENTS (Note 2)
SHAREHOLDERS' EQUITY (Note 5)
Preferred stock: par value $.01 per share;
2,760 shares authorized; 9.68% Cumulative
Convertible Series A, 2,760 and 2,760 issued
and outstanding, respectively; aggregate preference in
liquidation $69,000 . . . . . . . . . . . . . . . . . . 65,805 65,805
Common stock: par value $.01 per share;
47,240 shares authorized, 21,990 and 20,280 shares
issued and 21,490 and 20,280 outstanding, respectively. 220 203
Additional paid-in-capital . . . . . . . . . . . . . . . . 341,756 315,240
Accumulated other comprehensive income (loss). . . . . . . (82,148) (19,445)
Notes receivable from stock sales. . . . . . . . . . . . . (4,632) (2,698)
Retained earnings (deficit). . . . . . . . . . . . . . . . (4,512) (951)
Treasury stock: at cost, 500 and 0 shares respectively . . (4,666) -
----------- -----------
311,823 358,154
----------- -----------
$4,344,633 $4,691,116
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
THORNBURG MORTGAGE ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Year ended December 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest income from ARM assets and cash . . $ 287,032 $ 247,721 $ 151,511
Interest expense on borrowed funds . . . . . (255,992) (198,657) (121,166)
---------- ---------- ----------
Net interest income . . . . . . . . . . . . 31,040 49,064 30,345
---------- ---------- ----------
Gain (loss) on sale of ARM assets. . . . . . (278) 1,189 1,362
Provision for credit losses. . . . . . . . . (2,032) (886) (990)
Management fee (Note 7). . . . . . . . . . . (4,142) (3,664) (1,872)
Performance fee (Note 7) . . . . . . . . . . (759) (3,363) (2,462)
Other operating expenses . . . . . . . . . . (1,134) (938) (646)
---------- ---------- ----------
NET INCOME. . . . . . . . . . . . . . . . . $ 22,695 $ 41,402 $ 25,737
========== ========== ==========
Net income . . . . . . . . . . . . . . . . . $ 22,695 $ 41,402 $ 25,737
Dividend on preferred stock. . . . . . . . . (6,679) (6,251) -
---------- ---------- ----------
Net income available to common shareholders. $ 16,016 $ 35,151 $ 25,737
========== ========== ==========
Basic earnings per share . . . . . . . . . . $ 0.75 $ 1.95 $ 1.73
========== ========== ==========
Diluted earnings per share . . . . . . . . . $ 0.75 $ 1.94 $ 1.73
========== ========== ==========
Average number of common shares outstanding. 21,488 18,048 14,874
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
THORNBURG MORTGAGE ASSET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1998
(Dollar amounts in thousands, except per share data)
Notes
Accum. Receiv-
Addit- Other able
Pref- ional Compre- From Retained Compre-
erred Common Paid-in hensive Stock Earnings/ Treasury hensive
Stock Stock Capital Income Sales (Deficit) Stock Income Total
------- -------- -------- --------- -------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 . . . . . $ - $ 122 $175,708 $(14,826) $ - $ (527) $ - $160,477
Comprehensive income:
Net income. . . . . . . . . . . . 25,737 $ 25,737 25,737
Other comprehensive income:
Available-for-sale assets:
Fair value adjustment, net
of amortization . . . . . . . . - - - 6,028 - - - 6,028 6,028
Deferred gain on sale of
hedges, net of amortization . . - - - (2,468) - - - (2,468) (2,468)
---------
Other comprehensive income. . . . $ 29,297
=========
Issuance of common
Issuance of common stk. (Note 5) . - 40 57,469 - - - - 57,509
Dividends declared on common
stock - $1.65 per share . . . . . . - - - - - (25,085) - (25,085)
------- -------- -------- --------- -------- ---------- ---------- ---------
Balance, December 31, 1996 . . . . . - 162 233,177 (11,266) - 125 - 222,198
Comprehensive income:
Net income. . . . . . . . . . . . 41,402 $ 41,402
Other comprehensive income:
Available-for-sale assets:
Fair value adjustment, net
of amortization . . . . . . . . - - - (6,697) - - - (6,697) (6,697)
Deferred gain on sale of
hedges, net of amortization . . - - - (1,482) - - - (1,482) (1,482)
---------
Other comprehensive loss. . . . . $(33,223)
=========
Series A preferred stock issued,
Net of issuance cost (Note 5) . . 65,805 - - - - - - 65,805
Issuance of common
Issuance of common stk. (Note 5) . - 41 82,063 - (2,698) - - 79,406
Dividends declared on preferred
stock - $2.265 per share. . . . . . - - - - - (6,251) - (6,251)
Dividends declared on common
stock - $1.97per share. . . . . . . - - - - - (36,227) - (36,227)
------- -------- -------- --------- -------- ---------- ---------- ---------
Balance, December 31, 1997 . . . . . 65,805 203 315,240 (19,445) (2,698) (951) - 358,154
Comprehensive income:
Net income. . . . . . . . . . . . 22,695 $ 22,695 22,695
Other comprehensive income:
Available-for-sale assets:
Fair value adjustment, net
of amortization . . . . . . . . - - - (61,157) - - - (61,157) (61,157)
Deferred gain on sale of
hedges, net of amortization . . - - - (1,546) - - - (1,546) (1,546)
Other comprehensive loss. . . . . $(40,008)
=========
Issuance of common stk. (Note 5) . - 17 26,259 - (1,934) - - 24,342
Purchase of treasury stock (Note 5). - - - - - - (4,666) (4,666)
Interest from notes receivable from
stock sales . . . . . . . . . . 257 257
Dividends declared on preferred
stock - $2.42 per share . . . . . . - - - - - (6,679) - (6,679)
Dividends declared on common
stock - $0.905 per share. . . . . . - - - - - (19,577) - (19,577)
------- -------- -------- --------- -------- ---------- ---------- ---------
Balance, December 31, 1998 . . . . . $65,805 $ 220 $341,756 $(82,148) $(4,632) $ (4,512) $ (4,666) $311,823
======= ======== ======== ========= ======== ========== ========== =========
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
THORNBURG MORTGAGE ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Year ended December 31
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,695 $ 41,402 $ 25,737
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 49,657 24,665 14,346
Net realized (gain) loss from investing activities. . . . . . . 2,310 (303) (372)
Decrease (increase) in accrued interest receivable. . . . . . . 414 (14,789) (4,785)
Decrease (increase) in prepaid expenses and other . . . . . . . (1,557) (62) 33
Increase (decrease) in accrued interest payable . . . . . . . . (8,235) 21,002 8,840
Increase (decrease) in accrued expenses and other . . . . . . . 1,994 101 433
------------ ------------
Net cash provided by operating activities . . . . . . . . . . 67,278 72,016 44,232
------------ ------------ ------------
Investing Activities:
Available-for-sale securities:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,501,961) (2,929,746) (1,583,678)
Proceeds on sales . . . . . . . . . . . . . . . . . . . . . . . 929,999 190,196 277,594
Proceeds from calls . . . . . . . . . . . . . . . . . . . . . . 138,926 67,202
Principal payments. . . . . . . . . . . . . . . . . . . . . . . 1,635,298 756,379 441,722
Held-to-maturity securities:
Principal payments. . . . . . . . . . . . . . . . . . . . . . . 16,152 63,120 111,684
Collateral for callable collateralized bonds:
Principal payments. . . . . . . . . . . . . . . . . . . . . . . 13,416 - -
ARM Loans:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,092,238) (123,211) -
Principal payments. . . . . . . . . . . . . . . . . . . . . . . 115,081 4,092 -
Proceeds on sales . . . . . . . . . . . . . . . . . . . . . . . 2,043 - -
Purchase of interest rate cap and floor agreements. . . . . . . . (1,081) (4,074) (631)
------------ ------------ ------------
Net cash provided by (used in) investing activities . . . . . 255,635 (1,976,042) (753,309)
------------ ------------ ------------
Financing Activities:
Net borrowings from (repayments of) reverse repurchase agreements. (1,402,963) 1,811,038 678,278
Net borrowings from callable collateralized notes . . . . . . . . 1,127,181 - -
Repayments of other borrowings. . . . . . . . . . . . . . . . . . (7,989) (4,169) (4,259)
Proceeds from preferred stock issued. . . . . . . . . . . . . . . - 65,805 -
Proceeds from common stock issued . . . . . . . . . . . . . . . . 24,342 79,406 57,509
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . (4,666) - -
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . (36,396) (37,967) (22,418)
Interest from notes receivable from stock sales . . . . . . . . . 229 - -
------------ ------------ ------------
Net cash provided by (used in) financing activities . . . . . . (300,262) 1,914,113 709,110
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents . . . . . . . 22,651 10,087 33
Cash and cash equivalents at beginning of period . . . . . . . . . 13,780 3,693 3,660
------------ ------------ ------------
Cash and cash equivalents at end of period . . . . . . . . . . . . $ 36,431 $ 13,780 $ 3,693
============ ============ ============
<FN>
Supplemental disclosure of cash flow information and non-cash investing and financing activities are
included in Notes 2 and 3.
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
THORNBURG MORTGAGE ASSET CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Thornburg Mortgage Asset Corporation (the "Company") was incorporated in
Maryland on July 28, 1992. The Company commenced its operations of purchasing
and managing for investment a portfolio of adjustable-rate mortgage assets on
June 25, 1993, upon receipt of the net proceeds from the initial public offering
of the Company's common stock.
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and highly liquid investments
with original maturities of three months or less. The carrying amount of cash
equivalents approximates their value.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned special purpose finance subsidiaries, Thornburg Mortgage
Funding Corporation and Thornburg Mortgage Acceptance Corporation. The Company
formed these entities in connection with the issuance of the callable
collateralized notes discussed in Note 3. All material intercompany accounts
and transactions are eliminated in consolidation.
ADJUSTABLE-RATE MORTGAGE ASSETS
The Company's adjustable-rate mortgage ("ARM") assets are comprised of ARM
securities, ARM loans and collateral for callable AAA notes payable, which also
consists of ARM securities and ARM loans.
In the second quarter of 1998, the Company decided to change its policy
regarding its classification of ARM securities such that each ARM security is
classified as available-for-sale. The Company changed its policy because the
remaining amount of ARM securities classified as held-to-maturity had become a
relatively small percentage of the portfolio, less than 8% of assets at March
31, 1998, and because it is apparent that as more mortgage REITs have been
formed, that it is industry practice to carry all mortgage securities as
available-for-sale. The Company had not classified any ARM securities purchased
since 1994 as held-to-maturity and does not expect to do so in the future.
Management has made the determination that all of its ARM securities should be
designated as available-for-sale in order to be prepared to respond to potential
future opportunities in the market, to sell ARM securities in order to optimize
the portfolio's total return and to retain its ability to respond to economic
conditions that might require the Company to sell assets in order to maintain an
appropriate level of liquidity. Since all ARM securities are designated as
available-for-sale, they are reported at fair value, with unrealized gains and
losses excluded from earnings and reported in accumulated other comprehensive
income as a separate component of shareholders' equity.
Management has the intent and ability to hold the Company's ARM loans for the
foreseeable future and until maturity or payoff. Therefore, they are carried at
their unpaid principal balances, net of unamortized premium or discount and
allowance for loan losses.
The collateral for the callable AAA notes includes ARM securities and ARM loans
which are accounted for in the same manner as the ARM securities and ARM loans
that are not held as collateral.
Premiums and discounts associated with the purchase of the ARM assets are
amortized into interest income over the lives of the assets using the effective
yield method adjusted for the effects of estimated prepayments.
F-8
<PAGE>
ARM asset transactions are recorded on the date the ARM assets are purchased or
sold. Purchases of new issue ARM assets are recorded when all significant
uncertainties regarding the characteristics of the assets are removed, generally
shortly before settlement date. Realized gains and losses on ARM asset
transactions are determined on the specific identification basis.
CREDIT RISK
The Company limits its exposure to credit losses on its portfolio of ARM
securities by only purchasing ARM securities that have an investment grade
rating at the time of purchase and have some form of credit enhancement or are
guaranteed by an agency of the federal government. An investment grade security
generally has a security rating of BBB or Baa or better by at least one of two
nationally recognized rating agencies, Moody's Investor Services, Inc. or
Standard & Poor's, Inc. (the "Rating Agencies"). Additionally, the Company has
also purchased ARM loans and limits its exposure to credit losses by restricting
its whole loan purchases to ARM loans generally originated to "A" quality
underwriting standards or loans that have at least five years of pay history
and/or low loan to property value ratios. The Company further limits its
exposure to credit losses by limiting its investment in investment grade
securities that are rated A, or equivalent, BBB, or equivalent, or ARM loans
originated to "A" quality underwriting standards ("Other Investments") to no
more than 30% of the portfolio.
The Company monitors the delinquencies and losses on the underlying mortgage
loans backing its ARM assets. If the credit performance of the underlying
mortgage loans is not as expected, the Company makes a provision for possible
credit losses at a level deemed appropriate by management to provide for known
losses as well as unidentified losses in its ARM assets portfolio. The
provision is based on management's assessment of numerous factors affecting its
portfolio of ARM assets including, but not limited to, current economic
conditions, delinquency status, credit losses to date on underlying mortgages
and remaining credit protection. The provision for ARM securities is made by
reducing the cost basis of the individual security for the decline in fair value
which is other than temporary, and the amount of such write-down is recorded as
a realized loss, thereby reducing earnings. The Company also makes a monthly
provision for possible credit losses on its portfolio of ARM loans which is an
increase to the reserve for possible loan losses. The provision for possible
credit losses on loans is based on loss statistics of the real estate industry
for similar loans, taking into consideration factors including, but not limited
to, underwriting characteristics, seasoning, geographic location and current
economic conditions. When a loan or a portion of a loan is deemed to be
uncollectible, the portion deemed to be uncollectible is charged against the
reserve and subsequent recoveries, if any, are credited to the reserve.
Credit losses on pools of loans that are held as collateral for AAA notes
payable are also covered by third party insurance policies that protect the
Company from credit losses above a specified level, limiting the Company's
exposure to credit losses on such loans. The Company makes a monthly provision
for possible credit losses on these loans the same as it does for loans that are
not held as collateral for AAA notes payable, except, taking into consideration
its maximum exposure.
Provisions for credit losses do not reduce taxable income and thus do not affect
the dividends paid by the Company to shareholders in the period the provisions
are taken. Actual losses realized by the Company do reduce taxable income in
the period the actual loss is realized and would affect the dividends paid to
shareholders for that tax year.
DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE CAP AGREEMENTS
The Company purchases interest rate cap agreements (the "Cap Agreements") to
limit the Company's risks associated with the lifetime or maximum interest rate
caps of its ARM assets should interest rates rise above specified levels. The
Cap Agreements reduce the effect of the lifetime cap feature so that the yield
on the ARM assets will continue to rise in high interest rate environments as
the Company's cost of borrowings also continue to rise.
F-9
<PAGE>
Under policies in effect prior to the second quarter of 1998, Cap Agreements
classified as a hedge against held-to-maturity assets were initially carried at
their fair value as of the time the Cap Agreements and the related assets are
designated as held-to-maturity with an adjustment to equity for any unrealized
gains or losses at the time of the designation. Any adjustment to equity was
thereafter amortized into interest income as a yield adjustment in a manner
consistent with the amortization of any premium or discount. All Cap Agreements
are now classified as a hedge against available-for-sale assets and are carried
at their fair value with unrealized gains and losses reported as a separate
component of equity, consistent with the reporting of such assets. The carrying
value of the Cap Agreements are included in ARM securities on the balance sheet.
The Company purchases Cap Agreements by incurring a one-time fee or premium.
The amortization of the premium paid for the Cap Agreements is included in
interest income as a contra item (i.e., expense) and, as such, reduces interest
income over the lives of the Cap Agreements.
Realized gains and losses resulting from the termination of the Cap Agreements
that were hedging assets classified as held-to-maturity were deferred as an
adjustment to the carrying value of the related assets and are being amortized
into interest income over the terms of the related assets. Realized gains and
losses resulting from the termination of such agreements that are hedging assets
classified as available-for-sale are initially reported in a separate component
of equity, consistent with the reporting of those assets, and are thereafter
amortized as a yield adjustment.
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements in order to manage its
interest rate exposure when financing its ARM assets. In general, swap
agreements have been utilized by the Company in two ways. One way has been to
use swap agreements as a cost effective way to lengthen the average repricing
period of its variable rate and short term borrowings. Additionally, as the
Company acquires hybrid assets, it also enters into swap agreements in order to
manage the interest rate repricing mismatch (the difference between the
remaining fixed-rate period of a hybrid and the maturity of the fixed-rate
liability funding a hybrid) to approximately one year. Revenues and expenses
from the interest rate swap agreements are accounted for on an accrual basis and
recognized as a net adjustment to interest expense.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
and complies with the provisions of the Internal Revenue Code of 1986, as
amended (the "Code") with respect thereto. Accordingly, the Company will not be
subject to Federal income tax on that portion of its income that is distributed
to shareholders and as long as certain asset, income and stock ownership tests
are met.
NET EARNINGS PER SHARE
Basic EPS amounts are computed by dividing net income (adjusted for dividends
declared on preferred stock) by the weighted average number of common shares
outstanding. Diluted EPS amounts assume the conversion, exercise or issuance of
all potential common stock instruments unless the effect is to reduce a loss or
increase the earnings per common share.
F-10
<PAGE>
Following is information about the computation of the earnings per share data
for the years ended December 31, 1998, 1997 and 1996 (Amounts in thousands
except per share data):
<TABLE>
<CAPTION>
Earnings
Income Shares Per Share
---------- ------ ----------
<S> <C> <C> <C>
1998
Net income . . . . . . . . . . $ 22,695
Less preferred stock dividends (6,679)
----------
Basic EPS, income available to
common shareholders . . . . . 16,016 21,488 $ 0.75
==========
Effect of dilutive securities:
Stock options . . . . . . . . - -
---------- ------
Diluted EPS. . . . . . . . . . $ 16,016 21,488 $ 0.75
========== ====== ==========
1997
Net income . . . . . . . . . . $ 41,402
Less preferred stock dividends (6,251)
----------
Basic EPS, income available to
common shareholders . . . . . 35,151 18,048 $ 1.95
==========
Effect of dilutive securities:
Stock options . . . . . . . . - 110
---------- ------
Diluted EPS. . . . . . . . . . $ 35,151 18,158 $ 1.94
========== ====== ==========
1996
Net income . . . . . . . . . . $ 25,737
Less preferred stock dividends -
----------
Basic EPS, income available to
common stockholders . . . . . 25,737 14,874 $ 1.73
==========
Effect of dilutive securities:
Stock options . . . . . . . . - 37
---------- ------
Diluted EPS. . . . . . . . . . $ 25,737 14,911 $ 1.73
========== ====== ==========
</TABLE>
The Company has granted options to directors and officers of the Company and
employees of the Manager to purchase 59,784 in 1998, 240,320 in 1997 and 169,099
shares of common stock in 1996 at average prices of $14.82, $20.89 and $15.44
per share during the years ended December 31, 1998, 1997 and 1996, respectively.
The conversion of preferred stock was not included in the computation of diluted
EPS for any year because such conversion would increase the diluted EPS.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-11
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, Reporting Comprehensive Income. This statement requires companies to
classify items of other comprehensive income, such as unrealized gains and
losses on available-for-sale securities, by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company adopted this
statement in the first quarter of 1998.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 established a framework of
accounting rules that standardize accounting and reporting for all derivative
instruments and is effective for financial statements issued for fiscal years
beginning after June 15, 1999. The Statement requires that all derivative
financial instruments be carried on the balance sheet at fair value. Currently
the only derivative instruments that are not on the Company's balance sheet at
fair value are interest rate swap agreements. The fair value of interest rate
swap agreements is disclosed in Note 4, Fair Value of Financial Instruments.
The Company believes that its use of interest rate swap agreements qualify as
cash-flow hedges as defined in the statement. Therefore, the effective portion
of the hedge's change in the fair value of these derivatives instruments will be
recorded in other comprehensive income and the ineffective portion will be
included in earnings when the Company adopts the statement in the first quarter
of its fiscal 2000 year.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. This Statement, which is effective for the first
fiscal quarter beginning after December 15, 1998, provides guidance to mortgage
banking entities who securitize mortgage loans such that their accounting for
securitized loans will be the same as their accounting for marketable
securities. The Company has already been accounting for its securitized loans
in a manner consistent with the new statement and therefore expects no changes
to its financial position or results of operations as a result of adopting SFAS
No. 134.
F-12
<PAGE>
NOTE 2. ADJUSTABLE-RATE MORTGAGE ASSETS AND INTEREST RATE CAP AND FLOOR
AGREEMENTS
The following tables present the Company's ARM assets as of December 31, 1998
and December 31, 1997. The ARM securities classified as available-for-sale are
carried at their fair value, while the ARM securities classified as
held-to-maturity in 1997 and ARM loans are carried at their amortized cost basis
(dollar amounts in thousands):
<TABLE>
<CAPTION>
December 31, 1998:
ARM Securities
-----------------------------------
Available- Held-to- Collateral for
for-Sale Maturity Total Notes Payable ARM Loans
----------- --------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Principal balance outstanding $3,070,107 $ - $3,070,107 $ 1,131,007 $26,161
Net unamortized premium . . . 86,956 - 86,956 17,112 324
Deferred gain from hedging. . (613) - (613) - -
Allowance for losses. . . . . (1,242) - (1,242) (729) (75)
Cap Agreements. . . . . . . . 8,302 - 8,302 440 -
Principal payment receivable. 14,330 - 14,330 -
----------- --------- ----------- --------------- --------
Amortized cost, net . . . . 3,177,840 - 3,177,840 1,147,830 26,410
----------- --------- ----------- --------------- --------
Gross unrealized gains. . . . 1,070 - 1,070 38 53
Gross unrealized losses . . . (84,253) - (84,253) (7,606) (87)
----------- --------- ----------- --------------- --------
Fair value. . . . . . . . . $3,094,657 $ - $3,094,657 $ 1,140,262 $26,376
=========== ========= =========== =============== ========
Carrying value. . . . . . . $3,094,657 $ - $3,094,657 $ 1,147,350 $26,410
=========== ========= =========== =============== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997:
ARM Securities
------------------------------------
Available- Held-to- Collateral for
for-Sale Maturity Total Notes Payable ARM Loans
----------- ---------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Principal balance outstanding $3,984,770 $ 386,290 $4,371,060 $ - $115,996
Net unamortized premium . . . 119,133 5,025 124,158 - 3,033
Deferred gain from hedging. . - (1,217) (1,217) - -
Allowance for losses. . . . . (1,739) - (1,739) - (42)
Cap Agreements. . . . . . . . 11,144 2,160 13,304 - -
Principal payment receivable. 32,337 3,545 35,882 - -
----------- ---------- ----------- -------------- ---------
Amortized cost, net . . . . 4,145,645 395,803 4,541,448 - 118,987
----------- ---------- ----------- -------------- ---------
Gross unrealized gains. . . . 11,075 5,609 16,684 - -
Gross unrealized losses . . . (32,816) (2,859) (35,675) - -
----------- ---------- ----------- -------------- ---------
Fair value. . . . . . . . . $4,123,904 $ 398,553 $4,522,457 $ - $118,987
=========== ========== =========== ============== =========
Carrying value. . . . . . . $4,123,904 $ 395,803 $4,519,707 $ - $118,987
=========== ========== =========== ============== =========
</TABLE>
During 1998, the Company realized $4,634,000 in gains and $4,912,000 in losses
on the sale of $932.3 million of ARM securities and ARM loans. During 1997, the
Company realized $2,179,000 in gains and $990,000 in losses on the sale of
$189.0 million of ARM securities, and during 1996, the Company realized
$1,427,000 in gains and $65,000 in losses on the sale of $276.4 million of ARM
securities. All of the ARM securities sold were classified as
available-for-sale. During 1998, approximately $379 million securities
previously classified as held-to-maturity were reclassified as
available-for-sale.
As of December 31, 1998, the Company had reduced the cost basis of its ARM
securities due to potential future credit losses (other than temporary declines
in fair value) in the amount of $1,242,000. At December 31, 1998, the Company
is providing for potential future credit losses on two assets that have an
aggregate carrying value of $11.8 million, which represent less than 0.3% of the
Company's total portfolio of ARM assets. Both of these assets are performing
and one has some remaining credit support that mitigates the Company's exposure
to potential future credit losses. Additionally, during 1998, the Company, in
accordance with its credit policies, recorded a $762,000 provision for potential
credit losses on its loan portfolio, although no actual losses have been
realized in the loan portfolio to date.
F-13
<PAGE>
The following tables summarize ARM loan delinquency information as of December
31, 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
1998
----
Loan Loan Percent of Percent of
Delinquency Status Count Balance ARM Loans Total Assets
- ------------------ ----- -------- ----------- -------------
<S> <C> <C> <C> <C>
30 to 59 days. . 4 $ 1,138 0.11% 0.03%
60 to 89 days. . 2 423 0.04 0.01
90 days or more. 1 3,450 0.32 0.08
In foreclosure . 5 1,097 0.10 0.02
----- -------- ----------- -------------
12 $ 6,108 0.57% 0.14%
===== ======== =========== =============
</TABLE>
<TABLE>
<CAPTION>
1997
----
Loan Loan Percent of Percent of
Delinquency Status Count Balance ARM Loans Total Assets
- ------------------ ----- -------- ----------- -------------
<S> <C> <C> <C> <C>
30 to 59 days. . - $ - - -
60 to 89 days. . 1 215 0.19% 0.00%
90 days or more. 1 167 0.14 0.00
In foreclosure . - - - -
----- -------- ----------- -------------
2 $ 382 0.33% 0.01%
===== ======== =========== =============
</TABLE>
The following table summarizes the activity for the allowance for losses on ARM
loans for the year ended
December 31, 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Beginning balance. . $ 42 $ 0
Provision for losses 762 42
Charge-offs, net . . 0 0
----- -----
Ending balance . . . $ 804 $ 42
===== =====
</TABLE>
As of December 31, 1998, the Company had commitments to purchase $102.1 million
of ARM loans.
The average effective yield on the ARM assets owned was 5.86% as of December 31,
1998 and 6.38% as of December 31, 1997. The average effective yield is based on
historical cost and includes the amortization of the net premium paid for the
ARM assets and the Cap Agreements, the impact of ARM principal payment
receivables and the amortization of deferred gains from hedging activity.
As of December 31, 1998 and December 31, 1997, the Company had purchased Cap
Agreements with a remaining notional amount of $4.026 billion and $4.156
billion, respectively. The notional amount of the Cap Agreements purchased
decline at a rate that is expected to approximate the amortization of the ARM
assets. Under these Cap Agreements, the Company will receive cash payments
should the one-month, three-month or six-month London InterBank Offer Rate
("LIBOR") increase above the contract rates of the Cap Agreements which range
from 7.50% to 13.00% and average approximately 10.10%. The Company's ARM assets
portfolio had an average lifetime interest rate cap of 11.70%. The Cap
Agreements had an average maturity of 2.3 years as of December 31, 1998. The
initial aggregate notional amount of the Cap Agreements declines to
approximately $3.485 billion over the period of the agreements, which expire
between 1999 and 2004. The Company purchased these Cap Agreements by incurring
a one-time fee, or premium. The premium is amortized, or expensed, over the
lives of the Cap Agreements and decreases interest income on the Company's ARM
assets during the period of amortization. The Company has credit risk to the
extent that the counterparties to the cap agreements do not perform their
obligations under the Cap Agreements. If one of the counterparties does not
perform, the Company would not receive the cash to which it would otherwise be
entitled under the conditions of the Cap Agreement. In order to mitigate this
risk and to achieve competitive pricing, the Company has entered into Cap
Agreements with six different counterparties, five of which are rated AAA, and
one is rated AA.
F-14
<PAGE>
NOTE 3. REVERSE REPURCHASE AGREEMENTS, CALLABLE COLLATERALIZED NOTES PAYABLE
AND OTHER BORROWINGS
The Company has entered into reverse repurchase agreements to finance most of
its ARM assets. The reverse repurchase agreements are short-term borrowings
that are secured by the market value of the Company's ARM assets and bear
interest rates that have historically moved in close relationship to LIBOR.
As of December 31, 1998, the Company had outstanding $2.867 billion of reverse
repurchase agreements with a weighted average borrowing rate of 5.62% and a
weighted average remaining maturity of 2.0 months. As of December 31, 1998,
$1.147 billion of the Company's borrowings were variable-rate term reverse
repurchase agreements with original maturities that range from three months to
two years. The interest rates of these term reverse repurchase agreements are
indexed to either the one-, three- or six-month LIBOR rate and reprice
accordingly. The reverse repurchase agreements at December 31, 1997 were
collateralized by ARM assets with a carrying value of $3.005 billion, including
accrued interest and cash in the amount of $22.4 million.
At December 31, 1998, the reverse repurchase agreements had the following
remaining maturities (dollar amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
Within 30 days . . $1,440,407
31 to 89 days. . . 748,095
90 days or greater 678,705
----------
$2,867,207
==========
</TABLE>
As of December 31, 1998, the Company had one whole loan financing facility with
an uncommitted borrowing capacity of $250,000,000. The Company had no balance
borrowed against this facility as of year-end. This facility matured on January
8, 1999 and has been subsequently re-negotiated for an additional one year
period. Under the new agreement in effect as of January 8, 1999, the whole loan
financing facility is a committed facility in an amount of up to $150,000,000,
with an option to increase this amount to $300,000,000.
On December 18, 1998, the Company, through a special purpose finance subsidiary,
issued $1.144 billion of callable AAA notes payable ("Notes") collateralized by
ARM loans with a principal balance of $1.049 billion and ARM securities with a
balance of $128.3 million. As part of this transaction, the Company retained
ownership of a subordinated certificate in the amount of $32.4 million, which
represents the Company's maximum exposure to credit losses on the loans
collateralizing the Notes. As of December 31, 1998, the Notes had a balance of
$1.127 billion and an interest rate of 6.32%. The interest rate adjusts monthly
at one-month LIBOR plus 0.70% through November 1999 and at one-month LIBOR plus
1.40% thereafter. The Notes mature on January 25, 2029 and are callable by the
Company or Bear Stearns, one of the underwriters, monthly, although Bear Stearns
has indicated it does not intend to exercise its ability to call the collateral
prior to May 1999. The Company may call either the collateral or the Notes, at
its option. In connection with the issuance of the Notes, the Company incurred
costs of $3.9 million which is being amortized over the expected life of the
Notes. Since the Notes are paid down as the collateral pays down, the
amortization of the issuance cost will be adjusted periodically based on actual
payment experience. If the collateral pays down faster than currently
estimated, then the amortization of the issuance cost will increase and the
effective cost of the Notes will increase and, conversely, if the collateral
pays down slower than currently estimated, then the amortization of issuance
cost will be decreased and the effective cost of the Notes will also decrease.
As of December 31, 1998, the Company was a counterparty to nineteen interest
rate swap agreements ("Swaps") having an aggregate notional balance of $1.473
billion. As of year-end, these Swaps had a weighted average remaining term of
16.5 months. In accordance with these Swaps, the Company will pay a fixed rate
of interest during the term of these Swaps and receive a payment that varies
monthly with the one-month LIBOR rate. As a result of entering into these
Swaps, the Company has reduced the interest rate variability of its cost to
finance its ARM securities by increasing the average period until the next
repricing of its borrowings from 26 days to 204 days. Fourteen of these Swaps
were entered into in connection with the Company's acquisition of hybrid loans
and commitments to acquire hybrid loans. These fourteen Swaps that hedge the
fixed rate portion of the Company's hybrid loans (to within one year of the
first interest rate reset) had a notional balance of $523 million at year-end
and an average maturity of 44.0 months. The Swaps at December 31, 1998 were
collateralized by ARM assets with a carrying value of $0.9 million, including
accrued interest.
F-15
<PAGE>
As of December 31, 1998, the Company had financed a portion of its portfolio of
interest rate cap agreements with $2.0 million of other borrowings which require
quarterly or semi-annual payments until the year 2000. These borrowings have a
weighted average fixed rate of interest of 7.87% and have a weighted average
remaining maturity of 1.4 years. The other borrowings financing cap agreements
at December 31, 1998 were collateralized by ARM securities with a carrying value
of $3.1 million, including accrued interest. The aggregate maturities of these
other borrowings are as follows (dollars in thousands):
1999 $ 1,397
2000 632
-------
$ 2,029
=======
The total cash paid for interest was $267.9 million, $177.9 million and $112.2
million for 1998, 1997 and 1996 respectively.
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1998 and December 31, 1997.
FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale (dollar amounts in thousands):
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Assets:
ARM assets. . . . . . . . . . $4,266,497 $4,259,374 $4,634,612 $4,639,513
Cap Agreements. . . . . . . . 1,920 1,920 4,082 1,931
Liabilities:
Callable collateralized notes 1,127,181 1,127,181 - -
Other borrowings. . . . . . . 2,029 2,077 10,018 10,321
Swap agreements . . . . . . . (87) 7,326 (50) 184
</TABLE>
The above carrying amounts for assets are combined in the balance sheet under
the caption adjustable-rate mortgage assets. The carrying amount for assets
categorized as available-for-sale is their fair value whereas the carrying
amount for assets held-to-maturity or held for the foreseeable future is their
amortized cost.
The fair values of the Company's ARM securities and cap agreements are based on
market prices provided by certain dealers who make markets in these financial
instruments or third-party pricing services. The fair values for ARM loans is
determined by the Company by using the same pricing models employed by the
Company in the process of determining a price to bid for loans in the open
market, taking into consideration the aggregated characteristics of groups of
loans such as, but not limited to, collateral type, index, margin, life cap,
periodic cap, underwriting standards, age and delinquency experience. The fair
value of the Company's long-term debt and interest rate swap agreements, which
are off-balance sheet financial instruments, are based on market values provided
by dealers who are familiar with the terms of the long-term debt and swap
agreements. The fair values reported reflect estimates and may not necessarily
be indicative of the amounts the Company could realize in a current market
exchange. Cash and cash equivalents, interest receivable, reverse repurchase
agreements, callable collateralized notes and other liabilities are reflected in
the financial statements at their amortized cost, which approximates their fair
value because of the short-term nature of these instruments.
F-16
<PAGE>
NOTE 5. COMMON AND PREFERRED STOCK
In January 1997, the Company issued 2,760,000 shares of Series A 9.68%
Cumulative Convertible Preferred Stock at a price of $25 per share pursuant to
its Registration Statement on Form S-3 declared effective in December 1996. Net
proceeds from this issuance totaled $65.8 million. The dividends are cumulative
commencing on the issue date and are payable quarterly, in arrears. The
dividends per share are equal to the greater of (i) $0.605 per quarter, or (ii)
the quarterly dividend declared on the Company's common stock. Each share is
convertible at the option of the holder at any time into one share of common
stock. The preferred shares are redeemable by the Company on and after December
31, 1999, in whole or in part, as follows: (i) for one share of common stock
plus accumulated, accrued but unpaid dividends, provided that for 20 trading
days within any period of 30 consecutive trading days the closing price of the
common stock equals or exceeds the conversion price of $25, or (ii) for cash at
the issue price of $25, plus any accumulated, accrued but unpaid dividends
through the redemption date. In the event of liquidation, the holders of the
preferred shares will be entitled to receive out of the assets of the Company,
prior to any distribution to the common shareholders, the issue price of $25 per
share in cash, plus any accumulated, accrued and unpaid dividends.
During 1998, the Company issued 1,581,550 shares of common stock under its
Dividend Reinvestment and Stock Purchase Plan and received net proceeds of $24.4
million. During 1997, the Company issued 912,590 shares of common stock under
this plan and received net proceeds of $18.0 million, and during 1996, the
Company issued 347,434 shares of common stock under this plan and received net
proceeds of $5.4 million.
During 1998, stock options for 128,377 shares of common stock were exercised at
an average price of $15.23 and $2.0 million of notes receivable were executed in
connection with the exercise of these options. During 1997, stock options for
186,071 shares of common stock were exercised at an average price of $15.71.
The Company received net proceeds of $0.2 million, and $2.7 million of notes
receivable were executed in connection with the exercise of certain options.
During 1996, stock options for 23,595 shares of common stock were exercised at
an average price of $15.41 that generated net proceeds of $0.4 million.
On July 13, 1998, the Board of Directors approved a common stock repurchase
program of up to 500,000 shares at prices below book value, subject to
availability of shares and other market conditions. On September 18, 1998, the
Board of Directors expanded this program by approving the repurchase of up to an
additional 500,000 shares. To date, the company has repurchased 500,016 at an
average price of $9.28 per share.
During the Company's 1998 fiscal year, the Company declared dividends to
shareholders totaling $0.905 per common share, all of which was paid during
1998, and $2.42 per preferred share, of which $1.815 was paid during 1998 and
$0.605 was paid on January 11, 1999. During the Company's 1997 fiscal year, the
Company declared dividends to shareholders totaling $1.97 per common share, of
which $1.47 was paid during 1997 and $0.50 was paid on January 12, 1998, and
$2.265 per preferred share, of which $1.66 was paid during 1997 and $0.605 was
paid on January 12, 1998. During the Company's 1996 fiscal year, the Company
declared dividends to shareholders totaling $1.65 per common share, of which
$1.20 was paid during 1996 and $0.45 was paid on January 12, 1997. For federal
income tax purposes, $0.0638 of the 1998 common stock dividends was return of
capital and not taxable, $0.01 of the 1997 common stock dividend was capital
gains subject to a maximum tax rate of 28%, and $0.05 of the 1997 common stock
dividend was capital gains subject to a maximum tax rate of 20%, and $0.03 of
the 1996 common stock dividend was long-term capital gains. In addition, the
preferred dividend paid on January 11, 1999 will be taken as a dividend
deduction on the Company's 1999 income tax return and is therefore not taxable
income for preferred shareholders until 1999. The remainder of the dividends
paid for fiscal years 1998, 1997 and 1996 was ordinary income to the Company's
common and preferred shareholders.
NOTE 6. STOCK OPTION PLAN
The Company has a Stock Option and Incentive Plan (the "Plan") which authorizes
the granting of options to purchase an aggregate of up to 1,800,000 shares, but
not more than 5% of the outstanding shares of the Company's common stock. The
Plan authorizes the Board of Directors, or a committee of the Board of
Directors, to grant Incentive Stock Options ("ISOs") as defined under section
422 of the Internal Revenue Code of 1986, as amended, options not so qualified
("NQSOs"), Dividend Equivalent Rights ("DERs"), Stock Appreciation Rights
("SARs"), and Phantom Stock Rights ("PSRs").
F-17
<PAGE>
The exercise price for any options granted under the Plan may not be less than
100% of the fair market value of the shares of the common stock at the time the
option is granted. Options become exercisable six months after the date granted
and will expire ten years after the date granted, except options granted in
connection with an offering of convertible preferred stock, in which case such
options become exercisable if and when the convertible preferred stock is
converted into common stock.
The Company issued DERs at the same time as ISOs and NQSOs based upon a formula
defined in the Plan. During 1998 the number of DERs issued was based on 35% of
the ISOs and NQSOs granted during 1998. The number of PSRs issued are based on
the level of the Company's dividends and on the price of the Company's stock on
the related dividend payment date and is equivalent to the cash that otherwise
would be paid on the outstanding DERs and previously issued PSRs. The Company
recorded an expense associated with the DERs and the PSRs of $11,000 and $32,000
for the years ended December 31, 1998 and 1997, respectively.
Notes receivable from stock sales has resulted from the Company selling shares
of common stock through the exercise of stock options. The notes have maturity
terms ranging from 3 years to 9 years and accrue interest at rates that range
from 5.40% to 6.00% per annum. In addition, the notes are full recourse
promissory notes and are secured by a pledge of the shares of the Common Stock
acquired. Interest, which is credited to paid-in-capital, is payable quarterly,
with the balance due at the maturity of the notes. The payment of the notes
will be accelerated only upon the sale of the shares of Common Stock pledged for
the notes. The notes may be prepaid at any time at the option of each borrower.
As of December 31, 1998, there were $4.6 million of notes receivable from stock
sales outstanding.
The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the Company's stock
option plan. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in 1998, 1997
and 1996 consistent with the provisions of SFAS No. 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated in the table below. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model (dollar
amounts in thousands, except per share data).
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income - as reported. . $ 22,695 $ 41,402 $ 25,737
Net income - pro forma. . . 22,629 41,093 25,551
Basic EPS - as reported . . 0.75 1.95 1.73
Basic EPS - pro forma . . . 0.74 1.93 1.72
Diluted EPS - as reported . 0.75 1.94 1.73
Diluted EPS - pro forma . . 0.74 1.92 1.71
Assumptions:
Dividend yield. . . . . 10.00% 10.00% 10.00%
Expected volatility . . 25.60% 21.50% 23.30%
Risk-free interest rate 5.68% 6.40% 6.52%
Expected lives. . . . . 7 years 7 years 7 years
</TABLE>
F-18
<PAGE>
Information regarding options is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year. 680,995 $ 17.353 626,746 $ 15.510 482,078 $ 15.529
Granted . . . . . . . . . . . . 59,784 14.817 240,320 20.888 169,099 15.439
Exercised . . . . . . . . . . . (128,377) 15.234 (186,071) 15.711 (23,595) 15.407
Expired . . . . . . . . . . . . - - - - (836) 14.375
---------- --------- ---------- -------- --------- --------
Outstanding, end of year. . . . 612,402 $ 17.549 680,995 $ 17.353 626,746 $ 15.511
========== ========= ========== ======== ========= ========
Weighted average fair value of
options granted during the year $ 1.22 $ 1.29 $ 1.10
Options exercisable at year end 479,482 476,875 613,413
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Options Contractual Exercise Exercisable Exercise
Range of Exercise Prices Outstanding Life (Yrs) Price At 12/31/98 Price
- ------------------------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
9.375 - $12.4375 . . . . 20,049 9.6 $ 11.953 3,049 $ 12.388
14.375 - $16.125 . . . . 321,061 5.7 15.342 321,061 15.342
17.500 - $20.000 . . . . 183,092 8.2 19.588 67,172 18.876
$22.625. . . . . . . 88,200 8.5 22.625 88,200 22.625
- ------------------------- ----------- ------------ --------- ----------- ---------
$9.375 - $22.625 . . . . 612,402 6.9 17.549 479,482 17.158
========================= =========== ============ ========= =========== =========
</TABLE>
NOTE 7. TRANSACTIONS WITH AFFILIATES
The Company has a Management Agreement (the "Agreement") with Thornburg Mortgage
Advisory Corporation ("the Manager"). Under the terms of this Agreement, the
Manager, subject to the supervision of the Company's Board of Directors, is
responsible for the management of the day-to-day operations of the Company and
provides all personnel and office space. The Agreement provides for an annual
review by the unaffiliated directors of the Board of Directors of the Manager's
performance under the Agreement.
The Company pays the Manager an annual base management fee based on average
shareholders' equity, adjusted for liabilities that are not incurred to finance
assets ("Average Shareholders' Equity" or "Average Net Invested Assets" as
defined in the Agreement) payable monthly in arrears as follows: 1.1% of the
first $300 million of Average Shareholders' Equity, plus 0.8% of Average
Shareholders' Equity above $300 million.
For the years ended December 31, 1998, 1997 and 1996, the Company paid the
Manager $4,142,000, $3,664,000 and $1,872,000, respectively, in base management
fees in accordance with the terms of the Agreement.
The Manager is also entitled to earn performance based compensation in an amount
equal to 20% of the Company's annualized net income, before performance based
compensation, above an annualized Return on Equity equal to the ten year U.S.
Treasury Rate plus 1%. For purposes of the performance fee calculation, equity
is generally defined as proceeds from issuance of common stock before
underwriter's discount and other costs of issuance, plus retained earnings. For
the years ended December 31, 1998, 1997 and 1996, the Company paid the Manager
$759,000, $3,363,000 and $2,462,000, respectively, in performance based
compensation in accordance with the terms of the Agreement.
F-19
<PAGE>
NOTE 8. NET INTEREST INCOME ANALYSIS
The following table summarizes the amount of interest income and interest
expense and the average effective interest rate for the periods ended December
31, 1998, 1997 and 1996 (dollar amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ ---------------
Average Average Average
Amount Rate Amount Rate Amount Rate
--------- -------- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
ARM assets. . . . . . . . . . . . . . . $286,327 5.96% $246,507 6.56% $150,759 6.45%
Cash and cash equivalents . . . . . . . 705 4.35 1,214 5.57 752 5.29
287,032 5.96 247,721 6.56 151,511 6.44
--------- -------- --------- ------- -------- -------
Interest Bearing Liabilities:
Borrowings. . . . . . . . . . . . . . . 255,992 5.78 198,657 5.76 121,166 5.67
--------- -------- --------- ------- -------- -------
Net Interest Earning Assets and Spread . $ 31,040 0.18% $ 49,064 0.80% $ 30,345 0.77%
========= ======== ========= ======= ======== =======
Yield on Net Interest Earning Assets (1) 0.64% 1.30% 1.29%
======== ======= =======
<FN>
- ----------------------------------------
(1) Yield on Net Interest Earning Assets is computed by dividing annualized net interest income
by the average daily balance of interest earning assets.
</TABLE>
The following table presents the total amount of change in interest
income/expense from the table above and presents the amount of change due to
changes in interest rates versus the amount of change due to changes in volume
(dollar amounts in thousands):
<TABLE>
<CAPTION>
1998 versus 1997 1997 versus 1996
------------------------------ ------------------------
Rate Volume Total Rate Volume Total
--------- -------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
ARM assets. . . . . . . . $(22,549) $62,368 $ 39,819 $2,651 $93,097 $95,748
Cash and cash equivalents (266) (242) (508) 40 422 462
--------- -------- --------- ------ ------- -------
(22,815) 62,126 39,311 2,691 93,519 96,210
--------- -------- --------- ------ ------- -------
Interest Expense:
Borrowings. . . . . . . . 518 56,817 57,335 2,068 75,423 77,491
--------- -------- --------- ------ ------- -------
Net interest income. . . . $(23,333) $ 5,309 $(18,024) $ 623 $18,096 $18,719
========= ======== ========= ====== ======= =======
</TABLE>
F-20
<PAGE>
NOTE 9. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of the quarterly results of operations (amounts
in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income from ARM assets and cash . . $ 65,446 $ 72,252 $ 73,019 $ 76,315
Interest expense on borrowed funds . . . . . (59,402) (66,458) (65,243) (64,889)
--------- --------- --------- ---------
Net interest income . . . . . . . . . . . . 6,044 5,794 7,776 11,426
--------- --------- --------- ---------
Gain (loss) on ARM assets. . . . . . . . . . (4,689) 194 1,044 1,141
General and administrative expenses. . . . . (1,309) (1,310) (1,345) (2,071)
Dividend on preferred stock. . . . . . . . . (1,669) (1,670) (1,670) (1,670)
--------- --------- --------- ---------
Net income available to common shareholders $ (1,623) $ 3,008 $ 5,805 $ 8,826
========= ========= ========= =========
Basic EPS. . . . . . . . . . . . . . . . . . $ (0.08) $ 0.14 $ 0.27 $ 0.42
========= ========= ========= =========
Diluted EPS. . . . . . . . . . . . . . . . . $ (0.08) $ 0.14 $ 0.27 $ 0.42
========= ========= ========= =========
Average number of common shares outstanding. 21,490 21,858 21,796 20,797
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income from ARM assets and cash . . $ 73,011 $ 68,088 $ 57,623 $ 48,999
Interest expense on borrowed funds . . . . . (60,680) (54,862) (45,448) (37,667)
--------- --------- --------- ---------
Net interest income . . . . . . . . . . . . 12,331 13,226 12,175 11,332
--------- --------- --------- ---------
Gain (loss) on ARM assets. . . . . . . . . . 566 112 (189) (186)
General and administrative expenses. . . . . (2,047) (2,156) (1,911) (1,851)
Dividend on preferred stock. . . . . . . . . (1,670) (1,670) (1,670) (1,241)
--------- --------- --------- ---------
Net income available to common shareholders $ 9,180 $ 9,512 $ 8,405 $ 8,054
========= ========= ========= =========
Basic EPS. . . . . . . . . . . . . . . . . . $ 0.46 $ 0.50 $ 0.50 $ 0.49
========= ========= ========= =========
Diluted EPS. . . . . . . . . . . . . . . . . $ 0.46 $ 0.49 $ 0.50 $ 0.49
========= ========= ========= =========
Average number of common shares outstanding. 19,860 19,152 16,817 16,311
========= ========= ========= =========
</TABLE>
F-21
<PAGE>
SCHEDULE IV - Mortgage Loans on Real Estate
Column A, Description: The Company's whole loan portfolio at December 31, 1998,
which consists of only first mortgages on single-family residential housing, is
stratified as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Column A (continued) Column B Column C Column G Column H
- ----------------------------------- --------- --------- ------------- ---------------------
Description (4)
Principal Amount of
Range of Number Final Carrying Loans Subject to
Carrying Amounts of Interest Maturity Amount of Delinquent
of Mortgages Loans Rate Date Mortgages (3) Principal or Interest
- ------------------------ --------- --------- --------- ------------- ---------------------
<S> <C> <C> <C> <C> <C>
ARM Loans:
$ 0 - 250 931 5.73 - 8.98 Various $ 123,067 $ 827
251 - 500 498 5.23 - 8.48 Various 174,335 932
501 - 750 157 5.98 - 8.73 Various 96,788 644
751 - 1,000 78 5.86 - 8.11 Various 71,221
over 1,000 86 5.73 - 8.36 Various 129,613 3,450
---------- ------------ ---------------------
1,750 595,024 5,853
---------- ------------ ---------------------
Hybrid Loans:
0 - 250 1,418 4.73 - 9.23 Various 184,056 255
251 - 500 465 5.61 - 7.98 Various 164,727
501 - 750 95 5.61 - 7.73 Various 57,186
751 - 1,000 41 6.11 - 7.98 Various 37,219
over 1,000 15 5.98 - 7.48 Various 23,481
---------- ------------ ---------------------
2,034 466,669 255
---------- ------------ ---------------------
Premium 17,436
Allowance for losses (2) (804)
---------- ------------ ---------------------
3,784 $ 1,078,325 $ 6,108
========== ============ =====================
</TABLE>
Notes:
(1) Reconciliation of carrying amounts of mortgage loans:
Balance at December 31, 1997. . $ 118,987
Additions during 1998:
Loan purchases. . . . . . . . 1,092,238
Deductions during 1998:
Collections of principal. . 128,079
Cost of mortgage loans sold 2,043
Provision for losses. . . . 762
Amortization of premium . . 2,016
----------
132,900
----------
Balance at December 31, 1998. . $1,078,325
==========
(2) The provision for losses is based on management's assessment of various
factors.
(3) Cost for Federal income taxes is the same.
(4) The geographic distribution of the Company's whole loan portfolio at
December 31, 1998 is as follows:
F-22
<PAGE>
<TABLE>
<CAPTION>
Number of
State or Territory Loans Carrying Amount
- ----------------------- ---------- ----------------
<S> <C> <C>
Arizona . . . . . . . . 92 $ 25,087
California. . . . . . . 559 232,178
Colorado. . . . . . . . 112 46,930
Connecticut . . . . . . 67 29,295
Florida . . . . . . . . 554 137,587
Georgia . . . . . . . . 241 74,916
Illinois. . . . . . . . 189 36,189
Massachusetts . . . . . 84 28,868
Michigan. . . . . . . . 186 31,894
Missouri. . . . . . . . 225 46,515
New Jersey. . . . . . . 154 44,361
New York. . . . . . . . 287 73,875
Pennsylvania. . . . . . 67 17,376
Texas . . . . . . . . . 129 33,138
Washington. . . . . . . 69 21,460
Other states, less than
60 loans each . . . 769 182,024
Premium . . . . . . . . 17,436
Allowance for losses. . (804)
---------- ----------------
TOTAL . . . . . . . . . 3,784 $ 1,078,325
========== ================
</TABLE>
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THORNBURG MORTGAGE ASSET CORPORATION
(Registrant)
Dated: March 26, 1999 /s/ Garrett Thornburg
---------------------------------------
Garrett Thornburg
Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
Dated: March 26, 1999 /s/ Richard P. Story
---------------------------------------
Richard P. Story
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- ---------------------- ----------------------- --------------
<S> <C> <C>
/s/ Garrett Thornburg Chairman of the Board, March 26, 1999
- ----------------------
Garrett Thornburg Director and Chief
Executive Officer
/s/ Larry A. Goldstone President, Director and March 26, 1999
- ----------------------
Larry A. Goldstone Chief Operating Officer
/s/ David A. Ater Director March 26, 1999
- ----------------------
David A. Ater
/s/ Joseph H. Badal Director March 26, 1999
- ----------------------
Joseph H. Badal
/s/ Owen M. Lopez Director March 26, 1999
- ----------------------
Owen M. Lopez
/s/ James H. Lorie Director March 26, 1999
- ----------------------
James H. Lorie
/s/ Stuart C. Sherman Director March 26, 1999
- ----------------------
Stuart C. Sherman
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
Sequentially
Numbered
Exhibit Number Exhibit Description Page
- -------------- -------------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Sales Agency Agreement (a)
3.1 Articles of Incorporation of the Registrant (b)
3.1.1 Articles of Amendment to Articles of Incorporation dated June 29, 1995 (c)
3.1.2 Articles Supplementary dated January 21, 1997 (d)
3.2 Amended and Restated Bylaws of the Registrant (e)
4.1 Specimen Common Stock Certificates (b)
4.2 Specimen Preferred Stock Certificates (d)
10.1 Management Agreement between the Registrant and Thornburg Mortgage
Advisory Corporation dated June 17, 1994 (e)
10.1.1 Amendment to Management Agreement dated June 16, 1995 (a)
10.1.2 Amendment to Management Agreement dated December 15, 1995 (f)
10.1.3 Amendment to Management Agreement dated September 18, 1996 (g)
10.1.4 Amendment to Management Agreement dated October 1, 1998 * 69
10.2 Form of Servicing Agreement (b)
10.3 Form of 1992 Stock Option and Incentive Plan as amended and
restated March 14, 1997 (h)
10.3.1 Amendment dated December 16, 1997 to the amended and restated
1992 Stock Option and Incentive Plan (i)
10.4 Form of Dividend Reinvestment and Stock Purchase Plan (j)
10.5 Trust Agreement dated as of December 1, 1998 * 71
10.6 Indenture Agreement dated as of December 1, 1998 * 105
10.7 Sales and Service Agreement dated as of December 1, 1998 * 145
22. Notice and Proxy Statement for the Annual Meeting of Shareholders to be
held on April 30, 1998 (k)
27 Financial Data Schedule * 187
<FN>
- ---------------
* Being filed herewith.
(a) Previously filed with Registrant's Form 8-K dated October 10, 1995 and incorporated herein by
reference pursuant to Rule 12b-32.
(b) Previously filed as part of Form S-11 which went effective on June 18, 1993 and incorporated
herein by reference pursuant to Rule 12b-32.
(c) Previously filed with Registrant's Form 10-Q dated June 30, 1995 and incorporated herein by
reference pursuant to Rule 12b-32.
(d) Previously filed as part of Form 8-A dated January 17, 1997 and incorporated herein by reference
pursuant to Rule 12b-32.
(e) Previously filed as part of Form S-8 dated July 1, 1994 and incorporated herein by reference
pursuant to Rule 12b-32.
(f) Previously filed with Registrant's Form 10-K dated December 31, 1995 and incorporated herein by
reference pursuant to Rule 12b-32.
<PAGE>
(g) Previously filed with Registrant's Form 10-Q dated September 30, 1996 and incorporated herein by
reference pursuant to Rule 12b-32.
(h) Previously filed with Registrant's Form 10-K dated December 31, 1996 and incorporated herein by
reference pursuant to Rule 12b-32.
(i) Previously filed with Registrant's Form 10-K dated December 31, 1997 and incorporated herein by
reference pursuant to Rule 12b-32.
(j) Previously filed as Exhibit 4 to Registrant's registration statement on Form S-3D dated
September 24, 1997 and incorporated herein by reference pursuant to Rule 12b-32.
(k) Previously filed on March 30, 1998 and incorporated by reference pursuant to Rule 12-b32.
</TABLE>
<PAGE>
EXHIBIT 10.1.4
THORNBURG MORTGAGE ASSET CORPORATION
AMENDMENT TO MANAGEMENT AGREEMENT
AS OF OCTOBER 1, 1998
The Management Agreement (the "Management Agreement") between Thornburg
Mortgage Asset Corporation, a Maryland corporation (the "Company") and Thornburg
Mortgage Advisory Corporation, a Delaware corporation (the "Manager"), is
amended, effective as of October 1, 1998, as follows:
RECITALS
This amendment to the Management Agreement is being effected for the
purpose of amending the method of computing the Incentive Compensation payable
to the Manager pursuant to Section 7 of the Management Agreement, as approved by
the Board of Directors of the Company, including all of the independent
directors, on October 16, 1998, and to restate and confirm in all respects the
Management Agreement as so amended. Capitalized terms used herein shall have
the meanings ascribed to them in the Management Agreement.
IT IS THEREFORE AGREED AS FOLLOWS:
1. Section 7 of the Management Agreement is amended by adding after
subsection (c) thereof the following as subsection 7(d):
Solely for purposes of calculating the Manager's Incentive Compensation under
Section 7(b), Average Net Worth shall be reduced by the amount that the Company
pays for the purchase of Company stock.
2. Section 7 of the Management Agreement is amended by adding after new
subsection (d) thereof the following as subsection 7(e):
Net Income of the Company, solely for purposes of calculating the Manager's
Incentive Compensation under Section 7(b), shall be determined by calculating
net income, including deductions and charges thereto, in accordance with
generally accepted accounting principles ("GAAP"), as determined by the
Company's independent certified public accountants.
3. The Management Agreement, as amended by this Amendment dated as of
October 1, 1998, is in all respects restated and affirmed between the parties.
IN WITNESS WHEREOF, the Company and the Manager hereby execute this
Amendment to the Management Agreement as of October 1, 1998.
THORNBURG MORTGAGE ASSET CORPORATION
a Maryland corporation
By: /s/ Larry A. Goldstone
------------------------------
Larry A. Goldstone, President
THORNBURG MORTGAGE ADVISORY CORPORATION
a Delaware corporation
By: /s/ Garrett Thornburg
----------------------------------
Garrett Thornburg, President
68
<PAGE>
EXHIBIT 10.5
================================================================================
EXECUTION COPY
--------------
TRUST AGREEMENT
Among
THORNBURG MORTGAGE FUNDING CORPORATION,
as Depositor
THORNBURG MORTGAGE ASSET CORPORATION,
as Sponsor
and
WILMINGTON TRUST COMPANY,
as Owner Trustee
Dated as of December 1, 1998
TMA MORTGAGE FUNDING TRUST I
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C>
ARTICLE I
Definitions
SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 1.02. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE II
ORGANIZATION
- --------------------------------------------------------------------------------------------------------
SECTION 2.01. Name of Trust; Statement of Intent. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 2.02. Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 2.03. Purposes and Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 2.04. Appointment of Owner Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.05. Initial Capital Contribution of Owner Trust Estate. . . . . . . . . . . . . . . . . . . . 8
SECTION 2.06. Declaration of Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.07. Liability of the Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.08. Title to Trust Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.09. Situs of Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.10. Representations and Warranties of the Depositor and the Sponsor . . . . . . . . . . . . . 9
ARTICLE III
TRUST CERTIFICATES AND TRANSFER OF INTERESTS
SECTION 3.01. Initial Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 3.02. The Trust Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 3.03. Authentication of Trust Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 3.04 Registration of Transfer and Exchange of Trust Certificates. . . . . . . . . . . . . . . . 10
SECTION 3.05. Mutilated, Destroyed, Lost or Stolen Trust Certificates . . . . . . . . . . . . . . . . . 11
SECTION 3.06. Persons Deemed Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 3.07. Access to List of Certificateholders' Names and Addresses . . . . . . . . . . . . . . . . 11
SECTION 3.08. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 3.09. Appointment of Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 3.10. Trust Certificate Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 3.11. Note and Collateral Purchase Options. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 3.12. Beneficial Owner Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE IV
ACTIONS BY OWNER TRUSTEE
SECTION 4.01. Prior Notice to Certificateholders and Note Insurer with Respect to Certain
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 4.02. Action by Certificateholders with Respect to Certain Matters. . . . . . . . . . . . . . . 15
SECTION 4.03. Action by Certificateholders with Respect to Bankruptcy . . . . . . . . . . . . . . . . . 15
SECTION 4.04. Restrictions on Certificateholders' Power . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 4.05. Majority Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE V
APPLICATION OF TRUST FUNDS; CERTAIN DUTIES
SECTION 5.01. Establishment of Trust Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 5.02. Application of Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 5.03. Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 5.04. No Segregation of Moneys; No Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 5.05. Accounting and Reports to the Certificateholders, the Internal Revenue Service and Others 16
SECTION 5.06. Signature on Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE VI
AUTHORITY AND DUTIES OF OWNER TRUSTEE
SECTION 6.01. General Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 6.02. General Duties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 6.03. Action upon Instruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 6.04. No Duties Except as Specified in the Trust Agreement or in Instructions . . . . . . . . . 18
SECTION 6.05. No Action Except Under Specified Documents or Instructions. . . . . . . . . . . . . . . . 18
SECTION 6.06. Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 6.07. Delegation to Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE VII
CONCERNING THE OWNER TRUSTEE
SECTION 7.01. Acceptance of Trusts and Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 7.02. Furnishing of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 7.03. Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 7.04. Reliance; Advice of Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 7.05. Not Acting in Individual Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 7.06. Owner Trustee Not Liable for Trust Certificates, Mortgage Loans or Pooled Certificates. . 20
SECTION 7.07. Owner Trustee May Own Trust Certificates and Notes. . . . . . . . . . . . . . . . . . . . 20
ARTICLE VIII
COMPENSATION OF OWNER TRUSTEE
SECTION 8.01. Owner Trustee's Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 8.02. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 8.03. Payments to the Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE IX
TERMINATION OF TRUST AGREEMENT
SECTION 9.01. Termination of Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE X
SUCCESSOR OWNER TRUSTEES ANDADDITIONAL OWNER TRUSTEES
SECTION 10.01. Eligibility Requirements for Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 10.02. Resignation or Removal of Owner Trustee. . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 10.03. Successor Owner Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 10.04. Merger or Consolidation of Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 10.05. Appointment of Co-Trustee or Separate Trustee. . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 11.02. No Legal Title to Owner Trust Estate in Certificateholders . . . . . . . . . . . . . . . 25
SECTION 11.03. Limitations on Rights of Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 11.04. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 11.05. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 11.06. Separate Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 11.07. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 11.08. No Petition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 11.09. No Recourse. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 11.10. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 11.11. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 11.12. Grant of Certificateholder Rights to NoteInsurer. . . . . . . . . . . . . . . . . . . . . 26
SECTION 11.13. Third-Party Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 11.14. The Note Insurer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
APPENDIX A Definitions
EXHIBIT A Form of Trust Certificate
EXHIBIT B Form of Certificate of Trust
EXHIBIT C Form of Purchaser's Representation Letter
TRUST AGREEMENT (the "Trust Agreement") dated as of December 1, 1998, among
THORNBURG MORTGAGE FUNDING CORPORATION, a Delaware corporation, as depositor
(the "Depositor"), THORNBURG MORTGAGE ASSET CORPORATION, as sponsor, (the
"Sponsor") and WILMINGTON TRUST COMPANY, a Delaware banking corporation, as
owner trustee (the "Owner Trustee").
In consideration of the premises and the mutual agreements herein
contained, the Depositor and the Owner Trustee hereby agree as follows:
ARTICLE I
Definitions
-----------
SECTION 1.01. Definitions. For all purposes of the Trust Agreement,
-----------
except as otherwise expressly provided herein or unless the context otherwise
requires, capitalized terms used but not otherwise defined herein shall have the
meanings assigned to such terms in Appendix A hereto which are incorporated by
reference herein. All other capitalized terms used herein shall have the
meanings specified herein.
SECTION 1.02. Rules of Construction. Unless the context otherwise
-----------------------
requires:
(a) All terms defined in the Trust Agreement shall have the defined
meanings when used in any certificate or other document made or delivered
pursuant hereto unless otherwise defined therein.
(b) As used in the Trust Agreement and in any certificate or other
document made or delivered pursuant hereto or thereto, accounting terms not
defined in the Trust Agreement or in any such certificate or other document, and
accounting terms partly defined in the Trust Agreement or in any such
certificate or other document to the extent not defined, shall have the
respective meanings given to them under generally accepted accounting
principles. To the extent that the definitions of accounting terms in the Trust
Agreement or in any such certificate or other document are inconsistent with the
meanings of such terms under generally accepted accounting principles, the
definitions contained in the Trust Agreement or in any such certificate or other
document shall control.
(c) The words "hereof," "herein," "hereunder" and words of similar
import when used in the Trust Agreement shall refer to the Trust Agreement as a
whole and not to any particular provision of the Trust Agreement; Section and
Exhibit references contained in the Trust Agreement are references to Sections
and Exhibits in or to the Trust Agreement unless otherwise specified; and the
term "including" shall mean "including without limitation".
(d) The definitions contained in the Trust Agreement are applicable to
the singular as well as the plural forms of such terms and to the masculine as
well as to the feminine and neuter genders of such terms.
(e) Any agreement, instrument or statute defined or referred to herein
or in any instrument or certificate delivered in connection herewith means such
agreement, instrument or statute as from time to time amended, modified or
supplemented and includes (in the case of agreements or instruments) references
to all attachments thereto and instruments incorporated therein; references to a
Person are also to its permitted successors and assigns.
ARTICLE II
F
----
Organization
------------
SECTION 2.01. Name of Trust; Statement of Intent. The Trust created
---------------------------------------
hereby shall be known as "TMA Mortgage Funding Trust I," in which name the Owner
Trustee may conduct the business of the Trust, make and execute contracts and
other instruments on behalf of the Trust and sue and be sued on behalf of the
Trust. The parties hereto intend that the Trust shall constitute a business
trust within the meaning of Section 3801(a) of the Business Trust Statute and
that the Trust Agreement constitute the governing instrument of the Trust in
accordance with the Business Trust Statute. The Owner Trustee is hereby
authorized to file a certificate of trust with the Secretary of State of the
State of Delaware pursuant to Section 3810(a) of the Business Trust Statute.
SECTION 2.02. Office. The office of the Trust shall be in care of the
------
Owner Trustee at the Corporate Trust Office or at such other address in Delaware
as the Owner Trustee may designate by written notice to the Owners, the
Depositor and the Paying Agent.
SECTION 2.03. Purposes and Powers. The purpose of the Trust is to engage
-------------------
in the following activities, and the Trust shall have the power and authority:
(i) to issue the Notes pursuant to the Indenture and the Trust
Certificates and certain purchase options pursuant to the Trust Agreement and to
sell, transfer or exchange the Notes and to sell, transfer and exchange the
Trust Certificates;
(ii) with the proceeds of the sale of the Notes to purchase the
Mortgage Loans, the Pooled Certificates, the Swap Agreements and certain other
assets, to pay the organizational, start-up and transactional expenses of the
Trust, and to pay the balance to the Depositor pursuant to the Sale and
Servicing Agreement;
(iii) to assign, grant, transfer, pledge, mortgage and convey the
Trust Estate pursuant to the Indenture and to hold, manage and distribute to the
Certificateholders pursuant to the terms of the Trust Agreement and the Sale and
Servicing Agreement any portion of the Trust Estate released from the Lien of,
and remitted to the Trust pursuant to, the Indenture;
(iv) to enter into and perform its obligations under the Basic
Documents to which it is to be a party;
(v) to engage in those activities, including entering into
agreements, that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith;
(vi) subject to compliance with the Basic Documents, to engage in
such other activities as may be required in connection with conservation of the
Trust Estate and the making of payments or distributions to the
Certificateholders, the Noteholders and others as specified in the Basic
Documents;
(vii) to establish accounts in accordance with the Basic Documents
and to make deposits into and withdrawals from such accounts in accordance with
the Basic Documents;
(viii) to enter into the Note Purchase Agreement and to perform
its obligations thereunder; and
(ix) to enter into the Recognition Agreement and to perform its
obligations thereunder.
The Trust is hereby authorized to engage in the foregoing activities. The
Trust shall not engage in any activity other than in connection with the
foregoing or other than as required or authorized by the terms of the Trust
Agreement or the other Basic Documents.
SECTION 2.04. Appointment of Owner Trustee. The Depositor hereby appoints
----------------------------
the Owner Trustee as trustee of the Trust effective as of the date hereof, to
have all the rights, powers and duties set forth herein.
SECTION 2.05. Initial Capital Contribution of Owner Trust Estate. The
-----------------------------------------------------
Depositor hereby sells, assigns, transfers, conveys and sets over to the Owner
Trustee, as of the date hereof, the sum of $1.00. The Owner Trustee hereby
acknowledges receipt in trust from the Depositor, as of the date hereof, of the
foregoing contribution, which shall constitute the initial Owner Trust Estate
and shall be deposited in the Certificate Distribution Account. The Depositor
shall pay organizational expenses of the Trust as they may arise or shall, upon
the request of the Owner Trustee, promptly reimburse the Owner Trustee for any
such expenses paid by the Owner Trustee.
SECTION 2.06. Declaration of Trust. The Owner Trustee hereby declares
----------------------
that it will hold the Owner Trust Estate in trust upon and subject to the
conditions set forth herein for the use and benefit of the Certificateholders,
subject to the obligations of the Trust under the Basic Documents. It is the
intention of the parties hereto that the Trust constitute a business trust under
the Business Trust Statute and that the Trust Agreement constitute the governing
instrument of such business trust. It is the intention of the parties hereto
that, solely for federal income tax purposes, the Trust shall be treated as a
grantor trust for federal income tax purposes. The parties agree that, unless
otherwise required by appropriate tax authorities, the Trust will file or cause
to be filed annual or other necessary returns, reports and other forms
consistent with the characterization of the Trust as a grantor trust for such
tax purposes. Effective as of the date hereof, the Owner Trustee shall have all
rights, powers and duties set forth herein and in the Business Trust Statute
with respect to accomplishing the purposes of the Trust.
SECTION 2.07. Liability of the Certificateholders. No Certificateholder
-----------------------------------
shall have any personal liability for any liability or obligation of the Trust.
SECTION 2.08. Title to Trust Property. Legal title to all the Owner Trust
-----------------------
Estate shall be vested at all times in the Trust as a separate legal entity
except where applicable law in any jurisdiction requires title to any part of
the Owner Trust Estate to be vested in a trustee or trustees, in which case
title shall be deemed to be vested in the Owner Trustee, a co-trustee and/or a
separate trustee, as the case may be.
SECTION 2.09. Situs of Trust. The Trust will be located and administered
--------------
in the State of Delaware. All bank accounts maintained by the Owner Trustee on
behalf of the Trust shall be located in the State of Delaware, the State of
Illinois or the State of California. The Trust shall not have any employees in
any state other than Delaware; provided, however, that nothing herein shall
restrict or prohibit the Owner Trustee from having employees within or without
the State of Delaware. Payments will be received by the Trust only in Delaware,
Illinois or California, and payments will be made by the Trust only from
Delaware, Illinois or California. The only office of the Trust will be at the
Corporate Trust Office in Delaware.
SECTION 2.10. Representations and Warranties of the Depositor and the
-----------------------------------------------------------
Sponsor. The Depositor and the Sponsor hereby represent and warrant to the
Owner Trustee that:
(a) The Depositor and the Sponsor are duly organized and validly
existing as corporations in good standing under the laws of the jurisdiction of
their respective jurisdictions of incorporation, with power and authority to own
their properties and to conduct their business as such properties are currently
owned and such business is presently conducted.
(b) The Depositor and the Sponsor have the power and authority to
execute and deliver the Trust Agreement and to carry out its terms; the
Depositor has full power and authority to sell and assign the property to be
sold and assigned to and deposited with the Trust and the Depositor has duly
authorized such sale and assignment and deposit to the Trust by all necessary
corporate action; and the execution, delivery and performance of the Trust
Agreement have been duly authorized by the Depositor and the Sponsor by all
necessary corporate action.
(c) The Trust Agreement constitutes a legal, valid and binding
obligation of the Depositor and the Sponsor enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization and similar
laws relating to creditors' rights generally and subject to general principles
of equity.
(d) The consummation of the transactions contemplated by the Trust
Agreement and the fulfillment of the terms hereof do not conflict with, result
in any breach of any of the terms and provisions of, or constitute (with or
without notice or lapse of time) a default under, the certificate of
incorporation or bylaws of the Depositor or the Sponsor, or any material
indenture, agreement or other instrument to which the Depositor or the Sponsor
is a party or by which either is bound; nor result in the creation or imposition
of any Lien upon any of the properties of the Depositor or the Sponsor pursuant
to the terms of any such indenture, agreement or other instrument (other than
pursuant to the Basic Documents); nor violate any law or, to the best of the
Depositor's and the Sponsor's knowledge, any order, rule or regulation
applicable to the Depositor or the Sponsor of any court or of any federal or
state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Depositor or the Sponsor or their
respective properties.
(e) To the Depositor's and the Sponsor's best knowledge, there are
no proceedings or investigations pending or threatened before any court,
regulatory body, administrative agency or other governmental instrumentality
having jurisdiction over the Depositor or the Sponsor or their respective
properties: (A) asserting the invalidity of the Trust Agreement, (B) seeking
to prevent the consummation of any of the transactions contemplated by the Trust
Agreement or (C) seeking any determination or ruling that might materially and
adversely affect the performance by the Depositor or the Sponsor of the
obligations of either under, or the validity or enforceability of, the Trust
Agreement.
ARTICLE III
Trust Certificates and Transfer of Interests
--------------------------------------------
SECTION 3.01. Initial Ownership. Upon the formation of the Trust by the
------------------
contribution by the Depositor pursuant to Section 2.05 and until the issuance of
the Trust Certificates, the Depositor shall be the sole beneficiary of the
Trust.
SECTION 3.02. The Trust Certificates. (a) The Trust Certificates shall
-----------------------
be substantially in the form set forth in Exhibit A hereto, with an initial
Certificate Balance of $32,362,457. The Trust Certificates shall be issued in
minimum denominations of $100,000 and integral multiples of $1,000 in excess
thereof; provided however that one Trust Certificate may be issued in a
denomination that represents any residual amount of the Initial Certificate
Balance. The Trust Certificates shall be executed on behalf of the Trust by
manual or facsimile signature of an authorized officer of the Owner Trustee.
Trust Certificates bearing the manual or facsimile signatures of individuals who
were, at the time when such signatures shall have been affixed, authorized to
sign on behalf of the Trust, shall be validly issued and entitled to the benefit
of the Trust Agreement, notwithstanding that such individuals or any of them
shall have ceased to be so authorized prior to the authentication and delivery
of such Trust Certificates or did not hold such offices at the date of
authentication and delivery of such Trust Certificates. Notwithstanding the
foregoing or any other provision contained herein, so long as the
Certificateholder Collateral Purchase Option or the Note Purchase Option is
outstanding, there shall only be a single holder of all of the Trust
Certificates which Certificateholder shall also own such options.
(b) On the Closing Date, the Trust Certificates, in the initial
Certificate Balance of $32,362,457, shall be issued to TMA Acceptance Corp. in
exchange for the purchase price of $32,362,457 and registered in the name of TMA
Acceptance Corp. The Trust hereby directs that such cash amount be paid to, or
at the direction of, the Depositor as part of the consideration for the purchase
of the Trust Estate pursuant to the terms of the Sale and Servicing Agreement.
SECTION 3.03. Authentication of Trust Certificates. Concurrently with the
------------------------------------
initial sale of the Collateral to the Trust pursuant to the Sale and Servicing
Agreement, the Owner Trustee shall cause the Trust Certificates in an aggregate
principal amount equal to the Initial Certificate Balance to be executed on
behalf of the Trust, authenticated and delivered to or upon the written order of
TMA Acceptance Corp., as provided in Section 3.02(b), signed by its chairman of
the board, its president, any vice president, secretary or any assistant
treasurer, without further corporate action by the Depositor, in authorized
denominations. No Trust Certificate shall entitle its Holder to any benefit
under the Trust Agreement or be valid for any purpose unless there shall appear
on such Trust Certificate a certificate of authentication substantially in the
form set forth in Exhibit A, executed by the Owner Trustee, by manual signature;
such authentication shall constitute conclusive evidence that such Trust
Certificate shall have been duly authenticated and delivered hereunder. All
Trust Certificates shall be dated the date of their authentication. No further
Trust Certificates shall be issued except pursuant to Section 3.04 or 3.05
hereunder.
SECTION 3.04. Registration of Transfer and Exchange of Trust Certificates.
-----------------------------------------------------------
The Certificate Registrar shall keep or cause to be kept, at the office or
agency maintained pursuant to Section 3.08, a Certificate Register in which,
subject to such reasonable regulations as it may prescribe, the Owner Trustee
shall provide for the registration of Trust Certificates and, subject to Section
3.10 hereof, of transfers and exchanges of Trust Certificates as herein
provided. The Owner Trustee shall be the initial Certificate Registrar.
Upon surrender for registration of transfer of any Trust Certificate at the
office or agency maintained pursuant to Section 3.08, the Owner Trustee shall
execute, authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Trust Certificates in authorized denominations of a
like aggregate amount dated the date of authentication by the Owner Trustee or
any authenticating agent. At the option of a Certificateholder, Trust
Certificates may be exchanged for other Trust Certificates of authorized
denominations of a like aggregate amount upon surrender of the Trust
Certificates to be exchanged at the office or agency maintained pursuant to
Section 3.08. Whenever any Trust Certificates are surrendered for exchange, the
Owner Trustee shall execute on behalf of the Trust, authenticate and deliver one
or more new Trust Certificates dated the date of authentication by the Owner
Trustee or any authenticating agent to the Certificateholder making such
exchange.
Every Trust Certificate presented or surrendered for registration of
transfer or exchange shall be accompanied by a written instrument of transfer in
form satisfactory to the Owner Trustee and the Certificate Registrar duly
executed by the Certificateholder or such Certificateholder's attorney duly
authorized in writing. Each Trust Certificate surrendered for registration of
transfer or exchange shall be canceled and subsequently disposed of by the Owner
Trustee in accordance with its customary practice.
No service charge shall be made for any registration of transfer or
exchange of Trust Certificates, but the Owner Trustee or the Certificate
Registrar may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer or
exchange of Trust Certificates.
SECTION 3.05. Mutilated, Destroyed, Lost or Stolen Trust Certificates. If
-------------------------------------------------------
(a) any mutilated Trust Certificate shall be surrendered to the Certificate
Registrar, or if the Certificate Registrar shall receive evidence to its
satisfaction of the destruction, loss or theft of any Trust Certificate, and (b)
there shall be delivered to the Certificate Registrar and the Owner Trustee such
security or indemnity as may be required by them to save each of them harmless,
then in the absence of notice that such Trust Certificate has been acquired by a
protected purchaser, the Owner Trustee on behalf of the Trust shall execute and
the Owner Trustee shall authenticate and deliver, in exchange for or in lieu of
any such mutilated, destroyed, lost or stolen Trust Certificate, a new Trust
Certificate of like tenor and denomination. In connection with the issuance of
any new Trust Certificate under this Section, the Owner Trustee or the
Certificate Registrar may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection therewith.
Any duplicate Trust Certificate issued pursuant to this Section shall constitute
conclusive evidence of ownership in the Trust, as if originally issued, whether
or not the lost, stolen or destroyed Trust Certificate shall be found at any
time.
If, after the delivery of a replacement Trust Certificate pursuant to this
Section, a protected purchaser of the original Trust Certificate in lieu of
which such replacement Trust Certificate was issued presents for payment such
original Trust Certificate, the Owner Trustee shall be entitled to recover such
replacement Trust Certificate (and any distributions made with respect thereto)
from the Person to whom it was delivered or any Person taking such replacement
Trust Certificate from such Person to whom such replacement Trust Certificate
was delivered or any assignee of such Person, except a protected purchaser, and
shall be entitled to recover upon the security or indemnity provided therefor to
the extent of any loss, damage, cost or expense incurred by the Owner Trustee or
Certificate Registrar in connection therewith.
SECTION 3.06. Persons Deemed Certificateholders. Prior to due
-----------------------------------
presentation of a Trust Certificate for registration of transfer, the Owner
Trustee, the Certificate Registrar or any Paying Agent or other agent thereof
may treat the Person in whose name any Trust Certificate is registered in the
Certificate Register as the owner of such Trust Certificate for the purpose of
receiving distributions pursuant to Section 5.02 and for all other purposes
whatsoever, and none of the Owner Trustee, the Certificate Registrar or any
Paying Agent or other agent thereof shall be bound by any notice to the
contrary.
SECTION 3.07. Access to List of Certificateholders' Names and Addresses.
----------------------------------------------------------
The Owner Trustee shall furnish or cause to be furnished to the Paying Agent,
the Servicer and the Depositor, no later than the fifth Business Day following
each Record Date, a list, in such form as the Paying Agent, the Servicer or the
Depositor may reasonably require, of the names and addresses of the
Certificateholders as of the most recent Record Date. If three or more
Certificateholders or one or more Holders of Trust Certificates evidencing not
less than 25% of the aggregate Certificate Balance apply in writing to the Owner
Trustee, and such application states that the applicants desire to communicate
with other Certificateholders with respect to their rights under the Trust
Agreement or under the Trust Certificates and such application is accompanied by
a copy of the communication that such applicants propose to transmit, then the
Owner Trustee shall, within five Business Days after the receipt of such
application, afford such applicants access during normal business hours to the
current list of Certificateholders. Upon receipt of any such application, the
Owner Trustee will promptly notify the Depositor by providing a copy of such
application and a copy of the list of Certificateholders produced in response
thereto. Each Certificateholder, by receiving and holding a Trust Certificate,
shall be deemed to have agreed not to hold any of the Depositor, the Certificate
Registrar or the Owner Trustee accountable by reason of the disclosure of its
name and address, regardless of the source from which such information was
derived.
SECTION 3.08. Maintenance of Office or Agency. The Owner Trustee shall
---------------------------------
maintain in the Borough of Manhattan, The City of New York, an office or offices
or agency or agencies where Trust Certificates may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Owner Trustee in respect of the Trust Certificates and the Basic Documents
may be served. The Owner Trustee initially designates Harris Trust Company of
New York, 88 Pine Street, Wall Street Plaza, 19th Floor, New York, New York
10005; Attn: Reginold Aloisi as its office for such purposes. The Owner Trustee
shall give prompt written notice to the Depositor and to the Certificateholders
of any change in the location of the Certificate Register or any such office or
agency.
SECTION 3.09. Appointment of Paying Agent. The Paying Agent shall make
-----------------------------
distributions to Certificateholders from the Certificate Distribution Account
pursuant to Section 5.02 and shall report the amounts of such distributions to
the Owner Trustee. Any Paying Agent shall have the revocable power to withdraw
funds from the Certificate Distribution Account for the purpose of making the
distributions referred to above. The Owner Trustee may revoke such power and
remove the Paying Agent if the Owner Trustee determines in its sole discretion
that the Paying Agent shall have failed to perform its obligations under the
Trust Agreement in any material respect. The Paying Agent initially shall be
Bankers Trust Company of California, N.A. Bankers Trust Company of California,
N.A., shall be permitted to resign as Paying Agent upon 30 days' written notice
to the Owner Trustee, the Note Insurer and the Servicer. In the event that
Bankers Trust Company of California, N.A., shall no longer be the Paying Agent,
the Owner Trustee shall appoint a successor to act as Paying Agent (which shall
be a bank or trust company acceptable to the Note Insurer). The Owner Trustee
shall cause such successor Paying Agent or any additional Paying Agent appointed
by the Owner Trustee to execute and deliver to the Owner Trustee an instrument
in which such successor Paying Agent or additional Paying Agent shall agree with
the Owner Trustee that, as Paying Agent, such successor Paying Agent or
additional Paying Agent will hold all sums, if any, held by it for payment to
the Certificateholders in trust for the benefit of the Certificateholders
entitled thereto until such sums shall be paid to such Certificateholders. The
Paying Agent shall return all unclaimed funds to the Owner Trustee and upon
removal of a Paying Agent such Paying Agent shall also return all funds in its
possession to the Owner Trustee. The provisions of Sections 7.01, 7.04 and 8.02
shall apply to Bankers Trust Company of California, N.A. or the Owner Trustee
also in its role as Paying Agent, for so long as Bankers Trust Company of
California, N.A. or the Owner Trustee shall act as Paying Agent and, to the
extent applicable, to any other paying agent appointed hereunder. Any reference
in the Trust Agreement to the Paying Agent shall include any co-paying agent
unless the context requires otherwise.
SECTION 3.10. Trust Certificate Transfer Restrictions. The Trust
------------------------------------------
Certificates may not be offered or sold except to the Depositor or an Affiliate
thereof or to institutional "accredited investors" (as defined in Rule
501(a)(1)-(3) or (7) under the Securities Act who are United States persons (as
defined in Section 7701(a)(30) of the Code) in reliance on an exemption from the
registration requirements of the Securities Act. Further, for purposes of the
Investment Company Act of 1940, as amended, for so long as the Note Purchase
Option or either of the Collateral Purchase Options are outstanding, and until
an opinion of counsel is provided to the Owner Trustee to the effect that such
limitation is no longer necessary, the total number of beneficial owners of the
Certificates may not exceed three. Notwithstanding the foregoing, no transfer
of a Trust Certificate shall be permitted, and no such transfer shall be
registered by the Certificate Registrar or be effective hereunder, if, for
purposes of of Treasury regulation 1.7704-1(h)(3), the number of beneficial
owners of Trust Certificates exceeds 99. For purposes of Treasury regulation
1.7704-1(h)(3), in determining the number of beneficial owners, the Certificate
Registrar may treat the number of beneficial owners as equal to the number of
registered holders, provided that each holder represents that it is the
beneficial owner and (i) is an individual or a United States corporation (other
than an S corporation) or (ii) no principal purpose of the use of the entity to
hold the Trust Certificate is to permit the Trust to satisfy the 100 partners
limitation of Treasury regulation 1.7704-1(h)(3).
(a) The Trust Certificates have not been registered or
qualified under the Securities Act, or any state securities law. No transfer,
sale, pledge or other disposition of any Trust Certificate shall be made unless
such disposition is made pursuant to an effective registration statement under
the Securities Act and effective registration or qualification under applicable
state securities laws, or is made in a transaction which does not require such
registration or qualification. In the event that a transfer is to be made in
reliance upon an exemption from the Securities Act, the Owner Trustee may
require, in order to assure compliance with the Securities Act, that the
Certificateholder's prospective transferee certify to the Owner Trustee in
writing the facts surrounding such disposition. Unless the Owner Trustee
requests otherwise, such certification shall be substantially in the form of
Exhibit C hereto. In the event that such certification of facts does not on its
face establish the availability of an exemption under the Securities Act, the
Owner Trustee may require the prospective transferee to provide an opinion of
counsel satisfactory to it that such transfer may be made pursuant to an
exemption from the Securities Act, which opinion of counsel shall not be an
expense of the Owner Trustee or of the Trust.
(b) The Trust Certificates and any beneficial interest in such
Trust Certificates may not be acquired by or with the assets of (a) employee
benefit plans, retirement arrangements, individual retirement accounts or Keogh
plans subject to either Title I of the Employee Retirement Income Security Act
of 1974, as amended, or Section 4975 of the Internal Revenue Code of 1986, as
amended, or (b) entities (including insurance company general accounts) whose
underlying assets include plan assets by reason of the investment by any such
plans, arrangements or accounts in such entities (a "Benefit Plan Investor") and
any such purported transfer shall not be effective. Each transferee of a Trust
Certificate shall be required to represent (a) that it is not a Benefit Plan
Investor and is not acquiring such Trust Certificate with the assets of a
Benefit Plan Investor and (b) that if such Trust Certificate is subsequently
deemed to be a plan asset, it will dispose of such Trust Certificate.
(c) Each Trust Certificate will bear legends substantially to the
following effect.
THIS TRUST CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") OR STATE SECURITIES LAWS. THE HOLDER HEREOF, BY
PURCHASING THIS TRUST CERTIFICATE, AGREES THAT THIS TRUST CERTIFICATE MAY BE
RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN ACCORDANCE WITH ANY APPLICABLE
STATE SECURITIES LAWS AND TO A PERSON WHO HAS FURNISHED TO THE OWNER TRUSTEE (A)
AN INVESTMENT LETTER SATISFACTORY TO THE OWNER TRUSTEE TO THE EFFECT THAT SUCH
PURCHASER IS AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF RULE
501(A)(1)-(3) OR (7) UNDER THE ACT AND (B) IF REQUIRED, AN OPINION OF COUNSEL
SATISFACTORY TO THE OWNER TRUSTEE.
THIS TRUST CERTIFICATE MAY NOT BE TRANSFERRED DIRECTLY OR INDIRECTLY TO (1)
EMPLOYEE BENEFIT PLANS, RETIREMENT ARRANGEMENTS, INDIVIDUAL RETIREMENT ACCOUNTS
OR KEOGH PLANS SUBJECT TO EITHER TITLE I OF THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED, OR SECTION 4975 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED, OR (2) ENTITIES (INCLUDING INSURANCE COMPANY GENERAL
ACCOUNTS) WHOSE UNDERLYING ASSETS INCLUDE PLAN ASSETS BY REASON OF ANY SUCH
PLAN'S ARRANGEMENTS OR ACCOUNT'S INVESTMENT IN SUCH ENTITIES. FURTHER, THIS
TRUST CERTIFICATE MAY BE TRANSFERRED ONLY TO A UNITED STATES PERSON WITHIN THE
MEANING OF SECTION 7701(A)(30) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
IF THE CERTIFICATEHOLDER COLLATERAL PURCHASE OPTION OR THE NOTE PURCHASE OPTION
ARE OUTSTANDING, THIS TRUST CERTIFICATE MUST REPRESENT ALL OUTSTANDING TRUST
CERTIFICATES AND SHALL BE HELD BY ONLY ONE HOLDER.
THE HOLDER OF THIS TRUST CERTIFICATE FURTHER UNDERSTANDS AND AGREES THAT THE
NUMBER OF BENEFICIAL OWNERS OF ALL TRUST CERTIFICATES MAY NOT EXCEED 3 IN
NUMBER; THAT TRANSFERS OF THE TRUST CERTIFICATES WILL BE RESTRICTED ACCORDINGLY;
AND THAT THE HOLDER HEREOF WILL NOTIFY THE OWNER TRUSTEE IF THE NUMBER OF
BENEFICIAL OWNERS OF THIS TRUST CERTIFICATE WILL CHANGE AS PROVIDED IN THE TRUST
AGREEMENT.
SECTION 3.11. Note and Collateral Purchase Options. (a) As long as one
-------------------------------------
Person holds 100% of the Trust Certificates there is hereby granted to such
Certificateholder, the Note Purchase Option and the Certificateholder Collateral
Purchase Option. The Note Purchase Option shall permit such Certificateholder
to purchase all of the outstanding Notes on any Payment Date for the Note
Purchase Price and otherwise in accordance with the procedures set forth in
Article X of the Indenture. The Certificateholder Collateral Purchase Option
shall permit such Certificateholder to purchase all of the Collateral on any
Payment Date for the Certificateholder Collateral Purchase Price and otherwise
in accordance with the procedures set forth in Article X of the Indenture. Each
of the Note Purchase Option and the Certificateholder Collateral Purchase Option
shall be automatically transferred to the transferee of all of the Trust
Certificates upon such a transfer. Such Options shall cease to exist and be
void if there is more than one holder of the Trust Certificates.
(b) There is hereby granted to Bear Stearns the Bear Stearns
Collateral Purchase Option. The Bear Stearns Collateral Purchase Option is
transferable in whole but not in part by Bear Stearns or any assignee and does
not require Bear Stearns to hold any Trust Certificates or Notes. The Bear
Stearns Collateral Purchase Option shall permit the holder thereof to purchase
all of the Collateral on any Payment Date for the Bear Stearns Collateral
Purchase Price and otherwise in accordance with the procedures set forth in
Article X of the Indenture. Bear Stearns and any subsequent transferor shall
provide notice of any transfer of the Bear Stearns Collateral Purchase Option
and of the name and address of the transferee to the Owner Trustee, the
Indenture Trustee, the Note Insurer, the Servicer and the Rating Agencies.
(c) Upon the exercise of any option granted pursuant to this
Section 3.11, payment of the applicable exercise price and transfer of the Notes
or Collateral to or as directed by the Person exercising such option, such
respective option shall terminate. Exercise of the Note Purchase Option shall
not affect the Collateral Purchase Options. Exercise of a Collateral Purchase
Option and payment of the applicable exercise price and transfer of the
Collateral to the Person exercising such option shall cause the other Collateral
Purchase Option and the Note Purchase Option to terminate. Notwithstanding the
foregoing, if the holder thereof gives notice of exercise of the Bear Stearns
Collateral Purchase Option, the sole Certificateholder shall have the right
during the time period provided in Section 10.01 of the Indenture to itself
exercise its Certificateholder Collateral Purchase Option and, subject to its
provision of the Certificateholder Collateral Purchase Price by the time
provided in the Indenture, to purchase the Collateral. In such latter event,
the Bear Stearns Collateral Purchase Option shall terminate.
SECTION 3.12. Beneficial Owner Limitation. The Certificate Registrar shall
---------------------------
keep a list of the total number of beneficial owners of Trust Certificates as
evidenced by the claims made by Holders on each representation letter executed
by a prospective Holder pursuant to Section 3.10(a). In the event that the
transfer of Trust Certificates would cause the total number of beneficial owners
of Trust Certificates to exceed three, the Owner Trustee shall not permit the
proposed transfer of such Trust Certificates. Any transfer of Trust Certificates
that causes the total number of beneficial owners of Trust Certificates to
exceed three shall be null and void and the Certificate Register shall be
amended to reflect such voided transfer; provided, however, that in the event
-------- -------
(i) all of the Purchase Options are no longer outstanding and (ii) an opinion
of counsel, acceptable to the Depositor, the Note Insurer, the Indenture Trustee
and the Owner Trustee, is provided to such Persons, at the sole cost and expense
of the provider thereof, to the effect that for purposes of the Investment
Company Act of 1940, as amended, the total number of beneficial owners of all
Notes and Trust Certificates may exceed 100, then the total number of beneficial
owners of the Trust Certificates may exceed three and the related restrictive
legend may be removed from the Trust Certificates.
ARTICLE IV
Actions by Owner Trustee
------------------------
SECTION 4.01. Prior Notice to Certificateholders and Note Insurer with
-----------------------------------------------------------
Respect to Certain Matters. With respect to the following matters, the Owner
- -----------------------------
Trustee shall not take action unless at least 30 days before the taking of such
action, the Owner Trustee shall have notified the Note Insurer and the
Certificateholders in writing of the proposed action and neither the
Certificateholders nor the Note Insurer shall have notified the Owner Trustee in
writing prior to the 30th day after such notice is given that such
Certificateholders or the Note Insurer have withheld consent or provided
alternative direction; provided, however, that any direction by the
Certificateholders shall require the prior consent of the Note Insurer:
(a) the initiation of any material claim or lawsuit by the Trust
(except claims or lawsuits brought in connection with the collection of the
Mortgage Loans or under the Pooled Certificates) and the compromise of any
material action, claim or lawsuit brought by or against the Trust (except with
respect to the aforementioned claims or lawsuits for collection of the Mortgage
Loans or under the Pooled Certificates);
(b) the election by the Trust to file an amendment to the Certificate
of Trust (unless such amendment is required to be filed under the Business Trust
Statute);
(c) the amendment of the Indenture by a supplemental indenture in
circumstances where the consent of any Noteholder or the Note Insurer is
required;
(d) the amendment of the Indenture by a supplemental indenture in
circumstances where the consent of any Noteholder or the Note Insurer is not
required and such amendment materially adversely affects the interest of the
Certificateholders or the Note Insurer;
(e) the appointment pursuant to the Indenture of a successor Paying
Agent or Indenture Trustee or pursuant to the Trust Agreement of a successor
Certificate Registrar, or the consent to the assignment by the Paying Agent or
Indenture Trustee or Certificate Registrar of its obligations under the
Indenture or the Trust Agreement, as applicable;
(f) the consent to the calling or waiver of any default of any Basic
Document;
(g) the consent to the assignment of the Indenture Trustee or Servicer
of their respective obligations under any Basic Document;
(h) except as provided in Article IX hereof, the dissolution,
termination or liquidation of the Trust in whole or in part;
(i) the merger or consolidation of the Trust with or into any other
entity, or conveyance or transfer of all or substantially all of the Trust's
assets to any other entity;
(j) the incurrence, assumption or guaranty in the Trust of any
indebtedness other than as set forth in the Trust Agreement or the Basic
Documents;
(k) the doing of any act that conflicts with any of the Basic
Documents;
(l) the doing of any act which would make it impossible to carry on the
ordinary business of the Trust as described in Section 2.3 hereof;
(m) the confession of a judgment against the Trust;
(n) the possession of Trust assets, or assignment of the Trust's right
to property, for other than a Trust purpose as determined pursuant to the Trust
Agreement and the other Basic Documents;
(o) the lending by the Trust of any funds to any Person;
(p) the change in the Trust's purpose and powers from those set forth
in this Trust Agreement; or
(q) the removal or replacement of the Servicer or the Indenture
Trustee. In addition the Trust shall not commingle its assets with those of any
other entity. The Trust shall maintain its financial and accounting books and
records separate from those of any other entity. Except as expressly set forth
herein, the Trust shall pay its indebtedness, operating expenses and liabilities
from its own funds, and the Trust shall not pay the indebtedness, operating
expenses and liabilities of any other entity.
SECTION 4.02. Action by Certificateholders with Respect to Certain
----------------------------------------------------------
Matters. The Owner Trustee shall not have the power, (a) except upon the
written direction of the Certificateholders with the written consent of the Note
Insurer, to remove the Servicer under the Sale and Servicing Agreement pursuant
to Section 7.1 thereof, to consent to a successor Servicer, to remove the
Indenture Trustee under the Indenture pursuant to Section 6.08 thereof or to
consent to a successor Indenture Trustee or (b) except upon the written
direction of the Certificateholders and as expressly provided in the Basic
Documents, sell the Mortgage Loans and/or the Pooled Certificates after the
termination of the Indenture. The Owner Trustee shall take the actions referred
to in the preceding sentence only upon written instructions signed by the
Certificateholders.
SECTION 4.03. Action by Certificateholders with Respect to Bankruptcy.
----------------------------------------------------------
The Owner Trustee shall not have the power, except upon the written direction of
all of the Certificateholders with the written consent of the Note Insurer, and
to the extent otherwise consistent with the Basic Documents, to (i) institute
proceedings to have the Trust declared or adjudicated a bankrupt or insolvent,
(ii) consent to the institution of bankruptcy or insolvency proceedings against
the Trust, (iii) file a petition or consent to a petition seeking reorganization
or relief on behalf of the Trust under any applicable federal or state law
relating to bankruptcy, (iv) consent to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or any similar official) of the
Trust or a substantial portion of the property of the Trust, (v) make any
assignment for the benefit of the Trust's creditors, (vi) cause the Trust to
admit in writing its inability to pay its debts generally as they become due,
(vii) take any action, or cause the Trust to take any action, in furtherance of
any of the foregoing (any of the above, a "Bankruptcy Action"). So long as the
Indenture and the Insurance Agreement remain in effect and no Note Insurer
Default exists, no Certificateholder shall have the power to take and shall not
take, any Bankruptcy Action with respect to the Trust or direct the Owner
Trustee to take any Bankruptcy Action with respect to the Trust.
SECTION 4.04. Restrictions on Certificateholders' Power. The
--------------------------------------------
Certificateholders shall not direct the Owner Trustee to take or to refrain from
taking any action if such action or inaction would be contrary to any obligation
of the Trust or the Owner Trustee under the Trust Agreement or any of the Basic
Documents or would be contrary to Section 2.03, nor shall the Owner Trustee be
obligated to follow any such direction, if given.
SECTION 4.05. Majority Control. Except as expressly provided herein, any
----------------
action that may be taken by the Certificateholders under the Trust Agreement may
be taken by the Holders of Trust Certificates evidencing not less than a
majority of the aggregate Certificate Balances. Except as expressly provided
herein, any written notice of the Certificateholders delivered pursuant to the
Trust Agreement shall be effective if signed by Certificateholders evidencing
not less than a majority of the aggregate Certificate Balances at the time of
the delivery of such notice.
ARTICLE V
Application of Trust Funds; Certain Duties
------------------------------------------
SECTION 5.01. Establishment of Trust Account. The Owner Trustee, for the
------------------------------
benefit of the Certificateholders, shall cause the Paying Agent to establish and
maintain in the name of the Trust a segregated account with the Indenture
Trustee (the "Certificate Distribution Account"), bearing a designation clearly
indicating that the funds deposited therein are held for the benefit of the
Certificateholders.
SECTION 5.02. Application of Trust Funds. (a) On each Payment Date, the
---------------------------
Owner Trustee shall, or shall cause the Paying Agent to, distribute to the
Certificateholders, pro rata based on their respective Certificate Balances,
from amounts deposited in the Certificate Distribution Account received from the
Indenture Trustee pursuant to Section 5.2 of the Sale and Servicing Agreement,
the Certificate Interest Distribution Amount, the Certificate Principal
Distribution Amount and Additional Certificate Interest in each case, if any.
(b) On each Payment Date, the Owner Trustee shall, or shall cause the
Paying Agent to, send to each Certificateholder the statement or statements
provided to the Owner Trustee by the Indenture Trustee pursuant to Section 5.4
of the Sale and Servicing Agreement with respect to such Payment Date provided
that such statement or statements have actually been received by the Owner
Trustee.
(c) In the event that any withholding tax is imposed on the Trust's
payment (or allocations of income) to a Certificateholder, such tax shall reduce
the amount otherwise distributable to the Certificateholder in accordance with
this Section. The Owner Trustee is hereby authorized and directed to retain
from amounts otherwise distributable to the Certificateholders sufficient funds
for the payment of any tax that is legally owed by the Trust (but such
authorization shall not prevent the Owner Trustee from contesting any such tax
in appropriate proceedings, and withholding payment of such tax, if permitted by
law, pending the outcome of such proceedings). The amount of any withholding
tax imposed with respect to a Certificateholder shall be treated as cash
distributed to such Certificateholder at the time it is withheld by the Trust
and remitted to the appropriate taxing authority. If there is a possibility
that withholding tax is payable with respect to a distribution (such as a
distribution to a non-U.S. Certificateholder), the Owner Trustee may in its sole
discretion withhold such amounts in accordance with this paragraph (c). In the
event that a Certificateholder wishes to apply for a refund of any such
withholding tax, the Owner Trustee shall reasonably cooperate with such
Certificateholder in making such claim so long as such Certificateholder agrees
to reimburse the Owner Trustee or the Paying Agent for any out-of-pocket
expenses incurred. In enforcing its rights hereunder, the Owner Trustee may
direct the Paying Agent to withhold the applicable tax and remit to the
appropriate taxing authority any such amounts withheld.
SECTION 5.03. Method of Payment. Subject to Section 9.01(c),
-------------------
distributions required to be made to Certificateholders on any Payment Date
shall be made to each Certificateholder of record on the related Record Date
either by check mailed to such Certificateholder at the address of such holder
appearing in the Certificate Register or by wire transfer, in immediately
available funds, to the account of such Certificateholder at a bank or other
entity having appropriate facilities therefor, if (i) such Certificateholder
shall have provided to the Certificate Registrar and the Certificate Registrar
has forwarded such information promptly to the Paying Agent appropriate written
instructions at least five Business Days prior to such Payment Date and such
Certificateholder's Trust Certificates in the aggregate evidence an original
denomination of not less than $1,000,000 or, (ii) such Certificateholder is the
Depositor, or an Affiliate thereof.
SECTION 5.04. No Segregation of Moneys; No Interest. Subject to Sections
-------------------------------------
5.01 and 5.02, moneys received by the Owner Trustee hereunder need not be
segregated in any manner except to the extent required by law or the Sale and
Servicing Agreement and may be deposited under such general conditions as may be
prescribed by law, and the Owner Trustee shall not be liable for any interest
thereon.
SECTION 5.05. Accounting and Reports to the Certificateholders, the
-----------------------------------------------------------
Internal Revenue Service and Others. The Indenture Trustee shall (a) maintain
-------------------------------
(or cause to be maintained) the books of the Trust on a calendar year basis on
the accrual method of accounting, (b) deliver (or cause to be delivered) to each
Certificateholder, as may be required by the Code and applicable Treasury
Regulations, such information as may be required to enable each
Certificateholder to prepare its federal and state income tax returns, (c)
prepare or cause to be prepared, and file, or cause to be filed, all tax
returns, if any, relating to the Trust and direct the Owner Trustee, in writing,
to make such elections as from time to time may be required or appropriate under
any applicable state or federal statute or any rule or regulation thereunder so
as to maintain the Trust's characterization as a grantor trust for federal
income tax purposes, and (d) collect or cause to be collected any withholding
tax as described in and in accordance with Section 5.02(c) with respect to
income or distributions to Certificateholders. The Owner Trustee shall make all
elections pursuant to this Section 5.05 as directed by the Indenture Trustee in
writing.
SECTION 5.06. Signature on Returns. The Owner Trustee shall sign on
----------------------
behalf of the Trust the tax returns of the Trust, and any other returns as may
be required by law if any, furnished to it in execution form by the Depositor,
unless applicable law requires a Certificateholder to sign such documents. In
executing any such return, the Owner Trustee shall rely entirely upon, and shall
have no liability for information or calculations provided by the Depositor.
ARTICLE VI ARTICLE VI1
G
----
Authority and Duties of Owner Trustee
-------------------------------------
SECTION 6.01. General Authority. The Owner Trustee is authorized and
------------------
directed to execute and deliver the Basic Documents to which the Trust is to be
a party and each certificate or other document attached as an exhibit to or
contemplated by the Basic Documents to which the Trust is to be a party and any
amendment or other agreement or instrument, in each case, in such form as the
Depositor shall approve, as evidenced conclusively by the Owner Trustee's
execution thereof. In addition to the foregoing, the Owner Trustee is
authorized, but shall not be obligated, to take all actions required of the
Trust pursuant to the Basic Documents. The Owner Trustee is further authorized
from time to time to take, but shall not be obligated to take, such action as
the Servicer recommends with respect to the Basic Documents.
SECTION 6.02. General Duties. It shall be the duty of the Owner Trustee
---------------
to discharge (or cause to be discharged) all of its responsibilities pursuant to
the terms of the Trust Agreement and the Basic Documents to which the Trust is a
party and to administer the Trust for the benefit of the Certificateholders,
subject to the Basic Documents and in accordance with the provisions of the
Trust Agreement. Notwithstanding the foregoing, the Owner Trustee shall be
deemed to have discharged its duties and responsibilities hereunder and under
the Basic Documents to the extent the Depositor has agreed hereunder or the
Servicer has agreed in the Sale and Servicing Agreement to perform any act or to
discharge any duty of the Owner Trustee hereunder or of the Trust under any
Basic Document, and the Owner Trustee shall not be held liable for the default
or failure of the Depositor or the Servicer to carry out its obligations under
the Sale and Servicing Agreement, or the Trust Agreement, as applicable.
SECTION 6.03. Action upon Instruction. (a) Subject to Article IV and
-------------------------
Section 7.01 and in accordance with the terms of the Basic Documents, the
Certificateholders may by written instruction direct the Owner Trustee in the
management of the Trust. Such direction may be exercised at any time by written
instruction of the Certificateholders pursuant to Article IV.
(b) The Owner Trustee shall not be required to take any action
hereunder or under any Basic Document if the Owner Trustee shall have reasonably
determined, or shall have been advised by counsel, that such action is likely to
result in liability on the part of the Owner Trustee or is contrary to the terms
hereof or of any Basic Document or is otherwise contrary to law.
(c) Whenever the Owner Trustee is unable to decide between alternative
courses of action permitted or required by the terms of the Trust Agreement or
under any Basic Document, the Owner Trustee shall promptly give notice (in such
form as shall be appropriate under the circumstances) to the Certificateholders
requesting instruction as to the course of action to be adopted, and to the
extent the Owner Trustee acts in good faith in accordance with any written
instruction of the Certificateholders received, the Owner Trustee shall not be
liable on account of such action to any Person. If the Owner Trustee shall not
have received appropriate instruction within 10 days of such notice (or within
such shorter period of time as reasonably may be specified in such notice or may
be necessary under the circumstances) it may, but shall be under no duty to,
take or refrain from taking such action not inconsistent with the Trust
Agreement or the Basic Documents, as it shall deem to be in the best interests
of the Certificateholders, and shall have no liability to any Person for such
action or inaction.
(d) In the event that the Owner Trustee is unsure as to the application
of any provision of the Trust Agreement or any Basic Document or any such
provision is ambiguous as to its application, or is, or appears to be, in
conflict with any other applicable provision, or in the event that the Trust
Agreement permits any determination by the Owner Trustee or is silent or is
incomplete as to the course of action that the Owner Trustee is required to take
with respect to a particular set of facts, the Owner Trustee may give notice (in
such form as shall be appropriate under the circumstances) to the
Certificateholders requesting instruction and, to the extent that the Owner
Trustee acts or refrains from acting in good faith in accordance with any such
instruction received, the Owner Trustee shall not be liable, on account of such
action or inaction, to any Person. If the Owner Trustee shall not have received
appropriate instruction within 10 days of such notice (or within such shorter
period of time as reasonably may be specified in such notice or may be necessary
under the circumstances) it may, but shall be under no duty to, take or refrain
from taking such action not inconsistent with the Trust Agreement or the Basic
Documents, as it shall deem to be in the best interests of the
Certificateholders, and shall have no liability to any Person for such action or
inaction.
SECTION 6.04. No Duties Except as Specified in the Trust Agreement or in
-----------------------------------------------------------
Instructions. The Owner Trustee shall not have any duty or obligation to
- ------------
manage, make any payment with respect to, register, record, sell, dispose of, or
otherwise deal with the Owner Trust Estate, or to otherwise take or refrain from
taking any action under, or in connection with, any document contemplated hereby
to which the Owner Trustee is a party, except as expressly provided by the terms
of the Trust Agreement or in any document or written instruction received by the
Owner Trustee pursuant to Section 6.03; and no implied duties or obligations
shall be read into the Trust Agreement or any other Basic Document against the
Owner Trustee. The Owner Trustee shall have no responsibility for filing any
financing or continuation statement in any public office at any time or to
otherwise perfect or maintain the perfection of any security interest or lien
granted to it hereunder or to prepare or file any Securities and Exchange
Commission filing for the Trust or to record the Trust Agreement or any Basic
Document. The Owner Trustee nevertheless agrees that it will, at its own cost
and expense, promptly take all action as may be necessary to discharge any liens
on any part of the Owner Trust Estate that result from actions by, or claims
against, the Owner Trustee that are not related to the ownership or the
administration of the Owner Trust Estate.
SECTION 6.05. No Action Except Under Specified Documents or Instructions.
----------------------------------------------------------
The Owner Trustee shall not manage, control, use, sell, dispose of or otherwise
deal with any part of the Owner Trust Estate except (i) in accordance with the
powers granted to and the authority conferred upon the Owner Trustee pursuant to
the Trust Agreement, (ii) in accordance with the Basic Documents and (iii) in
accordance with any document or instruction delivered to the Owner Trustee
pursuant to Section 6.03.
SECTION 6.06. Restrictions. The Owner Trustee shall not take any action
------------
that (a) is inconsistent with the purposes of the Trust set forth in Section
2.03 or (b) to the Actual Knowledge of the Owner Trustee, would result in the
Trust's becoming taxable as a corporation for federal income tax purposes. The
Certificateholders shall not direct the Owner Trustee to take action that would
violate the provisions of this Section.
SECTION 6.07 Delegation to Indenture Trustee. The Owner Trustee hereby
---------------------------------
delegates to the Indenture Trustee, and the Indenture Trustee hereby accepts,
the responsibility for reviewing on behalf of the Trust representations given in
connection with transfers of Notes under Section 4.07 of the Indenture.
ARTICLE VII
H
----
Concerning the Owner Trustee
----------------------------
SECTION 7.01. Acceptance of Trusts and Duties. The Owner Trustee accepts
-------------------------------
the trusts hereby created and agrees to perform its duties hereunder with
respect to such trusts but only upon the terms of the Trust Agreement. The
Owner Trustee also agrees to disburse all moneys actually received by it
constituting part of the Owner Trust Estate upon the terms of the Trust
Agreement and the other Basic Documents. The Owner Trustee shall not be
answerable or accountable hereunder or under any other Basic Document under any
circumstances, except (i) for its own willful misconduct, bad faith or gross
negligence or (ii) in the case of the inaccuracy of any representation or
warranty contained in Section 7.03 expressly made by the Owner Trustee. In
particular, but not by way of limitation (and subject to the exceptions set
forth in the preceding sentence):
(a) the Owner Trustee shall not be liable for any error of judgment
made by an Authorized Officer of the Owner Trustee;
(b) the Owner Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in accordance with the instructions of the
Depositor or any Certificateholder;
(c) no provision of the Trust Agreement or any other Basic Document
shall require the Owner Trustee to expend or risk funds or otherwise incur any
financial liability in the performance of any of its rights or powers hereunder
or under any Basic Document if the Owner Trustee shall have reasonable grounds
for believing that repayment of such funds or adequate indemnity against such
risk or liability is not reasonably assured or provided to it;
(d) under no circumstances shall the Owner Trustee be liable for
indebtedness evidenced by or arising under any of the Basic Documents, including
the principal of and interest on the Notes;
(e) the Owner Trustee shall not be responsible for or in respect of the
validity or sufficiency of the Trust Agreement or for the due execution
hereof by the Depositor or for the form, character, genuineness, sufficiency,
value or validity of any of the Owner Trust Estate, or for or in respect of the
validity or sufficiency of the Basic Documents, other than the execution and the
certificate of authentication on the Trust Certificates, and the Owner Trustee
shall in no event assume or incur any liability, duty, or obligation to any
Noteholder or to any Certificateholder, other than as expressly provided for
herein or expressly agreed to in the Basic Documents;
(f) the Owner Trustee shall not be liable for the default or misconduct
of the Depositor, the Indenture Trustee or the Servicer under any of the
Basic Documents or otherwise and the Owner Trustee shall have no obligation or
liability to perform the obligations of the Trust under the Trust Agreement or
the other Basic Documents that are required to be performed by the Indenture
Trustee under the Indenture or the Servicer or the Depositor under the Sale and
Servicing Agreement; and
(g) the Owner Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by the Trust Agreement, or to institute,
conduct or defend any litigation under the Trust Agreement or otherwise or in
relation to the Trust Agreement or any other Basic Document, at the request,
order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Owner Trustee security or indemnity
satisfactory to it against the costs, expenses and liabilities that may be
incurred by the Owner Trustee therein or thereby. The right of the Owner
Trustee to perform any discretionary act enumerated in the Trust Agreement or in
any other Basic Document shall not be construed as a duty, and the Owner
Trustee shall not be answerable for other than its willful misconduct, bad faith
or gross negligence in the performance of any such act.
SECTION 7.02. Furnishing of Documents. The Owner Trustee shall furnish to
-----------------------
the Certificateholders and the Note Insurer promptly upon receipt of a written
request therefor, duplicates or copies of all reports, notices, requests,
demands, certificates, financial statements and any other instruments furnished
to the Owner Trustee under the Basic Documents.
SECTION 7.03. Representations and Warranties. Wilmington Trust Company
--------------------------------
hereby represents and warrants to the Depositor, for the benefit of the
Certificateholders, that:
(a) It is a banking corporation duly organized and validly existing in
good standing under the laws of the State of Delaware. It has all requisite
corporate power and authority to execute, deliver and perform its obligations
under the Trust Agreement.
(b) It has taken all corporate action necessary to authorize the
execution and delivery by it of the Trust Agreement, and the Trust Agreement
will be executed and delivered by one of its officers who is duly authorized to
execute and deliver the Trust Agreement on its behalf.
(c) Neither the execution nor the delivery by it of the Trust
Agreement, nor the consummation by it of the transactions contemplated hereby
nor compliance by it with any of the terms or provisions hereof will contravene
any federal or Delaware law, governmental rule or regulation governing the
banking or trust powers of the Owner Trustee or any judgment or order binding on
it, or constitute any default under its charter documents or bylaws or any
indenture, mortgage, contract, agreement or instrument to which it is a party or
by which any of its properties may be bound.
SECTION 7.04. Reliance; Advice of Counsel. (a) The Owner Trustee shall
-----------------------------
incur no liability to anyone in acting upon any signature, instrument, notice,
resolution, request, consent, order, certificate, report, opinion, bond, or
other document or paper believed by it to be genuine and believed by it to be
signed by the proper party or parties. The Owner Trustee may accept a certified
copy of a resolution of the board of directors or other governing body of any
corporate party as conclusive evidence that such resolution has been duly
adopted by such body and that the same is in full force and effect. As to any
fact or matter the method of determination of which is not specifically
prescribed herein, the Owner Trustee may for all purposes hereof rely on a
certificate, signed by the president or any vice president or by the treasurer
or other authorized officers of the relevant party, as to such fact or matter
and such certificate shall constitute full protection to the Owner Trustee for
any action taken or omitted to be taken by it in good faith in reliance thereon.
(b) In the exercise or administration of the trusts hereunder and in
the performance of its duties and obligations under the Trust Agreement or the
other Basic Documents, the Owner Trustee may act directly or through its agents
or attorneys pursuant to agreements entered into with any of them, and the Owner
Trustee shall not be liable for the conduct or misconduct of such agents or
attorneys if such agents or attorneys shall have been selected by the Owner
Trustee with reasonable care, and may consult with counsel, accountants and
other skilled Persons to be selected with reasonable care and employed by it.
The Owner Trustee shall not be liable for anything done, suffered or omitted in
good faith by it in accordance with the written opinion or advice of any such
counsel, accountants or other such Persons.
SECTION 7.05. Not Acting in Individual Capacity. Except as provided in
-----------------------------------
this Article VII, in accepting the trusts hereby created, Wilmington Trust
Company acts solely as Owner Trustee hereunder and not in its individual
capacity, and all Persons having any claim against the Owner Trustee by reason
of the transactions contemplated by the Trust Agreement or any Basic Document
shall look only to the Owner Trust Estate for payment or satisfaction thereof.
SECTION 7.06. Owner Trustee Not Liable for Trust Certificates, Mortgage
-----------------------------------------------------------
Loans or Pooled Certificates. The recitals contained herein and in the
- -------------------------------
Certificates (other than the signature and countersignature of the Owner Trustee
on the Trust Certificates) shall be taken as the statements of the Depositor and
the Owner Trustee assumes no responsibility for the correctness thereof. The
Owner Trustee makes no representations as to the validity or sufficiency of the
Trust Agreement, of any other Basic Document or of the Trust Certificates (other
than the signature and the certificate of authentication of the Owner Trustee on
the Trust Certificates) or the Notes, or of any Mortgage Loan, Swap Agreement or
Pooled Certificate or related documents. The Owner Trustee shall at no time
have any responsibility or liability for or with respect to the legality,
validity and enforceability of any Mortgage Loan, Swap Agreement or Pooled
Certificate, or for or with respect to the sufficiency of the Owner Trust Estate
or its ability to generate the payments to be distributed to Certificateholders
under the Trust Agreement or the Noteholders under the Indenture, including,
without limitation: the existence, condition and ownership of any property
securing a Mortgage Loan; the existence and enforceability of any insurance
thereon; the validity of the assignment of any Mortgage Loan to the Trust or of
any intervening assignment; the performance or enforcement of any Mortgage Loan,
Swap Agreement or Pooled Certificate; the compliance by the Depositor or the
Servicer with any warranty or representation made under any Basic Document or in
any related document or the accuracy of any such warranty or representation, or
any action of the Depositor, the Indenture Trustee or the Servicer or any
subservicer taken in the name of the Owner Trustee.
SECTION 7.07. Owner Trustee May Own Trust Certificates and Notes. The
-----------------------------------------------------
Owner Trustee in its individual or any other capacity may become the owner or
pledgee of Trust Certificates or Notes and may deal with the Depositor, the
Indenture Trustee, the Paying Agent and the Servicer in banking transactions
with the same rights as it would have if it were not Owner Trustee.
ARTICLE VIII
I
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Compensation of Owner Trustee
-----------------------------
SECTION 8.01. Owner Trustee's Fees and Expenses. The Owner Trustee shall
---------------------------------
receive as compensation for its services hereunder such fees as have been
separately agreed upon before the date hereof among the Sponsor, the Depositor
and the Owner Trustee, and the Owner Trustee shall be entitled to be reimbursed
by the Depositor for its other reasonable expenses hereunder, including the
reasonable compensation, expenses and disbursements of such agents,
representatives, experts and counsel as the Owner Trustee may employ in
connection with the exercise and performance of its rights and its duties
hereunder.
SECTION 8.02. Indemnification. The Sponsor shall be liable as primary
---------------
obligor for, and shall indemnify the Owner Trustee, the Paying Agent and their
successors, assigns, agents and servants (collectively, the "Indemnified
Parties") from and against, any and all liabilities, obligations, losses,
damages, taxes, claims, actions and suits, and any and all reasonable costs,
expenses and disbursements (including reasonable legal fees and expenses) of any
kind and nature whatsoever (collectively, "Expenses") which may at any time be
imposed on, incurred by, or asserted against the Owner Trustee, the Paying Agent
or any Indemnified Party in any way relating to or arising out of the Trust
Agreement, the Basic Documents, the Owner Trust Estate, the administration of
the Owner Trust Estate or the action or inaction of the Owner Trustee or the
Paying Agent hereunder, except only that the Sponsor shall not be liable for or
required to indemnify an Indemnified Party from and against Expenses arising or
resulting from any of the matters described in the third sentence of Section
7.01. The indemnities contained in this Section shall survive the resignation
or termination of the Owner Trustee or the Paying Agent or the termination of
the Trust Agreement. In any event of any claim, action or proceeding for which
indemnity will be sought pursuant to this Section, the Owner Trustee's or the
Paying Agent's, as applicable, choice of legal counsel shall be subject to the
approval of the Sponsor, which approval shall not be unreasonably withheld.
SECTION 8.03. Payments to the Owner Trustee. Any amounts paid to the
---------------------------------
Owner Trustee pursuant to this Article VIII shall be deemed not to be a part of
the Owner Trust Estate immediately after such payment.
ARTICLE IX
J
----
Termination of Trust Agreement
------------------------------
SECTION 9.01. Termination of Trust Agreement. (a) The Trust Agreement
---------------------------------
(other than Article VIII) shall terminate and the Trust shall dissolve and be of
no further force or effect upon the final distribution by the Paying Agent of
all moneys or other property or proceeds of the Owner Trust Estate whether
following the exercise of a Collateral Purchase Option or otherwise and in any
case in accordance with the terms of the Indenture, the Sale and Servicing
Agreement and Article V. The bankruptcy, liquidation, dissolution, death or
incapacity of any Certificateholder shall not (x) operate to terminate the Trust
Agreement or the Trust or (y) entitle such Certificateholder's legal
representatives or heirs to claim an accounting or to take any action or
proceeding in any court for a partition or winding up of all or any part of the
Trust or Owner Trust Estate or (z) otherwise affect the rights, obligations and
liabilities of the parties hereto.
(b) Except as provided in Section 9.01(a), neither the Depositor nor
any Certificateholder shall be entitled to revoke or terminate the Trust or the
Trust Agreement.
(c) Notice of any dissolution of the Trust, specifying the Payment Date
upon which the Certificateholders shall surrender their Trust Certificates to
the Paying Agent for payment of the final distribution thereon and cancellation
thereof, shall be given by the Owner Trustee by letter to Certificateholders
mailed within five Business Days of receipt of notice of such dissolution from
the Paying Agent stating (i) the Payment Date upon or with respect to which
final payment of the Trust Certificates shall be made upon presentation and
surrender of the Trust Certificates at the office of the Paying Agent therein
designated, (ii) the amount of any such final payment and (iii) that the Record
Date otherwise applicable to such Payment Date is not applicable, payments being
made only upon presentation and surrender of the Trust Certificates at the
office of the Paying Agent therein specified. The Owner Trustee shall give such
notice to the Certificate Registrar (if other than the Owner Trustee) and the
Paying Agent at the time such notice is given to Certificateholders. Upon
presentation and surrender of the Trust Certificates, the Paying Agent shall
cause to be distributed to Certificateholders amounts distributable on such
Payment Date pursuant to Section 5.02.
In the event that all of the Certificateholders shall not surrender their
Trust Certificates for cancellation within six months after the date specified
in the above mentioned written notice, the Owner Trustee shall give a second
written notice to the remaining Certificateholders to surrender their Trust
Certificates for cancellation and receive the final distribution with respect
thereto. If within one year after the second notice all the Trust Certificates
shall not have been surrendered for cancellation, the Owner Trustee may take
appropriate steps, or may appoint an agent to take appropriate steps, to contact
the remaining Certificateholders concerning surrender of their Trust
Certificates, and the cost thereof shall be paid out of the funds and other
assets that shall remain subject to the Trust Agreement. Any funds remaining in
the Trust after exhaustion of such remedies shall be distributed by the Owner
Trustee to the Depositor. Certificateholders shall thereafter look solely to
the Depositor as general unsecured creditors.
(d) Upon the winding up of the Trust and payment of its obligations in
accordance with applicable law, the Owner Trustee shall cause the Certificate of
Trust to be cancelled by filing a certificate of cancellation with the Secretary
of State in accordance with the provisions of Section 3810 of the Business Trust
Statute and the Trust shall terminate.
ARTICLE X
K
----
Successor Owner Trustees and Additional Owner Trustees
------------------------------------------------------
SECTION 10.01. Eligibility Requirements for Owner Trustee. The Owner
----------------------------------------------
Trustee shall at all times be a corporation satisfying the provisions of Section
3807(a) of the Business Trust Statute; authorized to exercise corporate trust
powers; having a combined capital and surplus of at least $50,000,000 and
subject to supervision or examination by federal or state authorities; and
having (or having a parent that has) a rating of at least BBB from S&P and Baa2
from Moody's (or such lower rating as may be acceptable to S&P, Moody's and the
Note Insurer). If such corporation shall publish reports of condition at least
annually pursuant to law or to the requirements of the aforesaid supervising or
examining authority, then for the purpose of this Section, the combined capital
and surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. In
case at any time the Owner Trustee shall cease to be eligible in accordance with
the provisions of this Section, the Owner Trustee shall resign immediately in
the manner and with the effect specified in Section 10.02.
SECTION 10.02. Resignation or Removal of Owner Trustee. The Owner Trustee
---------------------------------------
may at any time resign and be discharged from the trusts hereby created by
giving written notice thereof to the Depositor. Upon receiving such notice of
resignation, the Depositor shall promptly appoint a successor Owner Trustee by
written instrument, in duplicate, one copy of which instrument shall be
delivered to the resigning Owner Trustee and one copy to the successor Owner
Trustee. If no successor Owner Trustee shall have been so appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning Owner Trustee may petition any court of competent
jurisdiction for the appointment of a successor Owner Trustee.
If at any time the Owner Trustee shall cease to be eligible in accordance
with the provisions of Section 10.01 and shall fail to resign after written
request therefor by the Depositor, or if at any time the Owner Trustee shall be
legally unable to act, or shall be adjudged bankrupt or insolvent, or a receiver
of the Owner Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Owner Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation, then the
Depositor may remove the Owner Trustee. If the Depositor shall remove the Owner
Trustee under the authority of the immediately preceding sentence, the Depositor
shall promptly appoint a successor Owner Trustee by written instrument, in
duplicate, one copy of which instrument shall be delivered to the outgoing Owner
Trustee so removed and one copy to the successor Owner Trustee, and shall pay
all fees owed to the outgoing Owner Trustee.
Any resignation or removal of the Owner Trustee and appointment of a
successor Owner Trustee pursuant to any of the provisions of this Section shall
not become effective until acceptance of appointment by the successor Owner
Trustee pursuant to Section 10.03 and payment of all fees and expenses owed to
the outgoing Owner Trustee. The Depositor shall provide notice of such
resignation or removal of the Owner Trustee to the Note Insurer and each of the
Rating Agencies.
SECTION 10.03. Successor Owner Trustee. Any successor Owner Trustee
-------------------------
appointed pursuant to Section 10.02 shall execute, acknowledge and deliver to
the Depositor and to its predecessor Owner Trustee an instrument accepting such
appointment under the Trust Agreement, and thereupon the resignation or removal
of the predecessor Owner Trustee shall become effective, and such successor
Owner Trustee, without any further act, deed or conveyance, shall become fully
vested with all the rights, powers, duties and obligations of its predecessor
under the Trust Agreement, with like effect as if originally named as Owner
Trustee. The predecessor Owner Trustee shall upon payment of its fees and
expenses deliver to the successor Owner Trustee all documents and statements and
moneys held by it under the Trust Agreement; and the Depositor and the
predecessor Owner Trustee shall execute and deliver such instruments and do such
other things as may reasonably be required for fully and certainly vesting and
confirming in the successor Owner Trustee all such rights, powers, duties and
obligations.
No successor Owner Trustee shall accept appointment as provided in this
Section unless at the time of such acceptance such successor Owner Trustee shall
be eligible pursuant to Section 10.01.
Upon acceptance of appointment by a successor Owner Trustee pursuant to
this Section, the Depositor shall mail notice thereof to all Certificateholders,
the Indenture Trustee, the Noteholders, the Paying Agent, the Note Insurer, the
Swap Counterparty and the Rating Agencies. If the Depositor shall fail to mail
such notice within 10 days after acceptance of such appointment by the successor
Owner Trustee, the successor Owner Trustee shall cause such notice to be mailed
at the expense of the Depositor.
SECTION 10.04. Merger or Consolidation of Owner Trustee. Any Person into
----------------------------------------
which the Owner Trustee may be merged or converted or with which it may be
consolidated, or any Person resulting from any merger, conversion or
consolidation to which the Owner Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Owner Trustee, shall be the successor of the Owner Trustee hereunder, without
the execution or filing of any instrument or any further act on the part of any
of the parties hereto, anything herein to the contrary notwithstanding;
provided, that such Person shall be eligible pursuant to Section 10.01 and,
provided, further, that the Owner Trustee shall mail notice of such merger or
consolidation to the Note Insurer, the Paying Agent, the Swap Counterparty and
the Rating Agencies.
SECTION 10.05. Appointment of Co-Trustee or Separate Trustee.
--------------------------------------------------
Notwithstanding any other provisions of the Trust Agreement, at any time, for
the purpose of meeting any legal requirements of any jurisdiction in which any
part of the Owner Trust Estate may at the time be located, the Depositor and the
Owner Trustee acting jointly shall have the power and shall execute and deliver
all instruments to appoint one or more Persons approved by the Depositor and
Owner Trustee to act as co-trustee, jointly with the Owner Trustee, or as
separate trustee or separate trustees, of all or any part of the Owner Trust
Estate, and to vest in such Person, in such capacity, such title to the Trust or
any part thereof and, subject to the other provisions of this Section, such
powers, duties, obligations, rights and trusts as the Depositor and the Owner
Trustee may consider necessary or desirable. If the Depositor shall not have
joined in such appointment within 15 days after the receipt by it of a request
so to do, the Owner Trustee alone shall have the power to make such appointment.
No co-trustee or separate trustee under the Trust Agreement shall be required to
meet the terms of eligibility as a successor Owner Trustee pursuant to Section
10.01 and no notice of the appointment of any co-trustee or separate trustee
shall be required pursuant to Section 10.03.
Each separate trustee and co-trustee shall, to the extent permitted by law,
be appointed and act subject to the following provisions and conditions:
(a) all rights, powers, duties and obligations conferred or imposed
upon the Owner Trustee shall be conferred upon and exercised or performed by the
Owner Trustee and such separate trustee or co-trustee jointly (it being
understood that such separate trustee or co-trustee is not authorized to act
separately without the Owner Trustee joining in such act), except to the extent
that under any law of any jurisdiction in which any particular act or acts are
to be performed, the Owner Trustee shall be incompetent or unqualified to
perform such act or acts, in which event such rights, powers, duties and
obligations (including the holding of title to the Owner Trust Estate or any
portion thereof in any such jurisdiction) shall be exercised and performed
singly by such separate trustee or co-trustee, but solely at the direction of
the Owner Trustee;
(b) no trustee under the Trust Agreement shall be personally liable by
reason of any act or omission of any other trustee under the Trust Agreement;
and
(c) the Depositor and the Owner Trustee acting jointly may at any time
accept the resignation of or remove any separate trustee or co-trustee.
Any notice, request or other writing given to the Owner Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to the Trust Agreement and the
conditions of this Article. Each separate trustee and co-trustee, upon its
acceptance of the trusts conferred, shall be vested with the estates or property
specified in its instrument of appointment, either jointly with the Owner
Trustee or separately, as may be provided therein, subject to all the provisions
of the Trust Agreement, specifically including every provision of the Trust
Agreement relating to the conduct of, affecting the liability of, or affording
protection to, the Owner Trustee. Each such instrument shall be filed with the
Owner Trustee and a copy thereof given to each of the Depositor and the
Servicer.
Any separate trustee or co-trustee may at any time appoint the Owner
Trustee as its agent or attorney-in-fact with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of the
Trust Agreement on its behalf and in its name. If any separate trustee or
co-trustee shall die, become incapable of acting, resign or be removed, all of
its estates, properties, rights, remedies and trusts shall vest in and be
exercised by the Owner Trustee, to the extent permitted by law, without the
appointment of a new or successor co-trustee or separate trustee.
ARTICLE XI
L
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Miscellaneous
-------------
SECTION 11.01. Supplements and Amendments. The Trust Agreement may be
----------------------------
amended by the Depositor and the Owner Trustee, with the written consent of the
Note Insurer, without the consent of any of the Sponsor, the Noteholders or the
Certificateholders, to cure any ambiguity, to correct or supplement any
provisions in the Trust Agreement or for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions in the Trust
Agreement or of modifying in any manner the rights of the Noteholders or the
Certificateholders; provided, however, that such action shall not, as evidenced
by an opinion of counsel, adversely affect in any material respect the interests
of any Noteholder or Certificateholder; provided, further, that no opinion of
counsel shall be required if the Person requesting such amendment shall deliver
to the Owner Trustee and the Note Insurer a letter from each Rating Agency to
the effect that such amendment, in and of itself, will not cause such Rating
Agency to reduce its "shadow rating" on the Notes rated by it.
The Trust Agreement may also be amended from time to time by the Depositor
and the Owner Trustee, with the written consent of the Note Insurer, with the
consent of the Holders of Notes evidencing not less than a majority of the Class
Principal Balance of the Notes and, to the extent affected thereby, the consent
of the Holders of Certificates evidencing not less than a majority of the
Certificate Balance, for the purpose of adding any provisions to, or changing in
any manner, or eliminating any of the provisions of, the Trust Agreement or of
modifying in any manner the rights of the Noteholders or the Certificateholders;
provided, however, that no such amendment shall (a) increase or reduce in any
manner the amount of, or accelerate or delay the timing of, collections of
payments on Mortgage Loans or Pooled Certificates or pursuant to the Swap
Agreements or distributions that shall be required to be made for the benefit of
the Noteholders or the Certificateholders or (b) reduce the aforesaid percentage
of the Class Principal Balance of the Notes and the Certificate Balance required
to consent to any such amendment, without the consent of the holders of all the
outstanding Notes and Certificates.
Promptly after the execution of any such amendment or consent, the Owner
Trustee shall furnish written notification of the substance of such amendment or
consent to each Certificateholder, the Indenture Trustee and each of the Rating
Agencies.
It shall not be necessary for the consent of Certificateholders or
Noteholders pursuant to this Section to approve the particular form of any
proposed amendment or consent, but it shall be sufficient if such consent shall
approve the substance thereof. The manner of obtaining such consents (and any
other consents of Certificateholders provided for in the Trust Agreement or in
any other Basic Document) and of evidencing the authorization of the execution
thereof by Certificateholders shall be subject to such reasonable requirements
as the Owner Trustee may prescribe.
Promptly after the execution of any amendment to the Certificate of Trust,
the Owner Trustee shall cause the filing of such amendment with the Secretary of
State.
Prior to the execution of any amendment to the Trust Agreement or the
Certificate of Trust, the Owner Trustee shall be entitled to receive and rely
upon an opinion of counsel stating that the execution of such amendment is
authorized or permitted by the Trust Agreement. The Owner Trustee may, but
shall not be obligated to, enter into any such amendment that affects the Owner
Trustee's own rights, duties or immunities under the Trust Agreement or
otherwise.
Notwithstanding anything herein to the contrary, no provision of this
Agreement affecting the rights, duties and responsibilities of the Paying Agent
may be amended without the consent of the Paying Agent, such consent not to be
unreasonably withheld.
SECTION 11.02. No Legal Title to Owner Trust Estate in Certificateholders.
----------------------------------------------------------
The Certificateholders shall not have legal title to any part of the Owner
Trust Estate. The Certificateholders shall be entitled to receive distributions
with respect to their undivided ownership interest therein only in accordance
with Articles V and IX. No transfer, by operation of law or otherwise, of any
right, title or interest of the Certificateholders to and in their ownership
interest in the Owner Trust Estate shall operate to terminate the Trust
Agreement or the trusts under the Trust Agreement or entitle any transferee to
an accounting or to the transfer to it of legal title to any part of the Owner
Trust Estate.
SECTION 11.03. Limitations on Rights of Others. The provisions of the
----------------------------------
Trust Agreement are solely for the benefit of the Owner Trustee, the Depositor,
the Note Insurer, the Certificateholders, and, to the extent expressly provided
herein, the Indenture Trustee and the Noteholders, and nothing in the Trust
Agreement, whether express or implied, shall be construed to give to any other
Person any legal or equitable right, remedy or claim in the Owner Trust Estate
or under or in respect of the Trust Agreement or any covenants, conditions or
provisions contained herein.
SECTION 11.04. Notices. (a) Unless otherwise expressly specified or
-------
permitted by the terms hereof, all notices shall be in writing and shall be
deemed given upon receipt by the intended recipient or three Business Days after
mailing if mailed by certified mail, postage prepaid (except that notice to the
Owner Trustee shall be deemed given only upon actual receipt by the Owner
Trustee), if to the Owner Trustee, addressed to its Corporate Trust Office; if
to the Depositor, addressed to Thornburg Mortgage Funding Corporation, 18881 Von
Karman Avenue, Irvine, California 92612, Attention: Rick Story, Chief Financial
Officer; if to the Sponsor, addressed to Thornburg Mortgage Asset Corporation,
119 East Marcy Street, Suite 201, Santa Fe, New Mexico, 87501, Attention: Larry
Goldstone, President, or, as to each party, at such other address as shall be
designated by such party in a written notice to each other party.
(b) Any notice required or permitted to be given to a Certificateholder
shall be given by first-class mail, postage prepaid, at the address of such
Certificateholder as shown in the Certificate Register. Any notice so mailed
within the time prescribed in the Trust Agreement shall be conclusively presumed
to have been duly given, whether or not the Certificateholder receives such
notice.
SECTION 11.05. Severability. Any provision of the Trust Agreement that is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
SECTION 11.06. Separate Counterparts. The Trust Agreement may be executed
---------------------
by the parties hereto in separate counterparts, each of which when so executed
and delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
SECTION 11.07. Successors and Assigns. All covenants and agreements
------------------------
contained herein shall be binding upon, and inure to the benefit of, each of the
Sponsor, the Depositor, the Owner Trustee and its successors and each
Certificateholder and its successors and permitted assigns, all as herein
provided. Any request, notice, direction, consent, waiver or other instrument
or action by a Certificateholder shall bind the successors and assigns of such
Certificateholder.
SECTION 11.08. No Petition. (a) Neither the Sponsor nor the Depositor
------------
will, prior to the date which is one year and one day after the termination of
the Indenture, institute against the Trust any bankruptcy proceedings under any
United States Federal or state bankruptcy or similar law in connection with any
obligations relating to the Trust Certificates, the Notes, the Trust Agreement
or any of the other Basic Documents.
(b) The Owner Trustee, by entering into the Trust Agreement, each
Certificateholder, by accepting a Trust Certificate, and the Indenture Trustee
and each Noteholder, by accepting the benefits of the Trust Agreement, hereby
covenant and agree that they will not, prior to the date which is one year and
one day after the termination of the Indenture, institute against the Depositor
or the Trust, or join in any institution against the Depositor or the Trust of,
any bankruptcy proceedings under any United States federal or state bankruptcy
or similar law in connection with any obligations relating to the Trust
Certificates, the Notes, the Trust Agreement or any of the other Basic
Documents.
SECTION 11.09. No Recourse. Each Certificateholder by accepting a Trust
------------
Certificate acknowledges that such Certificateholder's Trust Certificates
represent beneficial interests in the Trust only and do not represent interests
in or obligations of the Depositor, the Servicer, the Owner Trustee, the
Indenture Trustee or any Affiliate thereof and no recourse may be had against
such parties or their assets, except as may be expressly set forth or
contemplated in the Trust Agreement, the Trust Certificates or the Basic
Documents. Except as expressly provided in the Basic Documents, neither the
Depositor, the Servicer, the Indenture Trustee nor the Owner Trustee in their
respective individual capacities, nor any of their respective Affiliates,
partners, beneficiaries, agents, officers, directors, employees or successors or
assigns, shall be personally liable for, nor shall recourse be had to any of
them for, the distribution of any amount with respect to the Trust Certificates,
or the Trust's performance of, or omission to perform, any of the covenants,
obligations or indemnifications contained in the Trust Certificates or the Trust
Agreement, it being expressly understood that said covenants and obligations
have been made solely by the Trust. Each Certificateholder by the acceptance of
a Trust Certificate (or a beneficial interest therein) agrees that, except as
expressly provided in the Basic Documents, in the case of nonpayment of any
amounts with respect to such Trust Certificate, it shall have no claim against
any of the foregoing for any deficiency, loss or claim therefrom.
SECTION 11.10. Headings. The headings of the various Articles and
--------
Sections herein are for convenience of reference only and shall not define or
limit any of the terms or provisions hereof.
SECTION 11.11. GOVERNING LAW. THE TRUST AGREEMENT SHALL BE CONSTRUED IN
--------------
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES UNDER THE TRUST AGREEMENT SHALL BE DETERMINED IN ACCORDANCE WITH SUCH
LAWS.
SECTION 11.12. Grant of Certificateholder Rights to Note Insurer. The
-----------------------------------------------------
rights of the Note Insurer to direct certain actions and consent to certain
actions of the Certificateholders hereunder will terminate at such time as the
Class Principal Balance of the Notes has been reduced to zero and the Note
Insurer has been reimbursed for any amounts owed under the Insurance Policy and
the Insurance Agreement and the Note Insurer has no further obligation under the
Insurance Policy.
SECTION 11.13. Third-Party Beneficiary. The Note Insurer is an intended
------------------------
third-party beneficiary of the Trust Agreement, and the Trust Agreement shall be
binding upon and inure to the benefit of the Note Insurer. Without limiting the
generality of the foregoing, all covenants and agreements in the Trust Agreement
that expressly confer rights upon the Note Insurer shall be for the benefit of
and run directly to the Note Insurer, and the Note Insurer shall be entitled to
rely on and enforce such covenants to the same extent as if it were a party to
the Trust Agreement. Provided, however, nothing in this Section 11.13 shall be
construed to impose a fiduciary obligation of the Owner Trustee to the Note
Insurer.
SECTION 11.14. The Note Insurer. Any right conferred to the Note Insurer
----------------
hereunder shall be suspended during any period in which the Note Insurer is in
default in its payment obligations under either of the Insurance Policies. At
such time as the Notes are no longer outstanding, and no amounts owed to the
Note Insurer remain unpaid, the Note Insurer's rights hereunder shall terminate.
* * * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to
be duly executed by their respective officers hereunto duly authorized, as of
the day and year first above written.
THORNBURG MORTGAGE FUNDING CORPORATION,
as Depositor
By: ______________________________________
Name:
Title:
THORNBURG MORTGAGE ASSET CORPORATION, as Sponsor
By: ______________________________________
Name:
Title:
WILMINGTON TRUST COMPANY,
not in its individual capacity but solely as
Owner Trustee and as Certificate Registrar
By: ______________________________________
Name:
Title:
BANKERS TRUST COMPANY OF CALIFORNIA, N.A. hereby accepts the appointment as
Paying Agent pursuant to Section 3.09 hereof and accepts
the obligations and duties provided under
Sections 5.05 and 6.07 hereof.
By: ______________________________________
Name:
Title:
We hereby agree to purchase the Trust Certificates in the amount and for
the price set forth in Section 3.02(b) hereof
TMA ACCEPTANCE CORP.
By: ______________________________________
Name:
Title:
Appendix A
Definitions
See Exhibit A of the Sale and Servicing Agreement.
EXHIBIT A
FORM OF TRUST CERTIFICATE
-------------------------
THIS TRUST CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"). THE HOLDER HEREOF, BY PURCHASING THIS TRUST
CERTIFICATE, AGREES THAT THIS TRUST CERTIFICATE MAY BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED ONLY IN ACCORDANCE WITH ANY APPLICABLE STATE SECURITIES
LAWS AND TO A PERSON WHO HAS FURNISHED TO THE OWNER TRUSTEE (A) AN INVESTMENT
LETTER SATISFACTORY TO THE OWNER TRUSTEE TO THE EFFECT THAT SUCH PURCHASER IS AN
INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(A)(1)-(3) UNDER
THE ACT AND (B) IF REQUIRED, AN OPINION OF COUNSEL SATISFACTORY TO THE OWNER
TRUSTEE.
THIS TRUST CERTIFICATE MAY NOT BE TRANSFERRED DIRECTLY OR INDIRECTLY TO (1)
EMPLOYEE BENEFIT PLANS, RETIREMENT ARRANGEMENTS, INDIVIDUAL RETIREMENT ACCOUNTS
OR KEOGH PLANS SUBJECT TO EITHER TITLE I OF THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED, OR SECTION 4975 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED, OR (2) ENTITIES (INCLUDING INSURANCE COMPANY GENERAL
ACCOUNTS) WHOSE UNDERLYING ASSETS INCLUDE PLAN ASSETS BY REASON OF ANY SUCH
PLAN'S ARRANGEMENTS OR ACCOUNT'S INVESTMENT IN SUCH ENTITIES. FURTHER, THIS
TRUST CERTIFICATE MAY BE TRANSFERRED ONLY TO A UNITED STATES PERSON WITHIN THE
MEANING OF SECTION 7701(A)(30) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
IF THE CERTIFICATEHOLDER COLLATERAL PURCHASE OPTION OR THE NOTE PURCHASE OPTION
ARE OUTSTANDING, THIS TRUST CERTIFICATE MUST REPRESENT ALL OUTSTANDING TRUST
CERTIFICATES AND SHALL BE HELD BY ONLY ONE HOLDER.
THE HOLDER OF THIS TRUST CERTIFICATE FURTHER UNDERSTANDS AND AGREES THAT THE
NUMBER OF BENEFICIAL OWNERS OF ALL TRUST CERTIFICATES MAY NOT EXCEED 3 IN
NUMBER; THAT TRANSFERS OF THE TRUST CERTIFICATES WILL BE RESTRICTED ACCORDINGLY;
AND THAT THE HOLDER HEREOF WILL NOTIFY THE OWNER TRUSTEE IF THE NUMBER OF
BENEFICIAL OWNERS OF THIS TRUST CERTIFICATE WILL CHANGE AS PROVIDED IN THE TRUST
AGREEMENT.
THIS TRUST CERTIFICATE IS NOT GUARANTEED OR INSURED BY AMBAC OR ANY GOVERNMENTAL
AGENCY.
NUMBER: _________ DENOMINATION:___________
INITIAL CERTIFICATE BALANCE: $32,362,457
TMA MORTGAGE FUNDING TRUST I
ASSET-BACKED TRUST CERTIFICATE
evidencing a beneficial ownership interest in the Trust, as defined below, the
property of which includes (i) a pool of adjustable rate mortgage loans and
adjustable rate mortgage loans with an original fixed rate period (collectively,
the "Mortgage Loans"), (ii) ten interest rate swap agreements between the Trust
and Merrill Lynch Capital Services, Inc. (the "Swap Agreements"), and (iii)100%
if the Class A-1 and Class A-2 Pass-through Certificates from CS First Boston
Mortgage Securities Corporation, Pass-through Certificates, Series 1993-B
(collectively, the "Pooled Certificates") caused to be sold to the Trust by
Thornburg Mortgage Funding Corporation.
(THIS TRUST CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THORNBURG MORTGAGE FUNDING CORPORATION, THE SERVICER (AS DEFINED BELOW) OR THE
OWNER TRUSTEE (AS DEFINED BELOW) OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT
TO THE EXTENT DESCRIBED BELOW.)
THIS CERTIFIES THAT ___________________________________________________ is
the registered owner of the Percentage Interest evidenced hereby in the
nonassessable, fully paid, beneficial ownership interest in TMA MORTGAGE FUNDING
TRUST I (the "Trust") formed by Thornburg Mortgage Funding Corporation, a
Delaware corporation.
The Trust was created pursuant to a Trust Agreement, dated as of December
1, 1998 (the "Trust Agreement"), among Thornburg Mortgage Funding Corporation,
as depositor (the "Depositor"), Thornburg Mortgage Asset Corporation, as Sponsor
(the "Sponsor") and Wilmington Trust Company, as owner trustee (the "Owner
Trustee"), a summary of certain of the pertinent provisions of which is set
forth below. To the extent not otherwise defined herein, the capitalized terms
used herein have the meanings assigned to them in the Trust Agreement.
This Certificate is one of a duly authorized issue of Asset-Backed Trust
Certificates (herein called the "Trust Certificates"). Also issued under the
Indenture dated as of December 1, 1998 between the Trust and Bankers Trust
Company of California, N.A., as indenture trustee, are a Series of Notes
designated as Collateralized Asset-Backed Notes, Series 1998-1 (the "Notes").
This Trust Certificate is issued under and is subject to the terms, provisions
and conditions of the Trust Agreement, to which Trust Agreement the holder of
this Trust Certificate by virtue of its acceptance hereof assents and by which
such holder is bound. The property of the Trust consists of the Mortgage Loans
and the Pooled Certificates; the collections in respect of the Mortgage Loans
and the Pooled Certificates received after the applicable Cut-off Date; property
that secured a Mortgage Loan which has been acquired by foreclosure or deed in
lieu of foreclosure and any REO Proceeds; the Note Insurance Policy and
collections thereunder; the Swap Agreements and collections thereunder net of
payments required to be made by the Trust; rights under certain Insurance
Policies relating to the Mortgage Loans; the Reserve Account; and certain other
assets and rights as provided under the Trust Agreement and the Sale and
Servicing Agreement.
Under the Trust Agreement, there will be distributed on the 25th day of
each month or, if such 25th day is not a Business Day, the next Business Day
(each, a "Payment Date"), commencing in December 1998, to the Person in whose
name this Trust Certificate is registered at the close of business on the last
day of the calendar month immediately preceding the Payment Date (the "Record
Date"), interest on the Certificate Balance of this Trust Certificate at a per
annum rate equal to the lesser of (i) 7.00% per annum and (ii) the result of
dividing the Certificate Interest Distribution Amount by the then Certificate
Balance of all of the Certificates, expressed as a per annum rate, and principal
in each case to the extent of such Certificateholder's Percentage Interest in
the amount to be distributed to Certificateholders on such Payment Date pursuant
to the terms of the Sale and Servicing Agreement. The holder of this
Certificate may also receive Additional Certificate Interest to the extent
provided in the Sale and Servicing Agreement.
The holder of this Trust Certificate acknowledges and agrees that its
rights to receive distributions in respect of this Trust Certificate are
subordinated to the rights of the Noteholders as described in the Sale and
Servicing Agreement and the Indenture.
It is the intent of the Depositor and the Certificateholders that, for
purposes of federal income taxes, the Trust will be treated as a grantor trust.
The Certificateholders, by acceptance of a Trust Certificate, agree to treat,
and to take no action inconsistent with the treatment of, the Trust and the
Trust Certificates for such tax purposes as just described.
Each Certificateholder, by its acceptance of a Trust Certificate, covenants
and agrees that such Certificateholder, will not prior to the date which is one
year and one day after the termination of the Indenture, institute against the
Trust or the Depositor, or join in any institution against the Trust or the
Depositor of, any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceedings under any United States federal or
state bankruptcy or similar law in connection with any obligations relating to
the Trust Certificates, the Notes, the Trust Agreement or any of the other Basic
Documents.
Distributions on this Trust Certificate will be made as provided in the
Trust Agreement by the Certificate Paying Agent by wire transfer or check mailed
to the Certificateholder of record in the Certificate Register without the
presentation or surrender of this Trust Certificate or the making of any
notation hereon. Except as otherwise provided in the Trust Agreement and
notwithstanding the above, the final distribution on this Trust Certificate will
be made after due notice by the Owner Trustee of the pendency of such
distribution and only upon presentation and surrender of this Trust Certificate
at the office or agency maintained for that purpose by the Owner Trustee in the
Borough of Manhattan, The City of New York.
The holder of this Certificate may have the right to the extent provided in
the Trust Agreement, the Indenture and the Sale and Servicing Agreement to
exercise options to purchase (i) among other items the Mortgage Loans and the
Pooled Certificates or (ii) the Notes.
Reference is hereby made to the further provisions of this Trust
Certificate set forth on the reverse hereof, which further provisions shall for
all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon shall have been executed by
an authorized officer of the Owner Trustee, by manual signature, this Trust
Certificate shall not entitle the holder hereof to any benefit under the Trust
Agreement or the Sale and Servicing Agreement or be valid for any purpose.
THIS TRUST CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND
THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE
DETERMINED IN ACCORDANCE WITH SUCH LAWS.
IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and not in
its individual capacity, has caused this Trust Certificate to be duly executed.
Date:
TMA MORTGAGE FUNDING TRUST I
By: WILMINGTON TRUST COMPANY,
solely as Owner Trustee and not in its individual
capacity
By:_________________________________________________
Authorized Signatory
OWNER TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Trust Certificates of TMA Mortgage Funding Trust I
referred to in the within-mentioned Trust Agreement.
Date:
WILMINGTON TRUST COMPANY,
solely as Owner Trustee and not in its individual
capacity
By:_________________________________________________
Authorized Signatory
[REVERSE OF TRUST CERTIFICATE]
The Trust Certificates do not represent an obligation of, or an interest
in, the Sponsor, the Depositor, the Servicer, the Owner Trustee or any
affiliates of any of them and no recourse may be had against such parties or
their assets, except as expressly set forth or contemplated herein or in the
Trust Agreement, the Indenture or the other Basic Documents. In addition, this
Trust Certificate is not guaranteed by any governmental agency or
instrumentality and is limited in right of payment to certain collections and
recoveries with respect to the Mortgage Loans, the Pooled Certificates, the Swap
Agreements (and certain other amounts), all as more specifically set forth in
the Trust Agreement and in the Sale and Servicing Agreement. A copy of each of
the Sale and Servicing Agreement and the Trust Agreement may be examined by any
Certificateholder upon written request during normal business hours at the
principal office of the Depositor and at such other places, if any, designated
by the Depositor.
The Trust Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Depositor and the rights of the Certificateholders under the Trust Agreement at
any time by the Depositor and the Owner Trustee with the consent of the Note
Insurer and the holders of the Trust Certificates evidencing not less than a
majority of the outstanding Certificate Balances and of the holders of the Notes
evidencing not less than a majority of the outstanding Class Principal Balance
of the Notes, each voting as a class. Any such consent by the holder of this
Trust Certificate shall be conclusive and binding on such holder and on all
future holders of this Trust Certificate and of any Trust Certificate issued
upon the transfer hereof or in exchange herefor or in lieu hereof, whether or
not notation of such consent is made upon this Trust Certificate. The Trust
Agreement also permits the amendment thereof, in certain limited circumstances,
without the consent of the holders of any of the Trust Certificates.
As provided in the Trust Agreement and subject to certain limitations
therein set forth, the transfer of this Trust Certificate is registerable in the
Certificate Register upon surrender of this Trust Certificate for registration
of transfer at the offices or agencies of the Certificate Registrar maintained
by the Owner Trustee in the Borough of Manhattan, The City of New York,
accompanied by a written instrument of transfer in form satisfactory to the
Owner Trustee and the Certificate Registrar duly executed by the holder hereof
or such holder's attorney duly authorized in writing, and thereupon one or more
new Trust Certificates of authorized denominations evidencing the same aggregate
interest in the Trust will be issued to the designated transferee. The initial
Certificate Registrar appointed under the Trust Agreement is the Owner Trustee.
The Trust Certificates are issuable only as registered Trust Certificates
without coupons in denominations of $100,000 and integral multiples of $1,000 in
excess thereof; PROVIDED, HOWEVER, that one Trust Certificate may be issued in a
denomination that represents any residual amount of the Initial Certificate
Balance. As provided in the Trust Agreement and subject to certain limitations
therein set forth, Trust Certificates are exchangeable for new Trust
Certificates of authorized denominations evidencing the same aggregate
denomination, as requested by the holder surrendering the same. No service
charge will be made for any such registration of transfer or exchange, but the
Owner Trustee or the Certificate Registrar may require payment of a sum
sufficient to cover any tax or governmental charge payable in connection
therewith.
The Owner Trustee, the Certificate Registrar and any agent of the Owner
Trustee or the Certificate Registrar may treat the Person in whose name this
Certificate is registered as the owner hereof for all purposes, and none of the
Owner Trustee, the Certificate Registrar or any such agent shall be affected by
any notice to the contrary.
This Trust Certificate may not be transferred directly or indirectly to (1)
employee benefit plans, retirement arrangements, individual retirement accounts
or Keogh plans subject to either Title I of the Employee Retirement Income
Security Act of 1974, as amended, or Section 4975 of the Internal Revenue Code
of 1986, as amended, or (2) entities (including insurance company general
accounts) whose underlying assets include plan assets by reason of the
investment by such plans, arrangements or accounts in such entities. By
accepting and holding this Trust Certificate, the Holder hereof shall be deemed
to have represented and warranted that it is not any of the foregoing entities.
This Trust Certificate may not be transferred to any person who is not
a U.S. Person, as such term is defined in Section 7701(a)(30) of the Internal
Revenue Code, as amended.
No transfer of a Trust Certificate shall be permitted, and no such
transfer shall be registered by the Certificate Registrar or be effective
hereunder, if the number of beneficial owners of Trust Certificates exceeds 99.
For purposes of determining the number of beneficial owners, the Certificate
Registrar may treat the number of beneficial owners as equal to the number of
registered holders, provided that each holder represents that it is the
beneficial owner and (i) is an individual or a United States corporation (other
than an S corporation) or (ii) no principal purpose of the use of the entity to
hold the Trust Certificate is to permit the Trust to satisfy the 100 partners
limitation of Treasury regulation 1.7704-1(h)(3).
Each purchaser of the Trust Certificates shall be required, prior to
purchasing a Trust Certificate, to execute the Purchaser's Representation and
Warranty Letter in the form attached to the Trust Agreement as Exhibit C.
The obligations and responsibilities created by the Trust Agreement shall
terminate and the Trust created thereby shall dissolve upon the payment to
Certificateholders of all amounts required to be paid to them pursuant to the
Trust Agreement and the Sale and Servicing Agreement and the disposition of all
property held as part of the Trust. In addition, Bear, Stearns & Co. Inc.
("Bear Stearns") has the option to purchase, among other items, the Mortgage
Loans and the Pooled Certificates, at a price specified in the Indenture. The
exercise of such option will effect repayment of the Notes in full and early
retirement of the Trust Certificates. It is unlikely that in such event, the
Trust Certificates will receive any proceeds. However, the Holder of 100% of
the Trust Certificates may choose to exercise its Certificateholder Collateral
Purchase Option and purchase the Mortgage Loans and Pooled Certificates, in lieu
of Bear Stearns, for the purchase price specified in the Indenture.
This Trust Certificate shall be construed in accordance with the laws of
the State of Delaware, without reference to its conflict of law provisions, and
the obligations, rights and remedies of the parties hereunder shall be
determined in accordance with such laws.
ASSIGNMENT
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(Please print or type name and address, including postal zip code, of assignee)
- --------------------------------------------------------------------------------
the within Trust Certificate, and all rights thereunder, hereby irrevocably
constituting and appointing
- --------------------------------------------------------------------------------
to transfer said Trust Certificate on the books of the Certificate Registrar,
with full power of substitution in the premises.
Dated:
___________________________________________*
Signature Guaranteed:
____________________________*
_________________
* NOTICE: The signature to this assignment must correspond with the name as it
appears upon the face of the within Trust Certificate in every particular,
without alteration, enlargement or any change whatever. Such signature must be
guaranteed by a member firm of the New York Stock Exchange or a commercial bank
or trust company.
EXHIBIT B
CERTIFICATE OF TRUST OF
TMA MORTGAGE FUNDING TRUST I
----------------------------
This Certificate of Trust of TMA MORTGAGE FUNDING TRUST I (the "Trust"), is
being duly executed and filed by Wilmington Trust Company, a Delaware bank and
trust company, as trustee, to form a business trust under the Delaware Business
Trust Act (12 Del. Code, 3801 et seq.).
----------
1. Name. The name of the business trust formed hereby is TMA MORTGAGE
----
FUNDING TRUST I.
2. Delaware Trustee. The name and business address of the trustee of
-----------------
the Trust in the State of Delaware is Wilmington Trust Company, Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: TMA
MORTGAGE FUNDING TRUST I.
3. Effective Time. This Certificate of Trust shall be effective upon
---------------
filing.
IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust,
has executed this Certificate of Trust.
Wilmington Trust Company,
not in its individual capacity but solely as
owner trustee of the Trust.
By: _____________________________
Name:
Title:
EXHIBIT C
[Form of Purchaser's Representation and Warranty Letter]
Thornburg Mortgage Funding Corporation
18881 on Karman Avenue
Suite 1400
Irvine, California 92612
TMA Mortgage Funding Trust I
c/o Wilmington Trust Company, as
Owner Trustee
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
Re: TMA Mortgage Funding Trust I - Trust Certificates
--------------------------------------------------------
Ladies and Gentlemen:
In connection with our proposed purchase of Trust Certificates (the
"Certificates") issued under the Trust Agreement dated as of December 1, 1998
(the "Agreement"), among Thornburg Mortgage Funding Corporation, as Depositor
(the "Depositor"), Thornburg Mortgage Assets Corporation, as Sponsor, and
Wilmington Trust Company, as Owner Trustee, the undersigned (the "Purchaser")
represents, warrants and agrees that:
1. It is an institutional "accredited investor" as defined in Rule
501(a)(1)-(3) or (7) under the Securities Act and is acquiring the Certificates
for its own institutional account or for the account of an institutional
accredited investor.
2. It is not (i) an employee benefit plan, retirement arrangement,
individual retirement account or Keogh plan subject to either Title I of the
Employee Retirement Income Security Act of 1974, as amended, or Section 4975 of
the Internal Revenue Code of 1986, as amended, or (2) an entity (including an
insurance company general account) whose underlying assets include plan assets
by reason of the investment by such plans, arrangements or accounts in any such
entity.
3. It is a U.S. Person as defined in Section 7701(a)(30) of the Code.
4. It has such knowledge and experience in evaluating business and
financial matters so that it is capable of evaluating the merits and risks of an
investment in the Certificates. It understands the full nature and risks of an
investment in the Certificates and based upon its present and projected net
income and net worth, it believes that it can bear the economic risk of an
immediate or future loss of its entire investment in the Certificates.
5. It understands that the Certificates will be offered in a
transaction not involving any public offering within the meaning of the
Securities Act, and that, if in the future it decides to resell, pledge or
otherwise transfer any Certificates, such Certificates may be resold, pledged or
transferred only (a) to a person who the seller reasonably believes is an
institutional "accredited investor" as defined in Rule 501(a)(1)-(3) or (7)
under the Securities Act that purchases for its own account or for the account
of another institutional accredited investor or (b) pursuant to an effective
registration statement under the Securities Act.
6. It understands that each Certificate will bear legends substantially
to the following effect:
"THIS TRUST CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT") OR STATE SECURITIES LAWS. THE HOLDER HEREOF, BY
PURCHASING THIS TRUST CERTIFICATE, AGREES THAT THIS TRUST CERTIFICATE MAY BE
RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN ACCORDANCE WITH ANY APPLICABLE
STATE SECURITIES LAWS AND TO A PERSON WHO HAS FURNISHED TO THE OWNER TRUSTEE (A)
AN INVESTMENT LETTER SATISFACTORY TO THE TRUSTEE TO THE EFFECT THAT SUCH
PURCHASER IS AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF RULE
501(A)(1)-(3) OR (7) UNDER THE ACT AND (B) IF REQUIRED, AN OPINION OF COUNSEL
SATISFACTORY TO THE OWNER TRUSTEE.
THIS TRUST CERTIFICATE MAY NOT BE TRANSFERRED DIRECTLY OR INDIRECTLY TO (1)
EMPLOYEE BENEFIT PLANS, RETIREMENT ARRANGEMENTS, INDIVIDUAL RETIREMENT ACCOUNTS
OR KEOGH PLANS SUBJECT TO EITHER TITLE I OF THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED, OR SECTION 4975 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED, OR (2) ENTITIES (INCLUDING INSURANCE COMPANY GENERAL
ACCOUNTS) WHOSE UNDERLYING ASSETS INCLUDE PLAN ASSETS BY REASON OF THE
INVESTMENT BY SUCH PLANS, ARRANGEMENTS OR ACCOUNTS IN SUCH ENTITIES. FURTHER,
THIS TRUST CERTIFICATE MAY BE TRANSFERRED ONLY TO A UNITED STATES PERSON WITHIN
THE MEANING OF SECTION 7701(A)(30) OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED.
IF THE CERTIFICATEHOLDER COLLATERAL PURCHASE OPTION OR THE NOTE PURCHASE OPTION
ARE OUTSTANDING, THIS TRUST CERTIFICATE MUST REPRESENT ALL OUTSTANDING TRUST
CERTIFICATES AND SHALL BE HELD BY ONLY ONE HOLDER.
THE HOLDER OF THIS TRUST CERTIFICATE FURTHER UNDERSTANDS AND AGREES THAT THE
NUMBER OF BENEFICIAL OWNERS OF ALL TRUST CERTIFICATES MAY NOT EXCEED 3 IN
NUMBER; THAT TRANSFERS OF THE TRUST CERTIFICATES WILL BE RESTRICTED ACCORDINGLY;
AND THAT THE HOLDER HEREOF WILL NOTIFY THE OWNER TRUSTEE IF THE NUMBER OF
BENEFICIAL OWNERS OF THIS TRUST CERTIFICATE WILL CHANGE AS PROVIDED IN THE TRUST
AGREEMENT."
7. It is acquiring the Certificates for its own account and not with a
view to the public offering thereof in violation of the Securities Act (subject,
nevertheless, to the understanding that disposition of its property shall at all
times be and remain within its control).
8. It has been furnished with all information regarding the Trust and
Certificates which it has requested from the Trust and the Depositor.
9. Neither it nor anyone acting on its behalf has offered, transferred,
pledged, sold or otherwise disposed of any Certificate, any interest in any
Certificate or any other similar security to, or solicited any offer to buy or
accept a transfer, pledge or other disposition of any Certificate, any interest
in any Certificate or any other similar security from, or otherwise approached
or negotiated with respect to any Certificate, any interest in any Certificate
or any other similar security with, any person in any manner or made any general
solicitation by means of general advertising or in any other manner, which would
constitute a distribution of the Certificates under the Securities Act or which
would require registration pursuant to the Securities Act nor will it act, nor
has it authorized or will authorize any person to act, in such manner with
respect to any Certificate.
10. If the purchase to which this letter relates applies to less than
all of the Certificates, the Purchaser acknowledges that the Certificateholder
Collateral Purchase Option and the Note Purchase Option are no longer
outstanding.
11. For purposes of the Investment Company Act of 1940, as amended, the
total number of beneficial owners of the Trust Certificates it is purchasing is
________________.
12. The Purchaser is a beneficial owner of the Trust Certificates and
either (i) is an individual or a United States corporation (other than an S
corporation) or (ii) no principal purpose of the use of the entity to hold the
Trust Certificate is to permit the Trust to satisfy the 100 partners limitation
of Treasury regulation 1.7704-1(h)(3).
Dated:____________
Very truly yours,
_____________________________
NAME OF PURCHASER
By: __________________________
Name:________________________
Title:_________________________
NOTE: To be executed by an
----
executive officer
<PAGE>
EXHIBIT 10.6
EXECUTION COPY
--------------
TMA MORTGAGE FUNDING TRUST I,
as Issuer
and
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Indenture Trustee
_________________________________________
INDENTURE
Dated as of December 1, 1998
__________________________________________
COLLATERALIZED ASSET-BACKED NOTES,
SERIES 1998-1
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Section Page
- ------------------------------------------------------------------------------------------------------ -----
<S> <C>
ARTICLE I
DEFINITIONS
1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
1.02. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
1.03. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE II
ORIGINAL ISSUANCE OF NOTES
2.01. Form. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.02. Execution, Authentication and Delivery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.03. Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE III
COVENANTS
3.01. Maintenance of Accounts; Payments of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.02. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.03. Money for Payments To Be Held in Trust; Paying Agent. . . . . . . . . . . . . . . . . . . . . . 42
3.04. Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.05. Payment of Principal and Interest; Defaulted Interest . . . . . . . . . . . . . . . . . . . . . 43
3.06. Protection of Trust Estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.07. Opinions as to Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.08. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
3.09. Performance of Obligations; Sale and Servicing Agreement. . . . . . . . . . . . . . . . . . . . 44
3.10. Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.11. Annual Statement as to Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.12. Recording of Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.13. Representations and Warranties Concerning the Collateral. . . . . . . . . . . . . . . . . . . . 45
3.14. Indenture Trustee's Review of Related Documents . . . . . . . . . . . . . . . . . . . . . . . . 45
3.15. Trust Estate; Related Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.16. Amendments to Sale and Servicing Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3.17. Servicer as Agent and Bailee of Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . 46
3.18. Investment Company Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3.19. Issuer May Consolidate, etc., Only on Certain Terms . . . . . . . . . . . . . . . . . . . . . . 46
3.20. Successor or Transferee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.21. No Other Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.22. No Borrowing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.23. Guarantees, Loans, Advances and Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . 47
3.24. Capital Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.25. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.26. Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.27. Notice of Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.28. Further Instruments and Acts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.29. Statements to Noteholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.30. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.31. Determination of Note Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.32. Payments under the Note Insurance Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.33 Payment Under the Swap Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
- ------------------------------------------------------------------------------------------------------
3.34. Exercise of Rights as Registered Holder of Pooled Certificates. . . . . . . . . . . . . . . . . 48
ARTICLE IV
THE NOTES; SATISFACTION AND DISCHARGE OF INDENTURE
4.01. The Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
4.02 Registration of and Limitations on Transfer and Exchange of Notes; Appointment of Note Registrar 48
4.03. Mutilated, Destroyed, Lost or Stolen Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.04. Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.05. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.06. Release of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.07. Restrictions on Transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.08. Limitation on Beneficial Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.09. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.10. Payment of Principal and Interest; Defaulted Interest . . . . . . . . . . . . . . . . . . . . . 51
4.11. Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.12. Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.13. Application of Trust Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.14. Subrogation and Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.15. Repayment of Moneys Held by Paying Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
ARTICLE V
REMEDIES
5.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
5.02. Acceleration of Maturity, Rescission and Annulment. . . . . . . . . . . . . . . . . . . . . . . 53
5.03. Collection of Indebtedness and Suits for Enforcement by Indenture Trustee . . . . . . . . . . . 54
5.04. Remedies; Priorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
5.05. Optional Preservation of the Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
5.06. Limitation of Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
5.07. Unconditional Rights of Noteholders To Receive Principal and Interest . . . . . . . . . . . . . 56
5.08. Restoration of Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
5.09. Rights and Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
5.10. Delay or Omission Not a Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
5.11. Control by Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
5.12. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
5.13. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
5.14. Waiver of Stay or Extension Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
5.15. Sale of Trust Estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
5.16. Action on Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
5.17. Performance and Enforcement of Certain Obligations. . . . . . . . . . . . . . . . . . . . . . . 59
ARTICLE VI
THE INDENTURE TRUSTEE
6.01. Duties of Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
6.02. Rights of Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
6.03. Individual Rights of Indenture Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
6.04. Indenture Trustee's Disclaimer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
6.05. Notice of Event of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
6.06. Reports by Indenture Trustee to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
6.07. Compensation and Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
6.08. Replacement of Indenture Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
6.09. Successor Indenture Trustee by Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
6.10. Appointment of Co-Indenture Trustee or Separate Indenture Trustee . . . . . . . . . . . . . . . 62
6.11. Eligibility; Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
6.12. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
6.13. Representation and Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
6.14. Directions to Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
ARTICLE VII
NOTEHOLDERS' LISTS AND REPORTS
7.01. Issuer To Furnish Indenture Trustee Names and Addresses of Noteholders. . . . . . . . . . . . . 63
7.02. Preservation of Information; Communications to Noteholders. . . . . . . . . . . . . . . . . . . 63
7.03. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
ARTICLE VIII
ACCOUNTS, DISBURSEMENTS AND RELEASES
8.01. Collection of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
8.02. Trust Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
8.03. Opinion of Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
8.04. Termination Upon Distribution to Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . 64
8.05. Release of Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
8.06. Surrender of Notes Upon Final Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
ARTICLE IX
SUPPLEMENTAL INDENTURES
9.01. Supplemental Indentures Without Consent of Noteholders. . . . . . . . . . . . . . . . . . . . . 64
9.02. Supplemental Indentures With Consent of Noteholders . . . . . . . . . . . . . . . . . . . . . . 65
9.03. Execution of Supplemental Indentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
9.04. Effect of Supplemental Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
9.05. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
9.06. Reference in Notes to Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . 66
9.07. Book Entry Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
ARTICLE X
NOTE AND COLLATERAL PURCHASE OPTIONS
10.01. Note and Collateral Purchase Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
10.02. Form of Option Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
10.03. Notes Payable on Purchase Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
10.04. The Indenture After the Exercise of the Note Purchase Option or a Collateral Purchase Option. . 68
ARTICLE XI
MISCELLANEOUS
11.01. Compliance Certificates and Opinions, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 69
11.02 Form of Documents Delivered to Indenture Trustee. . . . . . . . . . . . . . . . . . . . . . . . 69
11.03. Acts of Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
11.04. Notices, etc., to Indenture Trustee, Issuer, Note Insurer and Rating Agencies. . . . . . . . . 70
11.05. Notices to Noteholders; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
11.06. Alternate Payment and Notice Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
11.07. RIGHTS OF THE NOTE INSURER AND THE SWAP COUNTERPARTY . . . . . . . . . . . . . . . . . . . . . 71
- ------------------------------------------------------------------------------------------------------
11.08. Effect of Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
11.09. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
11.10. Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
11.11. Benefits of Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
11.12. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
11.13. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
11.14. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
11.15. Recording of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
11.16. Issuer Obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
11.17. No Petition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
11.18. Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65-66
</TABLE>
Appendix A - Definitions
Exhibit A- Form of Note
Exhibit B- Schedule of Mortgage Loans
Exhibit C- Schedule of Pooled Certificates
Exhibit D- Schedule of Swap Agreements
Exhibit E- Form of Institutional Accredited Investor Representation Letter
Exhibit F- Form of Qualified Institutional Buyer Representation Letter
Exhibit G- Notice of Exercise of Note Purchase Option
Exhibit H- Notice of Exercise of Collateral Purchase Option
This Indenture, dated as of December 1, 1998, between TMA MORTGAGE FUNDING
TRUST I, a Delaware statutory business trust, as Issuer (the "Issuer"), and
BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Indenture Trustee (the "Indenture
Trustee").
WITNESSETH THAT:
Each party hereto agrees as follows for the benefit of the other party and for
the equal and ratable benefit of the Holders of the Issuer's Notes and Note
Insurer.
GRANTING CLAUSE
The Issuer hereby Grants to the Indenture Trustee at the Closing Date, as
Indenture Trustee for the benefit of the Holders of the Notes, the Swap
Counterparty and the Note Insurer, all of the Issuer's right, title and interest
in and to whether now existing or hereafter created (a) the Trust Estate; (b)
all moneys on deposit from time to time in the Reserve Account; and (c) all
present and future claims, demands, causes and choses in action in respect of
any or all of the foregoing and all payments on or under, and all proceeds of
every kind and nature whatsoever in respect of, any or all of the foregoing and
all payments on or under, and all proceeds of every kind and nature whatsoever
in the conversion thereof, voluntary or involuntary, into cash or other liquid
property, all cash proceeds, accounts, accounts receivable, notes, drafts,
acceptances, checks, deposit accounts, rights to payment of any and every kind
(including but not limited to all proceeds of any Insurance Policies relating to
any Mortgage Loan), and other forms of obligations and receivables, instruments
and other property which at any time constitute all or part of or are included
in the proceeds of any of the foregoing (collectively, the "Collateral").
The foregoing Grant is made in trust to secure the payment of principal of and
interest on, and any other amounts owing in respect of, the Notes, equally and
ratably without prejudice, priority or distinction, and to secure compliance
with the provisions of this Indenture, all as provided in this Indenture.
The Indenture Trustee, as Indenture Trustee on behalf of the Holders of the
Notes, the Swap Counterparty and the Note Insurer, acknowledges such Grant,
accepts the trust under this Indenture in accordance with the provisions hereof
and agrees to perform its duties as Indenture Trustee as required herein.
ARTICLE I
Definitions
Section 1.01. Definitions. For all purposes of this Indenture, except as
-----------
otherwise expressly provided herein or unless the context otherwise requires,
capitalized terms used but not otherwise defined herein shall have the meanings
assigned to such terms in Appendix A hereto which are incorporated by reference
herein. All other capitalized terms used herein shall have the meanings
specified herein.
Section 1.02. [Reserved].
----------
Section 1.03. Rules of Construction. Unless the context otherwise requires:
-----------------------
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles as in effect
from time to time;
(iii) "or" is not exclusive;
(iv) "including" means including without limitation;
(v) words in the singular include the plural and words in the plural
include the singular;
(vi) any pronouns shall be deemed to cover all genders; and
(vii) any agreement, instrument or statute defined or referred to herein
or in any instrument or certificate delivered in connection herewith means such
agreement, instrument or statute as from time to time amended, modified or
supplemented and includes (in the case of agreements or instruments) references
to all attachments thereto and instruments incorporated therein; references to a
Person are also to its permitted successors and assigns.
ARTICLE II
Original Issuance of Notes
Section 2.01. Form. The Notes, together with the Indenture Trustee's
----
certificate of authentication, shall be in substantially the form set forth in
Exhibit A, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may, consistently herewith, be determined by the
officers executing the Notes, as evidenced by their execution of the Notes. Any
portion of the text of any Note may be set forth on the reverse thereof, with an
appropriate reference thereto on the face of the Note.
The Notes shall be typewritten, printed, lithographed or engraved or produced by
any combination of these methods (with or without steel engraved borders), all
as determined by the Authorized Officers executing such Notes, as evidenced by
their execution of such Notes.
The terms of the Note set forth in Exhibit A are part of the terms of this
Indenture.
Section 2.02. Execution, Authentication and Delivery. The Notes shall be
-----------------------------------------
executed on behalf of the Issuer by any of the Authorized Officers of the Owner
Trustee. The signature of any such Authorized Officer on the Notes may be
manual or facsimile.
Notes bearing the manual or facsimile signature of individuals who were at any
time Authorized Officers of the Issuer shall bind the Issuer, notwithstanding
that such individuals or any of them have ceased to hold such offices prior to
the authentication and delivery of such Notes or did not hold such offices at
the date of such Notes.
The Indenture Trustee shall upon Issuer Request authenticate and deliver Notes
for original issue in an aggregate initial principal amount $1,144,423,000. The
aggregate principal amount of Notes outstanding at any time may not exceed
$1,144,423,000.
Each Note shall be dated the date of its authentication. The Notes shall be
issuable as registered Notes in the minimum initial denominations of $100,000
and in integral multiples of $1,000 in excess thereof; provided, however, that
one Note may be issued in a different denomination.
No Note shall be entitled to any benefit under this Indenture or be valid or
obligatory for any purpose, unless there appears on such Note a certificate of
authentication substantially in the form provided for herein executed by the
Indenture Trustee by the manual signature of one of its authorized signatories,
and such certificate upon any Note shall be conclusive evidence, and the only
evidence, that such Note has been duly authenticated and delivered hereunder.
Section 2.03. Opinions of Counsel. On the Closing Date, the Indenture Trustee
-------------------
shall have received: (i) an opinion of counsel, in form and substance
reasonably satisfactory to the Indenture Trustee and its counsel, with respect
to securities law matters; (ii) an opinion of counsel, in form and substance
reasonably satisfactory to the Indenture Trustee and its counsel, with respect
to the tax status of the arrangement created by the Indenture; and (iii) an
opinion of counsel to the Issuer, in form and substance reasonably satisfactory
to the Indenture Trustee and its counsel, with respect to the due authorization,
valid execution and delivery of this Indenture and with respect to its binding
effect on the Issuer.
ARTICLE III
Covenants
Section 3.01. Maintenance of Accounts; Payments of Notes. The Indenture
-------------------------------------------
Trustee shall establish and maintain each of the Accounts specified in Sections
5.1 of the Sale and Servicing Agreement. The Indenture Trustee or other Paying
Agent shall make all payments of principal of and interest on the Notes, subject
to Section 3.03 and as provided in Section 3.05 herein, from moneys on deposit
in the Trustee Collection Account.
Section 3.02. Maintenance of Office or Agency. The Issuer will maintain in the
-------------------------------
Borough of Manhattan, The City of New York, an office or agency where, subject
to satisfaction of conditions set forth herein, Notes may be surrendered for
registration of transfer or exchange, and where notices and demands to or upon
the Issuer in respect of the Notes and this Indenture may be served. The Issuer
hereby initially appoints the Indenture Trustee to serve as its agent for the
foregoing purposes. If at any time the Issuer shall fail to maintain any such
office or agency or shall fail to furnish the Indenture Trustee with the address
thereof, such surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Indenture Trustee, and the Issuer hereby appoints
the Indenture Trustee as its agent to receive all such surrenders, notices and
demands.
Section 3.03. Money for Payments To Be Held in Trust; Paying Agent. (a) The
-----------------------------------------------------
Issuer will cause each Paying Agent other than the Indenture Trustee to execute
and deliver to the Indenture Trustee an instrument in which such Paying Agent
shall agree with the Indenture Trustee (and if the Indenture Trustee acts as
Paying Agent, it hereby so agrees), subject to the provisions of this Section
3.03, that such Paying Agent will:
(i) hold all sums held by it for the payment of amounts due with respect to
the Notes in trust for the benefit of the Persons entitled thereto until such
sums shall be paid to such Persons or otherwise disposed of as herein provided
and pay such sums to such Persons as herein provided;
(ii) give the Indenture Trustee notice of any default by the Issuer of which
it has Actual Knowledge in the making of any payment required to be made with
respect to the Notes;
(iii) at any time during the continuance of any such default, upon the
written request of the Indenture Trustee, forthwith pay to the Indenture Trustee
all sums so held in trust by such Paying Agent;
(iv) immediately resign as a Paying Agent and forthwith pay to the Indenture
Trustee all sums held by it in trust for the payment of Notes if at any time it
ceases to meet the standards required to be met by a Paying Agent at the time of
its appointment; and
(v) comply with all requirements of the Code with respect to the withholding
from any payments made by it on any Notes of any applicable withholding taxes
imposed thereon and with respect to any applicable reporting requirements in
connection therewith.
The Issuer may at any time, for the purpose of obtaining the satisfaction and
discharge of this Indenture or for any other purpose, by Issuer Request, direct
any Paying Agent to pay to the Indenture Trustee all sums held in trust by such
Paying Agent, such sums to be held by the Indenture Trustee upon the same trusts
as those upon which the sums were held by such Paying Agent; and upon such
payment by any Paying Agent to the Indenture Trustee, such Paying Agent shall be
released from all further liability with respect to such money.
Subject to applicable laws with respect to escheat of funds, any money held by
the Indenture Trustee or any Paying Agent in trust for the payment of any amount
due with respect to any Note and remaining unclaimed for two years after such
amount has become due and payable shall be discharged from such trust and be
paid to the Issuer on Issuer Request; and the Holder of such Note shall
thereafter, as an unsecured general creditor, look only to the Issuer for
payment thereof (but only to the extent of the amounts so paid to the Issuer),
and all liability of the Indenture Trustee or such Paying Agent with respect to
such trust money shall thereupon cease; provided, however, that the Indenture
Trustee or such Paying Agent, before being required to make any such repayment,
shall at the expense and direction of the Issuer cause to be published once, in
an Authorized Newspaper published in the English language, notice that such
money remains unclaimed and that, after a date specified therein, which shall
not be less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining will be repaid to the Issuer. The
Indenture Trustee shall also adopt and employ, at the expense and direction of
the Issuer, any other reasonable means of notification of such repayment
(including, but not limited to, mailing notice of such repayment to Holders
whose Notes have been called but have not been surrendered for purchase or
redemption or whose right to or interest in moneys due and payable but not
claimed is determinable from the records of the Indenture Trustee or of any
Paying Agent, at the last address of record for each such Holder).
Section 3.04. Existence. The Issuer will keep in full effect its existence,
---------
rights and franchises as a business trust under the laws of the State of
Delaware (unless it becomes, or any successor Issuer hereunder is or becomes,
organized under the laws of any other State or of the United States of America,
in which case the Issuer will keep in full effect its existence, rights and
franchises under the laws of such other jurisdiction) and will obtain and
preserve its qualification to do business in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Indenture, the Notes, the Mortgage Loans, the Pooled
Certificates and the Swap Agreements and each other instrument or agreement
included in the Trust Estate.
Section 3.05. Payments of Principal and Interest. The Issuer will duly and
-------------------------------------
punctually pay the principal of and interest on the Notes in accordance with the
terms of the Notes, this Indenture and the Sale and Servicing Agreement.
Without limiting the foregoing, subject to Section 8.02(b), the Issuer will
cause to be distributed all amounts on deposit in the Trustee Collection Account
on a Payment Date deposited therein pursuant to the Sale and Servicing Agreement
for the benefit of the Notes, to the Noteholders. Amounts properly withheld
under the Code by any Person from a payment to any Noteholder of interest and/or
principal shall be considered as having been paid by the Issuer to such
Noteholder for all purposes of this Indenture.
Section 3.06. Protection of Trust Estate. (a) The Issuer will from time to
----------------------------
time prepare (or shall cause to be prepared), execute and deliver all such
supplements and amendments hereto and all such financing statements,
continuation statements, instruments of further assurance and other instruments,
and will take such other action necessary or advisable to:
(i) maintain or preserve the lien and security interest (and the
priority thereof) of this Indenture or carry out more effectively the purposes
hereof;
(ii) perfect, publish notice of or protect the validity of any Grant
made or to be made by this Indenture;
(iii) enforce any of the Mortgage Loans, the Pooled Certificates, the
Swap Agreements or the other Collateral; or
(iv) preserve and defend title to the Trust Estate and the rights of the
Indenture Trustee, the Swap Counterparty, the Note Insurer and the Noteholders
in such Trust Estate against the claims of all persons and parties.
(b) Except as otherwise provided in the Sale and Servicing Agreement or
this Indenture, the Indenture Trustee shall not remove any portion of the Trust
Estate that consists of money or is evidenced by an instrument, certificate or
other writing from the jurisdiction in which it was held at the date of the most
recent opinion of counsel delivered pursuant to Section 3.07 (or from the
jurisdiction in which it was held as described in the opinion of counsel
delivered at the Closing Date pursuant to Section 3.07(a), if no opinion of
counsel has yet been delivered pursuant to Section 3.07(b)) unless the Trustee
shall have first received an opinion of counsel to the effect that the lien and
security interest created by this Indenture with respect to such property will
continue to be maintained after giving effect to such action or actions.
The Issuer hereby designates the Indenture Trustee its agent and
attorney-in-fact to execute any financing statement, continuation statement or
other instrument required to be executed pursuant to this Section 3.06.
Section 3.07. Opinions as to Trust Estate. (a) On the Closing Date, the
-------------------------------
Issuer shall furnish to the Indenture Trustee and the Note Insurer an opinion of
counsel either stating that, in the opinion of such counsel, such action has
been taken with respect to the delivery of the Mortgage Notes, the recording of
the Assignments of Mortgage (as and if required under the Sale and Servicing
Agreement), the recording and filing of this Indenture, any indentures
supplemental hereto, and any other requisite documents, and with respect to the
execution and filing of any financing statements and continuation statements, as
are necessary to perfect and make effective the lien and security interest of
this Indenture and reciting the details of such action, or stating that, in the
opinion of such counsel, no such action is necessary to make such lien and
security interest effective.
(b) On or before September 30 in each calendar year, beginning in 1999, the
Issuer shall furnish or cause the Servicer to furnish to the Indenture Trustee
and the Note Insurer an opinion of counsel at the expense of the Issuer either
stating that, in the opinion of such counsel, such action has been taken with
respect to the recording, filing, re-recording and refiling of this Indenture,
any indentures supplemental hereto and any other requisite documents and with
respect to the execution and filing of any financing statements and continuation
statements as is necessary to maintain the lien and security interest created by
this Indenture and reciting the details of such action or stating that in the
opinion of such counsel no such action is necessary to maintain such lien and
security interest. Such opinion of counsel shall also describe the recording,
filing, re-recording and refiling of this Indenture, any indentures supplemental
hereto and any other requisite documents and the execution and filing of any
financing statements and continuation statements that will, in the opinion of
such counsel, be required to maintain the lien and security interest of this
Indenture until September 30 in the following calendar year.
Section 3.08. [Reserved]
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Section 3.09. Performance of Obligations; Sale and Servicing Agreement. (a)
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The Issuer will punctually perform and observe all of its obligations and
agreements contained in this Indenture, the other Basic Documents and in the
instruments and agreements included in the Trust Estate. Except as otherwise
expressly provided therein, the Issuer shall not waive, amend, modify,
supplement or terminate any Basic Document, including without limitation the
Sale and Servicing Agreement or any provision thereof without the consent of the
Indenture Trustee and the Note Insurer or the Holders of at least a majority of
the Class Principal Balance of the Notes, the Servicer and the Note Insurer.
Upon the taking of any such action with respect to any Basic Document, the
Issuer shall give written notice thereof to the Rating Agencies.
(b) The Issuer may contract with other Persons to assist it in
performing its duties under this Indenture, and any performance of such duties
by a Person identified to the Indenture Trustee in an Officer's Certificate of
the Issuer shall be deemed to be action taken by the Issuer. Initially, the
Issuer has contracted with the Servicer to assist the Issuer in performing its
duties under this Indenture.
(c) The Issuer will not take any action or permit any action to be
taken by others which would release any Person from any of such Person's
material covenants or obligations under any of the documents relating to the
Mortgage Loans, the Pooled Certificates and the Swap Agreements or under any
Instrument included in the Trust Estate, or which would result in the amendment,
hypothecation, subordination, termination or discharge of, or impair the
validity or effectiveness of, any of the documents relating to the Mortgage
Loans, the Pooled Certificates and the Swap Agreements or any such instrument,
except such actions as the Servicer is expressly permitted to take in the Sale
and Servicing Agreement.
(d) If the Issuer shall have knowledge of the occurrence of a Servicer
Termination Event, the Issuer shall promptly notify the Indenture Trustee and
the Note Insurer thereof, and shall specify in such notice the action, if any,
the Issuer is taking in respect of such Servicer Termination Event. If such
Servicer Termination Event arises from the failure of the Servicer to perform
any of its duties or obligations under the Sale and Servicing Agreement, the
Issuer may remedy such failure. So long as any such Servicer Termination Event
shall be continuing, the Indenture Trustee, with the consent of the Note
Insurer, may exercise its remedies set forth in Section 7.1 of the Sale and
Servicing Agreement. Unless granted or permitted by the Note Insurer or the
Holders of the Notes to the extent provided above, the Issuer may not waive any
such Servicer Termination Event or terminate the rights and powers of the
Servicer under the Sale and Servicing Agreement.
(e) Upon any termination of the Servicer's rights and powers pursuant
to Section 7.1 of the Sale and Servicing Agreement, the Indenture Trustee, in
consultation with the Issuer, shall appoint a successor servicer acceptable to
the Note Insurer, and such successor servicer shall accept its appointment by a
written assumption in a form acceptable to the Indenture Trustee, the Issuer and
the Note Insurer. In the event that a successor servicer has not been appointed
and accepted its appointment at the time when the Servicer ceases to act as
servicer, the Indenture Trustee without further action shall automatically be
appointed the successor servicer in accordance with Section 7.1 of the Sale and
Servicing Agreement. The Indenture Trustee may resign as the Servicer by giving
written notice of such resignation to the Issuer and the Note Insurer and in
such event will be released from such duties and obligations, such release to be
effective on the date a successor servicer enters into a servicing agreement
with the Issuer as provided below. Upon delivery of any such notice to the
Issuer, the Issuer shall obtain a successor servicer, satisfactory in all
respects to the Indenture Trustee and the Note Insurer, which shall enter into a
servicing agreement with the Issuer and the Indenture Trustee, such agreement to
be not less favorable to the Note Insurer in its reasonable judgment, or the
Noteholders if a Note Insurer Default shall have occurred and be continuing,
than the Sale and Servicing Agreement in any material respect. If, within 30
days after the delivery of the notice referred to above, the Issuer shall not
have obtained such successor servicer, the Indenture Trustee may appoint, or may
petition a court of competent jurisdiction to appoint, a successor servicer
acceptable to the Note Insurer to service the Mortgage Loans. In connection
with any such appointment, the Indenture Trustee, in consultation with the
Issuer, may make such arrangements for the compensation of such successor as it
and such successor shall agree, and the Issuer shall enter into an agreement
with such successor for the servicing of the Mortgage Loans, such agreement to
be substantially similar to the Sale and Servicing Agreement or otherwise
acceptable to the Note Insurer; provided that any such compensation of the
successor servicer unless otherwise agreed to by the Note Insurer, shall not be
in excess of the Servicing Fee payable to the Servicer under the Sale and
Servicing Agreement. If the Indenture Trustee shall succeed to the Servicer's
duties as servicer of the Mortgage Loans as provided herein, it shall do so in
its individual capacity and not in its capacity as Indenture Trustee.
(f) Without derogating from the absolute nature of the assignment
granted to the Indenture Trustee under this Indenture or the rights of the
Indenture Trustee hereunder, the Issuer agrees that it will not, without the
prior written consent of the Indenture Trustee and the Note Insurer, or the
Noteholders of at least a majority in Class Principal Balance of the Notes,
amend, modify, waive, supplement, terminate or surrender, or agree to any
amendment, modification, supplement, termination, waiver or surrender of, the
terms of any Collateral or the other Basic Documents, except to the extent
otherwise provided in this Indenture or the Sale and Servicing Agreement, or
waive timely performance or observance by the Servicer, the Depositor or the
Issuer under the Sale and Servicing Agreement; provided however, that no such
amendment shall (i) increase or reduce in any manner the amount of, or
accelerate or delay the timing of, distributions that are required to be made
for the benefit of the Noteholders, or (ii) reduce the aforesaid percentage of
the Notes which is required to consent to any such amendment, without the
consent of all of the Noteholders. If any such amendment, modification,
supplement or waiver shall be so consented to by the Indenture Trustee and the
Note Insurer or such Noteholders, the Issuer agrees, to execute and deliver in
furtherance of such amendment, modification, supplement or waiver, in its own
name and at its own expense, such agreements, instruments, consents and other
documents as the Indenture Trustee may deem necessary or appropriate in the
circumstances.
Section 3.10. Negative Covenants. So long as any Notes are Outstanding, the
-------------------
Issuer shall not:
(i) except as expressly permitted by this Indenture or any other Basic
Document, sell, transfer, exchange or otherwise dispose of the Trust Estate,
unless directed to do so by the Indenture Trustee with the approval of the Note
Insurer;
(ii) claim any credit on, or make any deduction from the principal or
interest (including any LIBOR Interest Carryover Amounts) payable in respect of,
the Notes (other than amounts properly withheld from such payments under the
Code or applicable state law) or assert any claim against any present or former
Noteholder by reason of the payment of the taxes levied or assessed upon any
part of the Trust Estate;
(iii) (A) permit the validity or effectiveness of this Indenture to be
impaired, or permit the lien of this Indenture to be amended, hypothecated,
subordinated, terminated or discharged, or permit any Person to be released from
any covenants or obligations with respect to the Notes under this Indenture
except as may be expressly permitted hereby, (B) permit any lien, charge,
excise, claim, security interest, mortgage or other encumbrance (other than the
lien of this Indenture) to be created on or extend to or otherwise arise upon or
burden the Trust Estate or any part thereof or any interest therein or the
proceeds thereof (other than tax liens or other liens that arise by operation of
law, in each case solely as a result of an action or omission of the related
obligor, and other than as expressly permitted by the Basic Documents) or (C)
permit the lien of this Indenture not to constitute a valid first priority
security interest in the Trust Estate; or
(iv) except as contemplated by the Basic Documents, dissolve or
liquidate in whole or in part.
Section 3.11. Annual Statement as to Compliance. The Issuer will deliver (or
----------------------------------
cause the Servicer to deliver to) the Indenture Trustee, within 120 days after
the end of each calendar year (commencing with the calendar year 1999), an
Officer's Certificate stating, as to the Authorized Officer signing such
Officer's Certificate, that:
(i) a review of the activities of the Issuer (or the Servicer on the
Issuer's behalf) during such year and of its performance under this Indenture
has been made under such Authorized Officer's supervision; and
(ii) to the best of such Authorized Officer's knowledge, based on such
review, the Issuer (or the Servicer on the Issuer's behalf) has complied with
all conditions and covenants under this Indenture throughout such year, or, if
there has been a default in its compliance with any such condition or covenant,
specifying each such default known to such Authorized Officer and the nature and
status thereof.
Section 3.12. Recording of Assignments. The Issuer shall (or shall cause the
-------------------------
Depositor to) exercise its right under the Collateral Sale Agreement with
respect to the obligation of the Seller to submit or cause to be submitted for
recording all Assignments of Mortgages (in and to the extent required under the
Sale and Servicing Agreement) within one year after the Closing Date.
Section 3.13. Representations and Warranties Concerning the Collateral. The
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Issuer has pledged to the Indenture Trustee all of its rights under the
Collateral Sale Agreement and the Sale and Servicing Agreement and the Indenture
Trustee has the benefit of the representations and warranties made by the Seller
and the Depositor in such documents concerning the Collateral and the right to
enforce any remedy against the Seller or the Depositor, as applicable, provided
in the Collateral Sale Agreement and the Sale and Servicing Agreement, as
applicable, to the same extent as though such representations and warranties
were made directly to the Indenture Trustee.
Section 3.14. Indenture Trustee's Review of Files. The Indenture Trustee
---------------------------------------
agrees, for the benefit of the holders of the Notes and the Note Insurer, to
review the Files as provided in Section 2.2 of the Sale and Servicing Agreement.
Section 3.15. Trust Estate; Related Documents. (a) When required by the
----------------------------------
provisions of this Indenture or the Sale and Servicing Agreement, the Indenture
Trustee shall execute instruments to release property from the lien of this
Indenture, or convey the Indenture Trustee's interest in the same, in a manner
and under circumstances which are not inconsistent with the provisions of this
Indenture or the Sale and Servicing Agreement. No party relying upon an
instrument executed by the Indenture Trustee as provided in this Article III
shall be bound to ascertain the Indenture Trustee's authority, inquire into the
satisfaction of any conditions precedent or see to the application of any
moneys.
(b) In order to facilitate the servicing of the Mortgage Loans, the
Indenture Trustee authorizes the Servicer in the name and on behalf of both the
Indenture Trustee and the Issuer, to perform the Servicer's duties and
obligations under the Sale and Servicing Agreement and the Indenture Trustee
agrees to perform its obligations thereunder in accordance with the terms
thereof.
(c) The Indenture Trustee shall, at such time as there are no Notes
Outstanding and no amounts due to the Note Insurer, release all of the Trust
Estate to the Issuer (other than any cash held for the payment of the Notes
pursuant to Sections 3.03 or 4.10), subject, however, to the rights of the
Indenture Trustee under Section 6.07.
Section 3.16. Amendments to Sale and Servicing Agreement. The Indenture
-----------------------------------------------
Trustee may enter into any amendment or supplement to the Sale and Servicing
Agreement only in accordance with Section 9.1 of the Sale and Servicing
Agreement. The Indenture Trustee may, in its discretion, decline to enter into
or consent to any such supplement or amendment if its own rights, duties or
immunities shall be adversely affected.
Section 3.17. Servicer as Agent and Bailee of Indenture Trustee. Solely for
---------------------------------------------------
purposes of perfection under Section 9-305 of the Uniform Commercial Code or
other similar applicable law, rule or regulation of the state in which such
property is held by the Servicer or a Subservicer, the Indenture Trustee hereby
acknowledges that the Servicer or Subservicer, as applicable, is acting as agent
and bailee of the Indenture Trustee in holding amounts on deposit in the
Servicer Collection Account or related Subservicer Principal and Interest
Accounts, as the case may be, pursuant to Sections 4.2 (a) and 4.3 (a) of the
Sale and Servicing Agreement, as well as its agent and bailee in holding any
documents released to the Servicer or Subservicer, as applicable, pursuant to
the Sale and Servicing Agreement, and any other items constituting a part of the
Trust Estate which from time to time come into the possession of the Servicer or
Subservicer, as the case may be. It is intended that, by the Servicer's
execution and delivery of the Sale and Servicing Agreement, the Indenture
Trustee, as a secured party, will be deemed to have possession of such
documents, such moneys and such other items for purposes of Section 9-305 of the
Uniform Commercial Code of the state in which such property is held by the
Servicer.
Section 3.18. Investment Company Act. The Issuer shall not become an
------------------------
"investment company" or under the "control" of an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended (or any
successor or amendatory statute), and the rules and regulations thereunder
(taking into account not only the general definition of the term "investment
company" but also any available exceptions to such general definition);
provided, however, that the Issuer shall be in compliance with this Section 3.18
if it shall have obtained an order exempting it from regulation as an
"investment company" so long as it is in compliance with the conditions imposed
in such order.
Section 3.19. Issuer May Consolidate, etc., Only on Certain Terms. (a) The
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Issuer shall not consolidate or merge with or into any other Person, unless:
(i) the Person (if other than the Issuer) formed by or surviving such
consolidation or merger shall be a Person organized and existing under the laws
of the United States of America or any State or the District of Columbia and
shall expressly assume, by an indenture supplemental hereto, executed and
delivered to the Indenture Trustee, in form reasonably satisfactory to the
Indenture Trustee and the Note Insurer, the due and punctual payment of the
principal of and interest (including LIBOR Interest Carryover Amounts) on all
Notes and Certificates and the performance or observance of every agreement and
covenant of this Indenture on the part of the Issuer to be performed or
observed, all as provided herein;
(ii) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
(iii) each of the Rating Agencies shall have notified the Issuer that
such transaction shall not cause the rating of the Notes to be reduced,
suspended or withdrawn or to be considered by such Rating Agency to be below
investment grade without taking into account the Note Insurance Policy;
(iv) the Issuer shall have received an opinion of counsel (and shall
have delivered copies thereof to the Indenture Trustee and the Note Insurer) to
the effect that such transaction will not have any material adverse Federal or
relevant state tax consequence to the Issuer, any Noteholder or any
Certificateholder;
(v) the Note Insurer shall have provided written consent with respect
to such transaction;
(vi) any action that is necessary to maintain the lien and security
interest created by this Indenture shall have been taken; and
(vii) the Issuer shall have delivered to the Indenture Trustee and the
Note Insurer an Officer's Certificate and an opinion of counsel each stating
that such consolidation or merger and such supplemental indenture comply with
this Article III and that all conditions precedent herein provided for or
relating to such transaction have been complied with (including any filing
required by the Exchange Act).
(b) The Issuer shall not convey or transfer all or substantially all its
properties or assets, including those included in the Trust Estate, to any
Person, unless:
(i) the Person that acquires by conveyance or transfer the properties
and assets of the Issuer the conveyance or transfer of which is hereby
restricted shall (A) be a United States citizen or a Person organized and
existing under the laws of the United States of America or any State or the
District of Columbia, (B) expressly assumes, by an indenture supplemental
hereto, executed and delivered to the Indenture Trustee, in form reasonably
satisfactory to the Indenture Trustee and the Note Insurer, the due and punctual
payment of the principal of and interest (including LIBOR Interest Carryover
Amounts) on all Notes and the performance or observance of every agreement and
covenant of this Indenture on the part of the Issuer to be performed or
observed, all as provided herein, (C) expressly agrees by means of such
supplemental indenture that all right, title and interest so conveyed or
transferred shall be subject and subordinate to the rights of Holders of the
Notes, and (D) unless otherwise provided in such supplemental indenture,
expressly agrees to indemnify, defend and hold harmless the Issuer against and
from any loss, liability or expense arising under or related to this Indenture
and the Notes;
(ii) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
(iii) each Rating Agency shall have notified the Issuer that such
transaction shall not cause the rating of the Notes to be reduced, suspended or
withdrawn without taking into account the Note Insurance Policy;
(iv) the Issuer shall have received an opinion of counsel (and shall
have delivered copies thereof to the Indenture Trustee and the Note Insurer) to
the effect that such transaction will not have any material adverse Federal or
relevant State tax consequence to the Issuer, any Noteholder or any
Certificateholder;
(v) the Note Insurer shall have provided written consent with respect
to such transaction;
(vi) any action that is necessary to maintain the lien and security
interest created by this Indenture shall have been taken; and
(vii) the Issuer shall have delivered to the Indenture Trustee and the
Note Insurer an Officer's Certificate and an opinion of counsel each stating
that such conveyance or transfer and such supplemental indenture comply with
this Article III and that all conditions precedent herein provided for relating
to such transaction have been complied with.
Section 3.20. Successor or Transferee. (a) Upon any consolidation or merger
------------------------
of the Issuer in accordance with Section 3.19(a), the Person formed by or
surviving such consolidation or merger (if other than the Issuer) shall succeed
to, and be substituted for, and may exercise every right and power of, the
Issuer under this Indenture with the same effect as if such Person had been
named as the Issuer herein.
(b) Upon a conveyance or transfer of all or substantially all of the assets
and properties of the Issuer pursuant to Section 3.19(b), the Issuer will be
released from every covenant and agreement of this Indenture to be observed or
performed on the part of the Issuer with respect to the Notes immediately upon
the delivery of written notice to the Indenture Trustee that the Issuer is to be
so released.
Section 3.21. No Other Business. The Issuer shall not engage in any business
------------------
other than (A) financing, purchasing, owning and selling and managing the
Collateral, (B) issuing the Notes and the Certificates and making payments
thereon and (C) issuing the Purchase Options, each in the manner contemplated by
this Indenture, the Trust Agreement and the other Basic Documents and all
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith or that are
contemplated or required by this Indenture or the other Basic Documents.
Section 3.22. No Borrowing. The Issuer shall not issue, incur, assume,
-------------
guarantee or otherwise become liable, directly or indirectly, for any
indebtedness except for the Notes.
Section 3.23. Guarantees, Loans, Advances and Other Liabilities. Except as
----------------------------------------------------
contemplated by this Indenture, the Issuer shall not make any loan or advance or
credit to, or guarantee (directly or indirectly or by an instrument having the
effect of assuring another's payment or performance on any obligation or
capability of so doing or otherwise), endorse or otherwise become contingently
liable, directly or indirectly, in connection with the obligations, stocks or
dividends of, or own, purchase, repurchase or acquire (or agree contingently to
do so) any stock, obligations, assets or securities of, or any other interest
in, or make any capital contribution to, any other Person.
Section 3.24. Capital Expenditures. The Issuer shall not make any expenditure
--------------------
(by long-term or operating lease or otherwise) for capital assets (either realty
or personalty).
Section 3.25. [Reserved]
--------
Section 3.26. Restricted Payments. The Issuer shall not, directly or
--------------------
indirectly, (i) pay any dividend or make any distribution (by reduction of
capital or otherwise), whether in cash, property, securities or a combination
thereof, to the Owner Trustee or any owner of a beneficial interest in the
Issuer or otherwise with respect to any ownership or equity interest or security
in or of the Issuer, (ii) redeem, purchase, retire or otherwise acquire for
value any such ownership or equity interest or security or (iii) set aside or
otherwise segregate any amounts for any such purpose; provided, however, that
the Issuer may make, or cause to be made, (w) distributions to the Owner Trustee
and the Certificateholders as contemplated by, and to the extent funds are
available for such purpose under the Trust Agreement and the Sale and Servicing
Agreement, (x) payment to the Servicer pursuant to the terms of the Sale and
Servicing Agreement and (y) payments to the Indenture Trustee pursuant to
Section 5.2 of the Sale and Servicing Agreement and (z) payments to the
Indenture Trustee for deposit in the Reserve Account as provided in Section 5.7
of the Sale and Servicing Agreement. The Issuer will not, directly or
indirectly, make payments to or distributions from the Trustee Collection
Account except in accordance with this Indenture and the other Basic Documents.
Section 3.27. Notice of Events of Default. Upon Actual Knowledge thereof, the
----------------------------
Issuer shall give the Indenture Trustee, the Note Insurer and the Rating
Agencies prompt written notice of each Event of Default hereunder and under the
Sale and Servicing Agreement and the Trust Agreement.
Section 3.28. Further Instruments and Acts. Upon request of the Indenture
-------------------------------
Trustee or the Note Insurer, the Issuer will execute and deliver such further
instruments and do such further acts as may be reasonably necessary or proper to
carry out more effectively the purpose of this Indenture.
Section 3.29. Statements to Noteholders. The Indenture Trustee shall forward
--------------------------
by mail to each Noteholder and the Note Insurer the statement prepared by it
pursuant to Section 5.4(a) of the Sale and Servicing Agreement and the statement
delivered to it pursuant to Section 5.4(b) of the Sale and Servicing Agreement.
Section 3.30. [Reserved].
Section 3.31. Determination of Note Rate. Until the Class Principal Balance of
--------------------------
the Notes has been reduced to zero, the Indenture Trustee shall determine LIBOR
and the Note Rate for each Accrual Period as provided in the Sale and Servicing
Agreement.
Section 3.32. Payments under the Note Insurance Policy. The Indenture Trustee
----------------------------------------
on behalf of the Noteholders shall make a draw on the Note Insurance Policy, as
provided in Section 5.02(c) of the Sale and Servicing Agreement.
Section 3.33. Payment Under the Swap Agreements: The Indenture Trustee on
-------------------------------------
behalf of the Noteholders, the Note Insurer and the Certificateholders shall
verify with the Swap Counterparty that the amounts to be paid and the amounts
being received under the Swap Agreements are correct.
Section 3.34. Exercise of Rights as Registered Holder of Pooled Certificates.
---------------------------------------------------------------
If at any time the Indenture Trustee, as the registered holder of the Pooled
Certificates, is asked to exercise a right to vote inherent in any Pooled
Certificate or to take any action or give any consent, approval or waiver with
respect to such Pooled Certificate or the related agreement, the Indenture
Trustee shall, subject to the rights of the Note Insurer as conferred under
Section 11.07 hereof, promptly notify all of the Noteholders of such request in
writing, requesting direction from such Noteholders as to the course of action
the Indenture Trustee should take. The Indenture Trustee shall furnish copies
to the Holders of any request or other notice requiring action by, and received
by the Indenture Trustee as, registered holder of any Pooled Certificate, and
shall act in accordance with the written directions of Holders of the Notes
evidencing a majority of the Class Principal Balances of the Notes. In the
absence of such directions, the Indenture Trustee may, but shall have no
obligation to, take such action as it may determine in its absolute discretion.
Except as so provided, the Indenture Trustee shall have no responsibility to
monitor or regulate on behalf of the Holders the exercise by any Person of its
rights under the trust agreement relating to the Pooled Certificates, including
any right to amend or terminate such trust agreement, nor any responsibility to
monitor or regulate the liquidation of mortgage loans or other collateral
pursuant to such trust agreement.
ARTICLE IV
The Notes; Satisfaction and Discharge of Indenture
Section 4.01. The Notes. The Notes shall be registered in the name of the
----------
Noteholders. The Notes shall, on original issue, be executed on behalf of the
Issuer by the Owner Trustee, not in its individual capacity but solely as Owner
Trustee, authenticated by the Note Registrar and delivered by the Indenture
Trustee to or upon the order of the Issuer.
Section 4.02. Registration of and Limitations on Transfer and Exchange of
-----------------------------------------------------------
Notes; Appointment of Note Registrar. The Issuer shall cause to be kept a
- ----------------------------------------
register (the "Note Register") in which, subject to such reasonable regulations
as it may prescribe, the Issuer shall provide for the registration of Notes and
the registration of transfers of Notes. The Indenture Trustee shall be "Note
Registrar" for the purpose of registering Notes and transfers of Notes as herein
provided. Upon any resignation of any Note Registrar, the Issuer shall promptly
appoint a successor or, if it elects not to make such an appointment, assume the
duties of Note Registrar.
If a Person other than the Indenture Trustee is appointed by the Issuer as
Note Registrar, the Issuer will give the Indenture Trustee prompt written notice
of the appointment of such Note Registrar and of the location, and any change in
the location, of the Note Register, and the Indenture Trustee shall have the
right to inspect the Note Register at all reasonable times and to obtain copies
thereof, and the Indenture Trustee shall have the right to rely upon a
certificate executed on behalf of the Note Registrar by an Authorized Officer
thereof as to the names and addresses of the Noteholders and the principal
amounts and number of such Notes.
Subject to the restrictions and limitations set forth below, upon surrender for
registration of transfer of any Note at the Corporate Trust Office of the
Indenture Trustee, the Indenture Trustee shall make provision to obtain the
signature of the Owner Trustee on such Note, which may be in facsimile or
photostatic reproduction form, and the Note Registrar shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Notes in authorized denominations evidencing the same aggregate principal
amount.
Subject to the foregoing, at the option of the Noteholders, Notes may be
exchanged for other Notes of like tenor or, in each case in authorized
denominations evidencing the same aggregate principal amount upon surrender of
the Notes to be exchanged at the Corporate Trust Office of the Note Registrar.
Whenever any Notes are so surrendered for exchange, the Indenture Trustee shall
execute and the Note Registrar shall authenticate and deliver the Notes which
the Noteholder making the exchange is entitled to receive. Every Note presented
or surrendered for registration of transfer or exchange shall be duly endorsed
by, or be accompanied by a written instrument of transfer in form satisfactory
to the Indenture Trustee duly executed by the Noteholder thereof or such
Noteholder's attorney duly authorized in writing, with such signature guaranteed
by an "eligible guarantor institution" meeting the requirements of the Note
Registrar, which requirements include membership or participation in Securities
Transfer Agent's Medallion Program ("STAMP") or such other "signature guarantee
program" as may be determined by the Note Registrar in addition to, or in
substitution for, STAMP, all in accordance with the Exchange Act.
No service charge shall be made for any registration of transfer or exchange of
Notes, but the Note Registrar shall require payment of a sum sufficient to cover
any tax or governmental charge that may be imposed in connection with any
registration of transfer or exchange of Notes.
All Notes surrendered for registration of transfer and exchange shall be
cancelled by the Note Registrar and delivered to the Indenture Trustee for
subsequent destruction without liability on the part of either.
Each transferee of a Note shall be required to represent that it is not an
employee benefit plan, retirement arrangement, individual retirement account or
Keogh plan subject to either Title I of the Employee Retirement Income Security
Act of 1974, as amended, or Section 4975 of the Internal Revenue Code of 1986,
as amended, or an entity (including insurance company general accounts ) whose
underlying assets include plan assets by reason of the investment by any such
plan, arrangement or account in such entity, unless the proposed transferee
provides a representation to the Indenture Trustee and the Issuer, which
representation shall be in form and substance satisfactory to the Issuer, to the
effect that an individual or class prohibited transaction exemption including
but not limited to Department of Labor Prohibited Transaction Exemption ("PTE")
84-14 (Class Exemption for Plan Asset Transactions Determined by Independent
Qualified Professional Asset Managers); PTE 91-38 (Class Exemption for Certain
Transactions Involving Bank Collective Investment Funds); PTE 90-1 (Class
Exemption for Certain Transactions Involving Insurance Company Pooled Separate
Accounts), PTE 95-60 (Class Exemption for Certain Transactions Involving
Insurance Company General Accounts), and PTCE 96-23 (Class Exemption for Plan
Asset Transactions Determined by In-House Asset Managers) will apply to the
proposed transfer and/or holding of a Note. The Indenture Trustee shall be
entitled to conclusively rely on any such certificate provided to it. Each Note
shall bear the legend referring to the foregoing restrictions contained in
Section 4.07(b).
Section 4.03. Mutilated, Destroyed, Lost or Stolen Notes. If (i) any mutilated
------------------------------------------
Note is surrendered to the Indenture Trustee, or the Indenture Trustee receives
evidence to its satisfaction of the destruction, loss or theft of any Note, and
(ii) there is delivered to the Indenture Trustee such security or indemnity as
may be required by it to hold the Issuer and the Indenture Trustee harmless,
then, in the absence of notice to the Issuer, the Note Registrar or the
Indenture Trustee that such Note has been acquired by a bona fide purchaser, the
Owner Trustee shall execute, and upon its request the Indenture Trustee shall
authenticate and deliver, in exchange for or in lieu of any such mutilated,
destroyed, lost or stolen Note, a replacement Note; provided, however, that if
any such destroyed, lost or stolen Note, but not a mutilated Note, shall have
become or within seven days shall be due and payable, or shall have been called
for purchase or redemption, instead of issuing a replacement Note, the Issuer
may pay such destroyed, lost or stolen Note when so due or payable without
surrender thereof. If, after the delivery of such replacement Note or payment
of a destroyed, lost or stolen Note pursuant to the proviso to the preceding
sentence, a bona fide purchaser of the original Note in lieu of which such
replacement Note was issued presents for payment such original Note, the Issuer
and the Indenture Trustee shall be entitled to recover such replacement Note (or
such payment) from the Person to whom it was delivered or any Person taking such
replacement Note from such Person to whom such replacement Note was delivered or
any assignee of such Person, except a bona fide purchaser, and shall be entitled
to recover upon the security or indemnity provided therefor to the extent of any
loss, damage, cost or expense incurred by the Issuer or the Indenture Trustee in
connection therewith.
Upon the issuance of any replacement Note under this Section 4.03, the Issuer
may require the payment by the Holder of such Note of a sum sufficient to cover
any tax or other governmental charge that may be imposed in relation thereto and
any other reasonable expenses (including the fees and expenses of the Indenture
Trustee) connected therewith.
Every replacement Note issued pursuant to this Section 4.03 in replacement of
any mutilated, destroyed, lost or stolen Note shall constitute an original
additional contractual obligation of the Issuer, whether or not the mutilated,
destroyed, lost or stolen Note shall be at any time enforceable by anyone, and
shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Notes duly issued hereunder.
The provisions of this Section 4.03 are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes.
Section 4.04. Persons Deemed Owners. Prior to due presentment for registration
---------------------
of transfer of any Note, the Issuer, the Indenture Trustee, the Note Insurer and
any agent of the Issuer, the Note Insurer or the Indenture Trustee may treat the
Person in whose name any Note is registered on the Note Register (as of the day
of determination) as the owner of such Note for the purpose of receiving
payments of principal of and interest, if any, on such Note and for all other
purposes whatsoever, whether or not such Note be overdue, and neither the
Issuer, the Note Insurer, the Indenture Trustee nor any agent of the Issuer, the
Note Insurer or the Indenture Trustee shall be affected by notice to the
contrary.
Section 4.05. Cancellation. All Notes surrendered for payment, registration of
------------
transfer, exchange, purchase or redemption shall, if surrendered to any Person
other than the Indenture Trustee, be delivered to the Indenture Trustee and
shall be promptly cancelled by the Indenture Trustee. The Issuer may at any
time deliver to the Indenture Trustee for cancellation any Notes previously
authenticated and delivered hereunder which the Issuer may have acquired in any
manner whatsoever, and all Notes so delivered shall be promptly cancelled by the
Indenture Trustee. No Notes shall be authenticated in lieu of or in exchange
for any Notes cancelled as provided in this Section 4.05, except as expressly
permitted by this Indenture. All cancelled Notes may be held or disposed of by
the Indenture Trustee in accordance with its standard retention or disposal
policy as in effect at the time unless the Issuer shall direct by an Issuer
Request that they be destroyed or returned to it; provided, that such Issuer
Request is timely and the Notes have not been previously disposed of by the
Indenture Trustee.
Section 4.06. Release of Collateral. The Indenture Trustee shall release
---------------------
property from the lien of this Indenture only (i) upon receipt of an Issuer
Request accompanied by an Officer's Certificate of the Issuer and (ii) in
connection with the exercise of either the Certificateholder Collateral Purchase
Option or the Bear Stearns Collateral Purchase Option, as provided in Section
10.01(a) and (b) hereof.
Section 4.07. Restrictions on Transfer. (a) The Notes may not be offered or
-------------------------
sold except to "Qualified Institutional Buyers" (as defined in Rule 144A under
the Securities Act) or institutional "accredited investors" as defined in Rule
501(a)(1)-(3) or (7) under the Securities Act or any entity in which all of the
equity owners come within such paragraphs. Further, for purposes of the
Investment Company Act of 1940, as amended, the total number of beneficial
owners of Notes may not exceed 97.
The Notes will not have been registered or qualified under the Securities
Act, or any state securities law. No transfer, sale, pledge or other
disposition of any Note shall be made unless such disposition is made pursuant
to an effective registration statement under the Securities Act and effective
registration or qualification under applicable state securities laws, or is made
in a transaction which does not require such registration or qualification. In
the event that a transfer is to be made in reliance upon an exemption from the
Securities Act, the Indenture Trustee, the Issuer and the Note Insurer may
require that the Noteholders' prospective transferee certify to the Indenture
Trustee, the Issuer and the Note Insurer in writing the facts surrounding such
disposition. Unless the Indenture Trustee or the Note Insurer requests
otherwise, such certification shall be substantially in the form of Exhibit E or
Exhibit F hereto. In the event that such certification of facts does not on its
face establish the availability of an exemption under the Securities Act, the
Indenture Trustee, the Issuer and the Note Insurer, as applicable, may require
an opinion of counsel satisfactory to it that such transfer may be made pursuant
to an exemption from the Securities Act, which opinion of counsel shall not be
an expense of the Indenture Trustee or of the Trust.
(b) Each Note will bear legends substantially to the following effect:
"THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE AGREES FOR
THE BENEFIT OF THE TRUST THAT THIS NOTE MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY TO A PERSON WHOM THE TRANSFEROR REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE
IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, OR TO AN INSTITUTIONAL ACCREDITED INVESTOR TO WHOM NOTICE IS GIVEN
THAT THE RESALE, PLEDGE OR TRANSFER IS BEING MADE IN RELIANCE ON REGULATION D,
AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR OTHER JURISDICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS NOTE
REPRESENTS AND AGREES FOR THE BENEFIT OF THE TRUST, THE DEPOSITOR, THE SERVICER,
THE INDENTURE TRUSTEE, THE NOTE INSURER, THE OWNER TRUSTEE AND THE INITIAL
PURCHASERS THAT IT IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE
144A OR AN INSTITUTIONAL ACCREDITED INVESTOR (AS DEFINED IN RULE 501(A)(1)-(3)
AND (7) OF REGULATION D UNDER THE SECURITIES ACT) OR AN ENTITY IN WHICH ALL THE
EQUITY OWNERS COME WITHIN SUCH PARAGRAPHS AND THAT IT IS HOLDING THIS NOTE FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION."
"THE HOLDER OF THIS NOTE FURTHER UNDERSTANDS AND AGREES THAT THE NUMBER OF
BENEFICIAL OWNERS OF ALL NOTES MAY NOT EXCEED 97 IN NUMBER; THAT TRANSFERS OF
THE NOTES WILL BE RESTRICTED ACCORDINGLY; AND THAT THE HOLDER HEREOF WILL NOTIFY
THE INDENTURE TRUSTEE IF THE NUMBER OF BENEFICIAL OWNERS OF THIS NOTE WILL
CHANGE AS PROVIDED HEREIN AND IN THE INDENTURE."
"THIS NOTE MAY NOT BE ACQUIRED DIRECTLY OR INDIRECTLY BY A TRANSFEREE UNLESS THE
PROPOSED TRANSFEREE REPRESENTS TO THE TRUST AND THE INDENTURE TRUSTEE, IN FORM
AND SUBSTANCE SATISFACTORY TO THE TRUST AND THE INDENTURE TRUSTEE, THAT IT
EITHER: (I) IS NOT, AND IS NOT PURCHASING A NOTE, DIRECTLY OR INDIRECTLY, FOR,
ON BEHALF OF OR WITH THE ASSETS OF, AN EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT
ARRANGEMENT WHICH IS SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED ("ERISA") OR SECTION 4975 OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), OR (II) PTCE 95-60, PTCE 96-23,
PTCE 91-38, PTCE 90-1, PTCE 84-14 OR SOME OTHER PROHIBITED TRANSACTION EXEMPTION
IS APPLICABLE TO THE PURCHASE AND HOLDING OF A NOTE BY THE TRANSFEREE."
Section 4.08. Limitation on Beneficial Owners. The Indenture Trustee shall
----------------------------------
monitor the number of beneficial owners of all Notes, as represented to the
Indenture Trustee in the related purchaser representation letters, and shall not
permit the transfer of any Note if the effect of such transfer is to cause the
total number of beneficial owners of Notes to exceed 97. Any transfer of Notes
that causes the total number of beneficial owners of Notes to exceed 97 is
hereby deemed to be null and void and the Indenture Trustee shall amend the Note
Register to reflect such voided transfer; provided, however, that in the event
(i) all of the Purchase Options are no longer outstanding and (ii) an opinion of
counsel, acceptable to the Depositor, the Indenture Trustee, the Note Insurer
and the Owner Trustee, is provided to the Depositor, the Indenture Trustee, the
Note Insurer and the Owner Trustee at the sole cost and expense of the provider,
to the effect that for purposes of the Investment Company Act of 1940, as
amended, the total number of beneficial owners of all Notes and Certificates may
exceed 100 holders, then the total number of beneficial owners of the Notes may
exceed 97 and the related restrictive legend may be removed from the Notes.
Section 4.09. [Reserved].
---------
Section 4.10. Payment of Principal and Interest; Defaulted Interest. (a)
-----------------------------------------------------
The Notes shall accrue interest during each Accrual Period on the basis of the
actual number of days in such Accrual Period and a year assumed to consist of
360 days. Any installment of interest or principal, if any, payable on any Note
which is punctually paid or duly provided for by the Issuer on the applicable
Payment Date shall be paid to the Person in whose name such Note is registered
on the Record Date, by check mailed first-class, postage prepaid, to such
Person's address as it appears on the Note Register on such Record Date, or upon
written receipt from a Noteholder which holds Notes with an aggregate initial
principal balance of $1,000,000 or more, payment may be made by wire transfer in
immediately available funds to the account designated by such Noteholder and
except for the final installment of principal payable with respect to such Note
on a Payment Date or on the Maturity Date (and except for the Final Payment
Amount for any Note purchased or called for redemption pursuant to Section
10.01) which shall be payable as provided below. The funds represented by any
such checks returned undelivered shall be held in accordance with Section 3.03.
(b) The principal of each Note shall be payable in installments on each
Payment Date as provided in the form of the Note set forth in Exhibit A and in
Section 5.2 of the Sale and Servicing Agreement. Notwithstanding the foregoing,
the entire unpaid principal amount of the Notes shall be due and payable, if not
previously paid, on the date on which an Event of Default shall have occurred
and be continuing, if the Indenture Trustee with the consent of the Note
Insurer, or the Holders of the Notes representing not less than a majority of
the Class Principal Balance of the Notes with the consent of the Note Insurer,
have declared the Notes to be immediately due and payable in the manner provided
in Section 5.02. All principal payments on the Notes shall be made pro rata to
the Noteholders. Except as provided in Section 10.02, the Indenture Trustee
shall notify the Person in whose name a Note is registered at the close of
business on the Record Date preceding the Payment Date on which the Issuer
expects that the final installment of principal of and interest on such Note
will be paid. Such notice shall be mailed or transmitted by facsimile prior to
such final Payment Date and shall specify that such final installment will be
payable only upon presentation and surrender of such Note and shall specify the
place where such Note may be presented and surrendered for payment of such
installment. Notices in connection with a purchase or a redemption of the Notes
as a result of the exercise of a Purchase Option shall be mailed to Noteholders
as provided in Section 10.2.
Section 4.11. Tax Treatment. The Issuer has entered into this Indenture, and
--------------
the Notes will be issued, with the intention that, for federal, state and local
income, single business and franchise tax purposes, the Notes will qualify as
indebtedness of the Issuer. The Issuer, by entering into this Indenture, and
each Noteholder, by its acceptance of its Note, agrees to treat the Notes for
federal, state and local income, single business and franchise tax purposes as
indebtedness of the Issuer.
Section 4.12. Satisfaction and Discharge of Indenture. This Indenture shall
-----------------------------------------
cease to be of further effect with respect to the Notes except as to (i) rights
of registration of transfer and exchange, (ii) substitution of mutilated,
destroyed, lost or stolen Notes, (iii) rights of Noteholders to receive payments
of principal thereof and interest thereon, (iv) Sections 3.03, 3.04, 3.06, 3.10,
3.19, 3.21, 3.22, 4.11, 11.16 and 11.17, (v) the rights, obligations and
immunities of the Indenture Trustee hereunder (including the rights of the
Indenture Trustee under Section 6.07 and the obligations of the Indenture
Trustee under Section 4.13) and (vi) the rights of Noteholders as beneficiaries
hereof with respect to the property so deposited with the Indenture Trustee
payable to all or any of them, and the Indenture Trustee, on demand of and at
the expense of the Issuer, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture with respect to the Notes, when:
(A) either
(1) all Notes theretofore authenticated and delivered (other than
(i) Notes that have been destroyed, lost or stolen and that have been replaced
or paid as provided in Section 4.03 and (ii) Notes for whose payment money has
theretofore been deposited in trust or segregated and held in trust by the
Issuer and thereafter repaid to the Issuer or discharged from such trust, as
provided in Section 3.03) have been delivered to the Indenture Trustee for
cancellation; or
(2) all Notes not theretofore delivered to the Indenture Trustee
for cancellation
a. have become due and payable, or
b. will become due and payable at the Maturity Date within one year,
and the Issuer, in the case of a. or b. above, has irrevocably deposited or
caused to be irrevocably deposited with the Indenture Trustee cash or direct
obligations of or obligations guaranteed by the United States of America (which
will mature prior to the date such amounts are payable), in trust for such
purpose, in an amount sufficient to pay and discharge the entire indebtedness on
such Notes then outstanding not theretofore delivered to the Indenture Trustee
for cancellation when due on the applicable Maturity Date;
(B) the Issuer has paid or caused to be paid all other sums payable
hereunder and under the Insurance Agreement by the Issuer; and
(C) the Issuer has delivered to the Indenture Trustee and the Note
Insurer an Officer's Certificate and an opinion of counsel, each meeting the
applicable requirements of Section 11.01 and, subject to Section 11.01 each
stating that all conditions precedent herein provided for relating to the
satisfaction and discharge of this Indenture have been complied with and, if the
opinion of counsel relates to a deposit made in connection with Section
4.12(A)(2)b. above, such opinion shall further be to the effect that such
deposit will not have any material adverse tax consequences to the Issuer, any
Noteholders or any Certificateholders.
Section 4.13. Application of Trust Money. All moneys deposited with the
-----------------------------
Indenture Trustee pursuant to Section 4.12 hereof shall be held in trust and
applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent, as the
Indenture Trustee may determine, to the Holders of Notes for the payment,
purchase or redemption of which such moneys have been deposited with the
Indenture Trustee, of all sums due and to become due thereon for principal and
interest; but such moneys need not be segregated from other funds except to the
extent required herein or in the Sale and Servicing Agreement or required by
law.
Section 4.14. Subrogation and Cooperation. (a) The Issuer and the Indenture
----------------------------
Trustee acknowledge that (i) to the extent the Note Insurer makes payments under
the Note Insurance Policy on account of principal of or interest on the Notes,
or under the Swap Insurance Policy on account of amounts due the Swap
Counterparty, the Note Insurer will be fully subrogated to the rights of such
Holders or the Swap Counterparty, as applicable, to receive such principal and
interest or amounts otherwise due the Swap Counterparty from the Issuer, and
(ii) the Note Insurer shall be paid such principal and interest and such other
amounts but only from the sources and in the manner provided herein and in the
Sale and Servicing Agreement and the Insurance Agreement for the payment of such
principal and interest.
The Indenture Trustee shall cooperate in all respects with any reasonable
request by the Note Insurer for action to preserve or enforce the Note Insurer's
rights or interest under this Indenture, the Sale and Servicing Agreement or the
Insurance Agreement without limiting the rights of the Noteholders as otherwise
set forth in the Indenture, including, without limitation, upon the occurrence
and continuance of a default under the Insurance Agreement, a request to take
any one or more of the following actions:
(i) institute Proceedings for the collection of all amounts then
payable on the Notes, or under this Indenture in respect to the Notes and all
amounts payable under the Insurance Agreement and to enforce any judgment
obtained and collect from the Issuer moneys adjudged due;
(ii) sell the Trust Estate or any portion thereof or rights or interest
therein, at one or more public or private Sales (as defined in Section 5.15
hereof) called and conducted in any manner permitted by law;
(iii) file or record all Assignments of Mortgages that have not
previously been recorded;
(iv) institute Proceedings from time to time for the complete or partial
foreclosure of this Indenture; and
(v) exercise any remedies of a secured party under the UCC and take any
other appropriate action to protect and enforce the rights and remedies of the
Note Insurer hereunder.
Section 4.15. Repayment of Moneys Held by Paying Agent. In connection with the
----------------------------------------
satisfaction and discharge of this Indenture with respect to the Notes, all
moneys then held by any Paying Agent other than the Indenture Trustee under the
provisions of this Indenture with respect to such Notes shall, upon demand of
the Issuer, be paid to the Indenture Trustee to be held and applied according to
Section 3.05 and thereupon such Paying Agent shall be released from all further
liability with respect to such moneys.
ARTICLE V
Remedies
Section 5.01. Events of Default. "Event of Default," wherever used herein,
-------------------
shall have the meaning provided in Appendix A; provided, however, that
Noteholders shall have no remedies for an Event of Default under clause (i) or
clause (ii) of the definition of "Event of Default" if the Issuer fails to make
payments of principal of and interest on the Notes so long as the Note Insurer
makes payments sufficient with respect thereto under the Note Insurance Policy.
The Issuer shall deliver to the Indenture Trustee and the Note Insurer, within
five days after having Actual Knowledge of the occurrence of an Event of
Default, written notice in the form of an Officer's Certificate of any event
which with the giving of notice and the lapse of time would become an Event of
Default under clause (iii) of the definition of "Event of Default," its status
and what action the Issuer is taking or proposes to take with respect thereto.
Section 5.02. Acceleration of Maturity; Rescission and Annulment. If an Event
--------------------------------------------------
of Default should occur and be continuing, then and in every such case (i) the
Indenture Trustee with the consent of the Note Insurer, (ii) the Note Insurer,
or (iii) the Holders of the Notes, representing not less than a majority of the
Class Principal Balance of all Notes with the consent of the Note Insurer, may
declare the Notes to be immediately due and payable, by a notice in writing to
the Issuer (and to the Indenture Trustee if given by Noteholders), and upon any
such declaration the unpaid principal amount of such Notes, together with
accrued and unpaid interest thereon through the date of acceleration, shall
become immediately due and payable.
At any time after such declaration of acceleration of maturity has been made and
before a judgment or decree for payment of the money due has been obtained by
the Indenture Trustee as hereinafter in this Article V provided, the Holders of
the Notes representing a majority of the Class Principal Balance of the Notes,
by written notice to the Issuer and the Indenture Trustee, may rescind and annul
such declaration and its consequences if:
(A) the Issuer has paid or deposited with the Indenture Trustee a sum
sufficient to pay:
(i) all payments of principal of and interest on the Notes and all
other amounts that would then be due hereunder or upon the Notes if the Event of
Default giving rise to such acceleration had not occurred; and
(ii) all sums paid or advanced by the Indenture Trustee hereunder and
the reasonable compensation, expenses, disbursements and advances of the
Indenture Trustee and its agents and counsel; and
(B) all Events of Default, other than the nonpayment of the principal
of the Notes that has become due solely by such acceleration, have been cured or
waived as provided in Section 5.12.
No such rescission shall affect any subsequent default or impair any right
consequent thereto.
Section 5.03. Collection of Indebtedness and Suits for Enforcement by
--------------------------------------------------------------
Indenture Trustee. (a) The Issuer covenants that if (i) default is made in the
- -----------------
payment of any interest on any Note when the same becomes due and payable, and
such default continues for a period of five days, or (ii) default is made in the
payment of the principal of or any installment of the principal of any Note when
the same becomes due and payable, the Issuer will, upon demand of the Indenture
Trustee, pay to it, for the benefit of the Holders of the Notes and of the Note
Insurer, the whole amount then due and payable on the Notes for principal and
interest, with interest upon the overdue principal, and in addition thereto such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Indenture Trustee and its agents and counsel.
(b) In case the Issuer shall fail forthwith to pay such amounts upon
such demand, the Indenture Trustee, in its own name and as trustee of an express
trust, subject to the provisions of Section 11.17 hereof may institute a
Proceeding for the collection of the sums so due and unpaid, and may prosecute
such Proceeding to judgment or final decree, and may enforce the same against
the Issuer or other obligor upon the Notes and collect in the manner provided by
law out of the Trust Estate, wherever situated, the moneys adjudged or decreed
to be payable.
(c) If an Event of Default occurs and is continuing, the Indenture
Trustee subject to the provisions of Section 11.17 hereof may, as more
particularly provided in Section 5.04, in its discretion, and shall, as directed
by the Note Insurer or the Noteholders representing not less than a majority of
the Class Principal Balance of all the Notes, proceed to protect and enforce its
rights and the rights of the Noteholders and the Note Insurer, by such
appropriate Proceedings as the Indenture Trustee shall deem most effective, or
as so directed, to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy or
legal or equitable right vested in the Indenture Trustee by this Indenture or by
law.
(d) In case there shall be pending, relative to the Issuer or any other
obligor upon the Notes or any Person having or claiming an ownership interest in
the Trust Estate (if such Person is an Affiliate of the Issuer), Proceedings
under Title 11 of the United States Code or any other applicable Federal or
state bankruptcy, insolvency or other similar law, or in case a receiver,
assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or
similar official shall have been appointed for or taken possession of the Issuer
or its property or such other obligor or Person, or in case of any other
comparable judicial Proceedings relative to the Issuer or other obligor upon the
Notes, or to the creditors or property of the Issuer or such other obligor, the
Indenture Trustee, irrespective of whether the principal of any Notes shall then
be due and payable as therein expressed or by declaration or otherwise and
irrespective of whether the Indenture Trustee shall have made any demand
pursuant to the provisions of this Section, shall be entitled and empowered, by
intervention in such Proceedings or otherwise:
(i) to file and prove a claim or claims for the whole amount of
principal and interest owing and unpaid in respect of the Notes and to file such
other papers or documents as may be necessary or advisable in order to have the
claims of the Indenture Trustee (including any claim for reasonable compensation
to the Indenture Trustee and each predecessor Indenture Trustee, and their
respective agents, attorneys and counsel, and for reimbursement of all expenses
and liabilities incurred, and all advances made, by the Indenture Trustee and
each predecessor Indenture Trustee, except as a result of negligence or bad
faith) and of the Noteholders allowed in such Proceedings;
(ii) unless prohibited by applicable law and regulations, to vote on
behalf of the Noteholders in any election of a trustee, a standby trustee or
Person performing similar functions in any such Proceedings;
(iii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute all amounts received with
respect to the claims of the Noteholders and of the Indenture Trustee on their
behalf; and
(iv) to file such proofs of claim and other papers or documents as may
be necessary or advisable in order to have the claims of the Indenture Trustee
or the Noteholders allowed in any judicial proceedings relative to the Issuer,
its creditors and its property;
and any trustee, receiver, liquidator, custodian or other similar official in
any such Proceeding is hereby authorized by each of such Noteholders to make
payments to the Indenture Trustee, and, in the event that the Indenture Trustee
shall consent to the making of payments directly to such Noteholders, to pay to
the Indenture Trustee such amounts as shall be sufficient to cover reasonable
compensation to the Indenture Trustee, each predecessor Indenture Trustee and
their respective agents, attorneys and counsel, and all other expenses and
liabilities incurred, and all advances made, by the Indenture Trustee and each
predecessor Indenture Trustee except as a result of negligence or bad faith.
(e) Nothing herein contained shall be deemed to authorize the Indenture
Trustee to authorize or consent to or vote for or accept or adopt on behalf of
any Noteholder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Noteholder thereof or to
authorize the Indenture Trustee to vote in respect of the claim of any
Noteholder in any such proceeding except, as aforesaid, to vote for the election
of a trustee in bankruptcy or similar Person.
(f) All rights of action and of asserting claims under this Indenture,
or under any of the Notes, may be enforced by the Indenture Trustee without the
possession of any of the Notes or the production thereof in any trial or other
Proceedings relative thereto, and any such action or Proceedings instituted by
the Indenture Trustee shall be brought in its own name as trustee of an express
trust, and any recovery of judgment, subject to the payment of the expenses,
disbursements and compensation of the Indenture Trustee, each predecessor
Indenture Trustee and their respective agents and attorneys, shall be for the
ratable benefit of the Noteholders.
(g) In any Proceedings brought by the Indenture Trustee (and also any
Proceedings involving the interpretation of any provision of this Indenture to
which the Indenture Trustee shall be a party), the Indenture Trustee shall be
held to represent all the Noteholders, and it shall not be necessary to make any
Noteholder a party to any such Proceedings.
Section 5.04. Remedies; Priorities. (a) If an Event of Default shall have
---------------------
occurred and be continuing, the Indenture Trustee subject to the provisions of
Section 11.17 hereof may do one or more of the following (subject to Section
5.05):
(i) institute Proceedings in its own name and as trustee of an express
trust for the collection of all amounts then payable on the Notes or under this
Indenture with respect thereto, whether by declaration or otherwise, and all
amounts payable under the Insurance Agreement or the Sale and Servicing
Agreement, enforce any judgment obtained, and collect from the Issuer and any
other obligor upon such Notes moneys adjudged due;
(ii) institute Proceedings from time to time for the complete or partial
foreclosure of this Indenture with respect to the Trust Estate;
(iii) exercise any remedies of a secured party under the UCC and take any
other appropriate action to protect and enforce the rights and remedies of the
Indenture Trustee, the Noteholders and the Note Insurer; and
(iv) sell the Trust Estate or any portion thereof or rights or interest
therein, at one or more public or private Sales called and conducted in any
manner permitted by law;
provided, however, that the Indenture Trustee may not sell or otherwise
liquidate the Trust Estate following an Event of Default, other than a default
in the payment of any principal or interest on the Notes for thirty (30) days or
more, unless (A) the Holders of 100% of the Class Principal Balance of the Notes
and the Note Insurer consent thereto, which consent will not be unreasonably
withheld, (B) the proceeds of such sale or liquidation distributable to the
Noteholders are sufficient to discharge in full all amounts then due and unpaid
upon the Notes for principal and interest including any LIBOR Interest Carryover
Amounts or (C) the Indenture Trustee determines that the Collateral will not
continue to provide sufficient funds for the payment of principal of and
interest on the Notes, as they would have become due if the Notes had not been
declared due and payable, and the Indenture Trustee obtains the consent of the
Note Insurer, which consent will not be unreasonably withheld, and of the
Holders of not less than 66-2/3% of the Class Principal Balance of the Notes.
In determining such sufficiency or insufficiency with respect to clause (B) and
(C), the Indenture Trustee may, but need not, obtain and rely upon an opinion of
an Independent investment banking or accounting firm of national reputation as
to the feasibility of such proposed action and as to the sufficiency of the
Trust Estate for such purpose. Notwithstanding the foregoing, so long as a
Servicer Termination Event has not occurred, any Sale (as defined in Section
5.15) of the Trust Estate shall be made subject to the continued servicing of
the Mortgage Loans by the Servicer as provided in the Sale and Servicing
Agreement.
(b) If the Indenture Trustee collects any money or property pursuant to this
Article V, it shall pay out the money or property in the following order:
FIRST: to the Indenture Trustee for amounts due under Section 6.07;
SECOND: to (i) the Swap Counterparty for all amounts due under the Swap
Agreement, and (ii) Noteholders, pari passu, for amounts due and unpaid on the
Notes for interest, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Notes for interest (excluding
all existing LIBOR Interest Carryover Amounts) and amounts due to the Swap
Counterparty under the Swap Agreements, respectively;
THIRD: to Noteholders for amounts due and unpaid on the Notes for principal,
ratably, without preference or priority of any kind, according to the amounts
due and payable on the Notes for principal;
FOURTH: to the payment of all amounts due and owing to the Note Insurer;
FIFTH: to the Noteholders for all existing LIBOR Interest Carryover Amounts;
SIXTH: to the Issuer for amounts due to the Owner Trustee under Section 8.01
of the Trust Agreement (or to reimburse the Sponsor for amounts paid to the
Owner Trustee pursuant to Section 8.02 of the Trust Agreement); and
SEVENTH: to the Issuer for amounts required to be distributed to the
Certificateholders.
The Indenture Trustee may fix a record date and payment date for any payment to
Noteholders pursuant to this Section 5.04. At least 15 days before the Record
Date with respect to payments under this Section 5.04, the Issuer shall mail to
each Noteholder and the Indenture Trustee a notice that states the record date,
the payment date and the amount to be paid.
Section 5.05. Optional Preservation of the Trust Estate. If the Notes have
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been declared to be due and payable under Section 5.02 following an Event of
Default and such declaration and its consequences have not been rescinded and
annulled, the Indenture Trustee may, but need not, elect to maintain possession
of the Trust Estate. It is the desire of the parties hereto and the Noteholders
that there be at all times sufficient funds for the payment of principal of and
interest on the Notes and other obligations of the Issuer including payment to
the Note Insurer, and the Indenture Trustee shall take such desire into account
when determining whether or not to maintain possession of the Trust Estate. In
determining whether to maintain possession of the Trust Estate, the Indenture
Trustee may, but need not, obtain and rely upon an opinion of an Independent
investment banking or accounting firm of national reputation as to the
feasibility of such proposed action and as to the sufficiency of the Trust
Estate for such purpose.
Section 5.06. Limitation of Suits. No Holder of any Note shall have any
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right to institute any Proceeding, judicial or otherwise, with respect to this
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless and subject to the provisions of Section 11.17 hereof:
(i) such Holder has previously given written notice to the Indenture
Trustee of a continuing Event of Default;
(ii) the Holders of not less than 25% of the Class Principal Balance of
the Notes have made written request to the Indenture Trustee to institute such
Proceeding in respect of such Event of Default in its own name as Indenture
Trustee hereunder;
(iii) such Holder or Holders have offered to the Indenture Trustee
reasonable indemnity against the costs, expenses and liabilities to be incurred
in complying with such request;
(iv) the Indenture Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute such Proceedings; and
(v) no direction inconsistent with such written request has been given
to the Indenture Trustee during such 60-day period by the Holders of a majority
of the Class Principal Balance of the Notes.
It is understood and intended that no one or more Holders of Notes shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other
Holders of Notes or to obtain or to seek to obtain priority or preference over
any other Holders or to enforce any right under this Indenture, except in the
manner herein provided.
In the event the Indenture Trustee shall receive conflicting or inconsistent
requests and indemnity satisfactory to it from two or more groups of Holders of
Notes, each representing less than a majority of the Class Principal Balance of
the Notes, the Indenture Trustee in its sole discretion may determine what
action, if any, shall be taken, notwithstanding any other provisions of this
Indenture. In no event shall the Indenture Trustee be liable for any action
taken in accordance herewith, except as otherwise provided in Section 6.01.
Section 5.07. Unconditional Rights of Noteholders To Receive Principal and
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Interest. Notwithstanding any other provisions in this Indenture, the Holder of
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any Note shall have the right, which is absolute and unconditional, to receive
payment of the principal of and interest, if any, on such Note on or after the
respective due dates thereof expressed in such Note or in this Indenture and to
institute suit for the enforcement of any such payment, and such right shall not
be impaired without the consent of such Holder.
Section 5.08. Restoration of Rights and Remedies. If the Indenture Trustee or
----------------------------------
the Holder of any Note has instituted any Proceeding to enforce any right or
remedy under this Indenture and such Proceeding has been discontinued or
abandoned for any reason or has been determined adversely to the Indenture
Trustee or to such Holder of any Note, then and in every such case the Issuer,
the Indenture Trustee and the Holders of such Notes shall, subject to any
determination in such Proceeding, be restored severally and respectively to
their former positions hereunder, and thereafter all rights and remedies of the
Indenture Trustee and the Holders of such Notes shall continue as though no such
Proceeding had been instituted.
Section 5.09. Rights and Remedies Cumulative. No right or remedy herein
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conferred upon or reserved to the Indenture Trustee or to the Noteholders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
Section 5.10. Delay or Omission Not a Waiver. No delay or omission of the
----------------------------------
Indenture Trustee, the Note Insurer or any Holder of any Note to exercise any
right or remedy accruing upon any Event of Default shall impair any such right
or remedy or constitute a waiver of any such Event of Default or an acquiescence
therein. Every right and remedy given by this Article V or by law to the
Indenture Trustee, the Note Insurer or to the Noteholders may be exercised from
time to time, and as often as may be deemed expedient, by the Indenture Trustee,
the Note Insurer or by the Noteholders, as the case may be.
Section 5.11. Control by Noteholders. The Holders of a majority of the Class
-----------------------
Principal Balance of the Notes, with the consent of the Note Insurer, shall have
the right to direct the time, method and place of conducting any Proceeding for
any remedy available to the Indenture Trustee with respect to the Notes or
exercising any trust or power conferred on the Indenture Trustee; provided that:
(i) such direction shall not be in conflict with any rule of law or
with this Indenture;
(ii) subject to the express terms of Section 5.04, any direction to the
Indenture Trustee to sell or liquidate the Trust Estate shall be by Holders of
the Notes representing not less than 100% of the Class Principal Balance of the
Notes;
(iii) if the conditions set forth in Section 5.05 have been satisfied and
the Indenture Trustee elects to retain the Trust Estate pursuant to such
Section, then any direction to the Indenture Trustee by Holders of Notes
representing less than 100% of the Class Principal Balance of the Notes to sell
or liquidate the Trust Estate shall be of no force and effect; and
(iv) the Indenture Trustee may take any other action deemed proper by
the Indenture Trustee that is not inconsistent with such direction.
Notwithstanding the rights of Noteholders set forth in this Section, subject to
Section 6.01, the Indenture Trustee need not take any action that it determines
might involve it in liability or might materially adversely affect the rights of
any Noteholders not consenting to such action.
Section 5.12. Waiver of Past Defaults. Prior to the declaration of the
--------------------------
acceleration of the maturity of the Notes as provided in Section 5.02, the
Holders of Notes of not less than a majority of the Class Principal Balance of
the Notes, with the consent of the Note Insurer, may waive any past Event of
Default and its consequences except an Event of Default (a) in payment when due
of principal of or interest on any of the Notes or (b) in respect of a covenant
or provision hereof which cannot be modified or amended without the consent of
the Holder of each Note or the waiver of which would materially and adversely
affect the interests of the Note Insurer or modify its obligation under the Note
Insurance Policy. In the case of any such waiver, the Issuer, the Indenture
Trustee and the Holders of the Notes shall be restored to their former positions
and rights hereunder, respectively; but no such waiver shall extend to any
subsequent or other Event of Default or impair any right consequent thereto.
Upon any such waiver, any Event of Default arising therefrom shall be deemed to
have been cured and not to have occurred, for every purpose of this Indenture;
but no such waiver shall extend to any subsequent or other Event of Default or
impair any right consequent thereto.
Section 5.13. Undertaking for Costs. All parties to this Indenture agree, and
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each Holder of any Note by such Holder's acceptance thereof shall be deemed to
have agreed, that any court may in its discretion require, in any suit for the
enforcement of any right or remedy under this Indenture, or in any suit against
the Indenture Trustee for any action taken, suffered or omitted by it as
Indenture Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 5.13 shall not apply to (a) any suit instituted by
the Indenture Trustee, (b) any suit instituted by any Noteholder, or group of
Noteholders, in each case holding in the aggregate more than 10% of the Class
Principal Balance of the Notes or (c) any suit instituted by any Noteholder for
the enforcement of the payment of principal of or interest on any Note on or
after the respective due dates expressed in such Note and in this Indenture.
Section 5.14. Waiver of Stay or Extension Laws. The Issuer covenants (to the
---------------------------------
extent that it may lawfully do so) that it will not at any time insist upon, or
plead or in any manner whatsoever, claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, that may affect the covenants or the performance of this Indenture; and
the Issuer (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Indenture
Trustee, but will suffer and permit the execution of every such power as though
no such law had been enacted.
Section 5.15. Sale of Trust Estate. (a) The power to effect any sale or other
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disposition (a "Sale") of any portion of a Trust Estate pursuant to Section 5.04
is expressly subject to the provisions of Section 5.05 and this Section 5.15.
The power to effect any such Sale shall not be exhausted by any one or more
Sales as to any portion of the Trust Estate remaining unsold, but shall continue
unimpaired until the entire Trust Estate shall have been sold or all amounts
payable on the Notes and under this Indenture and under the Insurance Agreement
shall have been paid. The Indenture Trustee may from time to time postpone any
public Sale by public announcement made at the time and place of such Sale. The
Indenture Trustee hereby expressly waives its right to any amount fixed by law
as compensation for any Sale.
(b) The Indenture Trustee shall not in any private Sale sell the Trust
Estate, or any portion thereof, unless
(i) the Holders of all Notes and the Note Insurer consent to, or direct
the Indenture Trustee to make, such Sale, or
(ii) the proceeds of such Sale would be not less than the entire amount
which would be payable to the Noteholders under the Notes, and the Note Insurer
in respect of amounts drawn under the Note Insurance Policy and any other
amounts due the Note Insurer under the Insurance Agreement, in full payment
thereof in accordance with Section 5.02, on the Payment Date next succeeding the
date of such Sale, or
(iii) the Indenture Trustee determines, in its sole discretion, that the
conditions for retention of the Trust Estate set forth in Section 5.05 cannot be
satisfied (in making any such determination, the Indenture Trustee may rely upon
an opinion of an Independent investment banking firm obtained and delivered as
provided in Section 5.05) and the Note Insurer consents to such Sale, which
consent will not be unreasonably withheld, and the Holders representing at least
66-2/3% of the Class Principal Balance of the Notes consent to such Sale.
The purchase by the Indenture Trustee of all or any portion of a Trust Estate at
a private Sale shall not be deemed a Sale or other disposition thereof for
purposes of this Section 5.15(b).
(c) Unless the Holders of the Notes and the Note Insurer have otherwise
consented or directed the Indenture Trustee, at any public Sale of all or any
portion of the Trust Estate at which a minimum bid equal to or greater than the
amount described in paragraph (ii) of subsection (b) of this Section 5.15 has
not been established by the Indenture Trustee and no Person bids an amount equal
to or greater than such amount, the Indenture Trustee shall bid an amount at
least $1.00 more than the highest other bid.
(d) In connection with a Sale of all or any portion of the Trust Estate
(i) any Holder or Holders of Notes may bid for and with the consent of
the Note Insurer purchase the property offered for sale, and upon compliance
with the terms of sale may hold, retain and possess and dispose of such
property, without further accountability, and may, in paying the purchase money
therefor, deliver any Notes or claims for interest thereon in lieu of cash up to
the amount which shall, upon distribution of the net proceeds of such sale, be
payable thereon, and such Notes, in case the amounts so payable thereon shall be
less than the amount due thereon, shall be returned to the Holders thereof after
being appropriately stamped to show such partial payment;
(ii) the Indenture Trustee may bid for and acquire the property offered
for Sale in connection with any Sale thereof, and, subject to any requirements
of, and to the extent permitted by, applicable law in connection therewith, may
purchase all or any portion of the Trust Estate in a private sale, and, in lieu
of paying cash therefor, may make settlement for the purchase price by crediting
the gross Sale price against the sum of (A) the amount which would be
distributable to the Holders of the Notes and amounts owing to the Note Insurer
as a result of such Sale in accordance with Section 5.04(b) on the Payment Date
next succeeding the date of such Sale and (B) the expenses of the Sale and of
any Proceedings in connection therewith which are reimbursable to it, without
being required to produce the Notes in order to complete any such Sale or in
order for the net Sale price to be credited against such Notes, and any property
so acquired by the Indenture Trustee shall be held and dealt with by it in
accordance with the provisions of this Indenture;
(iii) the Indenture Trustee shall execute and deliver an appropriate
instrument of conveyance transferring its interest in any portion of the Trust
Estate in connection with a Sale thereof;
(iv) the Indenture Trustee is hereby irrevocably appointed the agent and
attorney-in-fact of the Issuer to transfer and convey its interest in any
portion of the Trust Estate in connection with a Sale thereof, and to take all
action necessary to effect such Sale; and
(v) no purchaser or transferee at such a Sale shall be bound to
ascertain the Indenture Trustee's authority, inquire into the satisfaction of
any conditions precedent or see to the application of any moneys.
Section 5.16. Action on Notes. The Indenture Trustee's right to seek and
-----------------
recover judgment on the Notes or under this Indenture shall not be affected by
the seeking, obtaining or application of any other relief under or with respect
to this Indenture. Neither the lien of this Indenture nor any rights or
remedies of the Indenture Trustee or the Noteholders shall be impaired by the
recovery of any judgment by the Indenture Trustee against the Issuer or by the
levy of any execution under such judgment upon any portion of the Trust Estate
or upon any of the assets of the Issuer. Any money or property collected by the
Indenture Trustee shall be applied in accordance with Section 5.04(b).
Section 5.17. Performance and Enforcement of Certain Obligations. (a)
-------------------------------------------------------
Promptly following a request from the Indenture Trustee to do so, the Issuer
shall take all such lawful action as the Indenture Trustee may request to compel
or secure the performance and observance by the Depositor, the Seller and the
Servicer, as applicable, of each of their obligations to the Issuer under or in
connection with the Basic Documents, and to exercise any and all rights,
remedies, powers and privileges lawfully available to the Issuer under or in
connection with the Basic Documents to the extent and in the manner directed by
the Indenture Trustee, including the transmission of notices of default on the
part of the Depositor, the Seller or the Servicer thereunder and the institution
of legal or administrative actions or proceedings to compel or secure
performance by the Depositor, the Seller or the Servicer of each of their
obligations under the Basic Documents.
(b) If a Servicer Termination Event has occurred and is continuing, the
Indenture Trustee subject to the rights of the Note Insurer under the Sale and
Servicing Agreement may, and at the direction (which direction shall be in
writing or by telephone (confirmed in writing promptly thereafter)) of the
Holders of 66-2/3% of the Class Principal Balance of the Notes with the consent
of the Note Insurer shall, exercise all rights, remedies, powers, privileges and
claims of the Issuer against the Servicer under or in connection with the Sale
and Servicing Agreement, including the right or power to take any action to
compel or secure performance or observance by the Servicer of its obligations to
the Issuer thereunder and to give any consent, request, notice, direction,
approval, extension or waiver under the Sale and Servicing Agreement, and any
right of the Issuer to take such action shall not be suspended.
ARTICLE VI
The Indenture Trustee
Section 6.01. Duties of Indenture Trustee. (a) If an Event of Default has
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occurred and is continuing, the Indenture Trustee shall exercise the rights and
powers vested in it by this Indenture and use the same degree of care and skill
in their exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs with respect to the
Trust Estate.
(b) Except during the continuance of an Event of Default:
(i) the Indenture Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied covenants
or obligations shall be read into this Indenture against the Indenture Trustee;
and
(ii) in the absence of bad faith on its part, the Indenture Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Indenture Trustee and conforming to the requirements of this Indenture;
provided, however, that the Indenture Trustee shall examine the certificates and
opinions to determine whether or not they conform to the requirements of this
Indenture.
(c) The Indenture Trustee may not be relieved from liability for its
own negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b) of this
Section 6.01;
(ii) the Indenture Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer unless it is proved that the
Indenture Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Indenture Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a direction
received by it (A) pursuant to Section 5.11 or (B) from the Note Insurer, which
it is entitled to give under any of the Basic Documents.
(d) Every provision of this Indenture that in any way relates to the
Indenture Trustee is subject to paragraphs (a), (b), (c) and (g) of this Section
6.01.
(e) The Indenture Trustee shall not be liable for interest on any money
received by it except as the Indenture Trustee may agree in writing with the
Issuer or pursuant to the Sale and Servicing Agreement.
(f) Money held in trust by the Indenture Trustee need not be segregated
from other funds except to the extent required by law or the terms of this
Indenture or the Sale and Servicing Agreement.
(g) No provision of this Indenture shall require the Indenture Trustee
to expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that repayment
of such funds or adequate indemnity satisfactory to it against such risk or
liability is not reasonably assured to it.
(h) In the event that the Indenture Trustee is the Paying Agent or the
Note Registrar, the rights and protections afforded to the Indenture Trustee
pursuant to this Indenture shall also be afforded to the Indenture Trustee in
its capacity as Paying Agent or Note Registrar.
(i) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Indenture Trustee
shall be subject to the provisions of this Section.
Section 6.02. Rights of Indenture Trustee. (a) The Indenture Trustee may rely
---------------------------
on any document believed by it to be genuine and to have been signed or
presented by the proper person. The Indenture Trustee need not investigate any
fact or matter stated in the document.
(b) Before the Indenture Trustee acts or refrains from acting, it may
require an Officer's Certificate or an opinion of counsel. The Indenture
Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on an Officer's Certificate or opinion of counsel.
(c) The Indenture Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys or a custodian or nominee, and the Indenture Trustee shall
not be responsible for any misconduct or negligence on the part of, or for the
supervision of, any such agent, attorney, custodian or nominee appointed with
due care by it hereunder.
(d) The Indenture Trustee shall not be liable for any action it takes
or omits to take in good faith which it believes to be authorized or within its
rights or powers; provided, however, that the Indenture Trustee's conduct does
not constitute willful misconduct, negligence or bad faith.
(e) The Indenture Trustee may consult with counsel, and the advice or
opinion of counsel with respect to legal matters relating to this Indenture and
the Notes shall be full and complete authorization and protection from liability
in respect to any action taken, omitted or suffered by it hereunder in good
faith and in accordance with the advice or opinion of such counsel.
Section 6.03. Individual Rights of Indenture Trustee. The Indenture Trustee in
--------------------------------------
its individual or any other capacity may become the owner or pledgee of Notes
and may otherwise deal with the Issuer or its Affiliates with the same rights it
would have if it were not Indenture Trustee. Any Paying Agent, Note Registrar,
co-registrar or co-paying agent may do the same with like rights. However, the
Indenture Trustee must comply with Sections 6.11 and 6.12.
Section 6.04. Indenture Trustee's Disclaimer. The Indenture Trustee shall not
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be responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Notes, it shall not be accountable for the Issuer's use of
the proceeds from the Notes, and it shall not be responsible for any statement
of the Issuer in the Indenture or in any document issued in connection with the
sale of the Notes or in the Notes other than the Indenture Trustee's certificate
of authentication.
Section 6.05. Notice of Event of Default. If an Event of Default occurs and is
--------------------------
continuing and if it is known to a Responsible Officer of the Indenture Trustee,
the Indenture Trustee shall give notice thereof to the Note Insurer. The
Indenture Trustee shall mail to each Noteholder and the Owner Trustee notice of
the Event of Default within 90 days after it occurs. Except in the case of an
Event of Default in payment of principal of or interest on any Note, the
Indenture Trustee may withhold the notice if and so long as a committee of its
Responsible Officers in good faith determines that withholding the notice is in
the interests of Noteholders.
Section 6.06. Reports by Indenture Trustee to Holders. (a) The Indenture
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Trustee shall deliver to each Noteholder (and to each Person who was a
Noteholder at any time during the applicable calendar year) such information, as
may be required to enable such holder to prepare its Federal and state income
tax returns. In addition, upon the Issuer's written request, the Indenture
Trustee shall promptly furnish information reasonably requested by the Issuer
that is reasonably available to the Indenture Trustee to enable the Issuer to
perform its federal and state income tax reporting obligations.
(b) In addition, (1) the Indenture Trustee will provide to any
Noteholder and any prospective purchaser thereof designated by such a
Noteholder, upon the request of such Noteholder or prospective purchaser, the
information required to be provided to such Noteholder or prospective purchaser
by Rule 144A(d)(4) under the Securities Act; and (2) the Indenture Trustee shall
update or shall cause to be updated such information from time to time in order
to prevent such information from becoming false and misleading and will take
such other actions as are necessary to ensure that the safe harbor exemption
from the registration requirements of the Securities Act under Rule 144A is and
will be available for resales of the Notes conducted in accordance with Rule
144A.
Section 6.07. Compensation and Indemnity. The Issuer shall pay to the
----------------------------
Indenture Trustee on each Payment Date reasonable compensation for its services.
The Indenture Trustee's compensation shall not be limited by any law on
compensation of a trustee of an express trust. The Issuer shall or shall cause
the Servicer to reimburse the Indenture Trustee for all reasonable out-of-pocket
expenses incurred or made by it, including costs of collection, in addition to
the compensation for its services. Such expenses shall include the reasonable
compensation and expenses, disbursements and advances of the Indenture Trustee's
agents, counsel, accountants and experts. The Issuer shall or shall cause the
Servicer to indemnify the Indenture Trustee against any and all loss, liability
or expense (including attorneys' fees) incurred by it in connection with the
administration of this trust and the performance of its duties hereunder. The
Indenture Trustee shall notify the Issuer and the Servicer promptly of any claim
for which it may seek indemnity. Failure by the Indenture Trustee to so notify
the Issuer and the Servicer shall not relieve the Issuer or the Servicer of its
obligations hereunder or under the Sale and Servicing Agreement. The Issuer
shall or shall cause the Servicer to defend any such claim, and the Indenture
Trustee may have separate counsel and the Issuer shall or shall cause the
Servicer to pay the fees and expenses of such counsel. Neither the Issuer nor
the Servicer need reimburse any expense or indemnify against any loss, liability
or expense incurred by the Indenture Trustee through the Indenture Trustee's own
willful misconduct, negligence or bad faith.
The Issuer's payment obligations to the Indenture Trustee pursuant to this
Section 6.07 shall survive the discharge of this Indenture or the removal or
resignation of the Indenture Trustee hereunder. When the Indenture Trustee
incurs expenses after the occurrence of an Event of Default specified in clause
(iv) of the definition of "Event of Default" with respect to the Issuer, the
expenses are intended to constitute expenses of administration under Title 11 of
the United States Code or any other applicable Federal or state bankruptcy,
insolvency or similar law.
Section 6.08. Replacement of Indenture Trustee. No resignation or removal of
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the Indenture Trustee and no appointment of a successor Indenture Trustee shall
become effective until the acceptance of appointment by the successor Indenture
Trustee pursuant to this Section 6.08. The Indenture Trustee may resign at any
time by so notifying the Issuer, the Servicer and the Note Insurer. The Holders
of a majority of the Class Principal Balance of the Notes may remove the
Indenture Trustee by so notifying the Indenture Trustee, the Servicer and the
Note Insurer and may appoint a successor Indenture Trustee, with the consent of
the Note Insurer and the Servicer. The Issuer shall remove the Indenture
Trustee if:
(i) the Indenture Trustee fails to comply with Section 6.11;
(ii) the Indenture Trustee is adjudged a bankrupt or insolvent;
(iii) a receiver or other public officer takes charge of the Indenture
Trustee or its property; or
(iv) the Indenture Trustee otherwise becomes incapable of acting.
If the Indenture Trustee resigns or is removed or if a vacancy exists in the
office of Indenture Trustee for any reason (the Indenture Trustee in such event
being referred to herein as the retiring Indenture Trustee), the Issuer shall
promptly appoint a successor Indenture Trustee with the consent of the Note
Insurer and the Servicer.
A successor Indenture Trustee shall deliver a written acceptance of its
appointment to the retiring Indenture Trustee and to the Issuer. Thereupon the
resignation or removal of the retiring Indenture Trustee shall become effective,
and the successor Indenture Trustee shall have all the rights, powers and duties
of the Indenture Trustee under this Indenture. The successor Indenture Trustee
shall mail a notice of its succession to Noteholders. The retiring Indenture
Trustee shall promptly transfer all property held by it as Indenture Trustee to
the successor Indenture Trustee.
If a successor Indenture Trustee does not take office within 60 days after the
retiring Indenture Trustee resigns or is removed, the retiring Indenture
Trustee, the Issuer or the Holders of a majority of the Class Principal Balance
of the Notes, with the consent of the Note Insurer and the Servicer, may
petition any court of competent jurisdiction for the appointment of a successor
Indenture Trustee.
If the Indenture Trustee fails to comply with Section 6.11, any Noteholder, with
the consent of the Note Insurer, may petition any court of competent
jurisdiction for the removal of the Indenture Trustee and the appointment of a
successor Indenture Trustee.
Notwithstanding the replacement of the Indenture Trustee pursuant to this
Section, the Issuer's obligations under Section 6.07 shall continue for the
benefit of the retiring Indenture Trustee.
Upon appointment of a successor Indenture Trustee, the Indenture Trustee shall
make arrangements, at its own cost and expense, to deliver all items of
Collateral in its possession to the successor Indenture Trustee together with
all releases, bond powers, assignments, transfer documents or other documents
required to evidence the transfer of the lien of this Indenture from the
Indenture Trustee to the successor Indenture Trustee.
Section 6.09. Successor Indenture Trustee by Merger. If the Indenture Trustee
-------------------------------------
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Indenture Trustee; provided, that such
corporation or banking association shall be otherwise qualified and eligible
under Section 6.11. The Indenture Trustee shall provide the Issuer, the Note
Insurer, the Servicer and the Rating Agencies prior written notice of any such
transaction.
In case at the time such successor or successors by merger, conversion or
consolidation to the Indenture Trustee shall succeed to the trusts created by
this Indenture any of the Notes shall have been authenticated but not delivered,
any such successor to the Indenture Trustee may adopt the certificate of
authentication of any predecessor trustee, and deliver such Notes so
authenticated; and in case at that time any of the Notes shall not have been
authenticated, any successor to the Indenture Trustee may authenticate such
Notes either in the name of any predecessor hereunder or in the name of the
successor to the Indenture Trustee; and in all such cases such certificates
shall have the full force which it is anywhere in the Notes or in this Indenture
provided that the certificate of the Indenture Trustee shall have.
Section 6.10. Appointment of Co-Indenture Trustee or Separate Indenture
---------------------------------------------------------------
Trustee. (a) Notwithstanding any other provisions of this Indenture, at any
time, for the purpose of meeting any legal requirement of any jurisdiction in
which any part of the Trust Estate may at the time be located, the Indenture
Trustee shall have the power and may execute and deliver all instruments to
appoint one or more Persons to act as a co-trustee or co-trustees, or separate
trustee or separate trustees, of all or any part of the Trust Estate, and to
vest in such Person or Persons, in such capacity and for the benefit of the
Noteholders, such title to the Trust Estate, or any part thereof, and, subject
to the other provisions of this Section, such powers, duties, obligations,
rights and trusts as the Indenture Trustee may consider necessary or desirable.
No co-trustee or separate trustee hereunder shall be required to meet the terms
of eligibility as a successor trustee under Section 6.11 and no notice to
Noteholders of the appointment of any co-trustee or separate trustee shall be
required under Section 6.08 hereof.
(b) Every separate trustee and co-trustee shall, to the extent
permitted by law, be appointed and act subject to the following provisions and
conditions:
(i) all rights, powers, duties and obligations conferred or imposed upon the
Indenture Trustee shall be conferred or imposed upon and exercised or performed
by the Indenture Trustee and such separate trustee or co-trustee jointly (it
being understood that such separate trustee or co-trustee is not authorized to
act separately without the Indenture Trustee joining in such act), except to the
extent that under any law of any jurisdiction in which any particular act or
acts are to be performed the Indenture Trustee shall be incompetent or
unqualified to perform such act or acts, in which event such rights, powers,
duties and obligations (including the holding of title to the Trust Estate or
any portion thereof in any such jurisdiction) shall be exercised and performed
singly by such separate trustee or co-trustee, but solely at the direction of
the Indenture Trustee;
(ii) no trustee hereunder shall be personally liable by reason of any act or
omission of any other trustee hereunder; and
(iii) the Indenture Trustee may at any time accept the resignation of or
remove any separate trustee or co-trustee.
(c) Any notice, request or other writing given to the Indenture Trustee
shall be deemed to have been given to each of the then separate trustees and
co-trustees, as effectively as if given to each of them. Every instrument
appointing any separate trustee or co-trustee shall refer to this Indenture and
the conditions of this Article VI. Each separate trustee and co-trustee, upon
its acceptance of the trusts conferred, shall be vested with the estates or
property specified in its instrument of appointment, either jointly with the
Indenture Trustee or separately, as may be provided therein, subject to all the
provisions of this Indenture, specifically including every provision of this
Indenture relating to the conduct of, affecting the liability of, or affording
protection to, the Indenture Trustee. Every such instrument shall be filed with
the Indenture Trustee.
(d) Any separate trustee or co-trustee may at any time constitute the
Indenture Trustee, its agent or attorney-in-fact with full power and authority,
to the extent not prohibited by law, to do any lawful act under or in respect of
this Indenture on its behalf and in its name. If any separate trustee or
co-trustee shall die, become incapable of acting, resign or be removed, all of
its estates, properties, rights, remedies and trusts shall vest in and be
exercised by the Indenture Trustee, to the extent permitted by law, without the
appointment of a new or successor trustee.
Section 6.11. Eligibility; Disqualification. The Indenture Trustee shall have
-----------------------------
a combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition and it or its parent shall have a
long-term deposit rating of at least BBB from S&P and Baa2 from Moody's (or such
lower rating as may be acceptable to S&P, Moody's and the Note Insurer). If
such entity publishes reports of condition at least annually, pursuant to law or
to the requirements of said supervising or examining authority, then for the
purposes of this Section 6.11, the combined capital and surplus of such entity
shall be deemed to be its combined capital and surplus as set forth in is most
recent report of condition so published. If at any time the Indenture Trustee
shall cease to be eligible in accordance with the provisions of this Section
6.11, it shall resign immediately in the manner and with the effect hereinafter
specified in this Article VI.
Section 6.12. [Reserved] .
Section 6.13. Representation and Warranty. The Indenture Trustee represents
-----------------------------
and warrants to the Issuer, for the benefit of the Noteholders and the Note
Insurer, that this Indenture has been executed and delivered by one of its
Responsible Officers who is duly authorized to execute and deliver such document
in such capacity on its behalf.
Section 6.14. Directions to Indenture Trustee. The Indenture Trustee is hereby
-------------------------------
directed:
(i) to accept assignment of the Mortgage Loans, the Pooled Certificates, the
Swap Agreements, the Reserve Account, the Note Insurance Policy, and the other
portions of the Trust Estate being assigned hereunder, and hold the Collateral
in trust for the Noteholders and the Note Insurer;
(ii) to issue, execute and deliver the Notes substantially in the form
prescribed by Exhibit A in accordance with the terms of this Indenture;
(iii) to take all other actions as shall be required to be taken by the
terms of this Indenture;
(iv) to (A) establish the Swap Counterparty Floor Account, (B) accept
delivery and retain possession of the Interest Rate Floor Agreement in its own
name for the benefit of the Note Insurer, (C) deposit payments received from the
Interest Rate Floor Agreement into the Swap Counterparty Floor Account, and (D)
make distributions from the Swap Counterparty Floor Account to the Note Insurer
and/or the Certificateholder, all in accordance with the terms of the Sale and
Servicing Agreement, and in each case for the benefit of the Note Insurer and
the Certificateholders; and
(v) to (A) establish the Swap Counterparty Reserve Account, (B) accept
delivery on the Closing Date and retain possession of the initial deposit of
$800,000 into the Swap Counterparty Reserve Account, and (C) make distributions
from the Swap Counterparty Reserve Account to the Note Insurer and/or the
Certificateholder, all in accordance with the terms of the Sale and Servicing
Agreement, and in each case for the benefit of the Note Insurer and the
Certificateholders.
ARTICLE VII
Noteholders' Lists and Reports
Section 7.01. Issuer To Furnish Indenture Trustee Names and Addresses of
----------------------------------------------------------------
Noteholders. The Issuer will furnish or cause to be furnished to the Indenture
- -----------
Trustee (a) not more than five days after each Record Date, a list, in such form
as the Indenture Trustee may reasonably require, of the names and addresses of
the Holders of Notes as of such Record Date, and (b) at such other times as the
Indenture Trustee and the Note Insurer may request in writing, within 30 days
after receipt by the Issuer of any such request, a list of similar form and
content as of a date not more than 10 days prior to the time such list is
furnished; provided, however, that so long as the Indenture Trustee is the Note
Registrar, no such list shall be required to be furnished.
Section 7.02. Preservation of Information; Communications to Noteholders. (a)
----------------------------------------------------------
The Indenture Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of the Holders of Notes contained in the
most recent list furnished to the Indenture Trustee as provided in Section 7.01
and the names and addresses of Holders of Notes received by the Indenture
Trustee in its capacity as Note Registrar. The Indenture Trustee may destroy
any list furnished to it as provided in such Section 7.01 upon receipt of a new
list so furnished.
(b) If three or more Noteholders or one or more Holders of Notes evidencing
not less than 25% of the aggregate Class Principal Balance of the Notes apply in
writing to the Indenture Trustee, and such application states that the
applicants desire to communicate with other Noteholders with respect to their
rights under this Indenture or under the Notes and such application is
accompanied by a copy of the communication that such applicants propose to
transmit, then the Indenture Trustee shall, within five Business Days after the
receipt of such application, afford such applicants access during normal
business hours to the current list of Noteholders. Upon receipt of any such
application, the Indenture Trustee will promptly notify the Issuer by providing
a copy of such application and a copy of the list of Noteholders produced in
response thereto. Each Noteholder, by receiving and holding a Note, shall be
deemed to have agreed not to hold any of the Issuer, the Note Registrar or the
Indenture Trustee accountable by reason of the disclosure of its name and
address, regardless of the source from which such information was derived.
(c) The Indenture Trustee shall furnish to the Noteholders promptly upon
receipt of a written request therefor, duplicates or copies of all reports,
notices, requests, demands, certificates, financial statements and any
other instruments furnished to the Indenture Trustee under the Basic Documents
or as a result of being record holder of the Pooled Certificates.
Section 7.03. Fiscal Year. Unless the Issuer otherwise determines, the
------------
fiscal year of the Issuer shall end on December 31 of each year.
ARTICLE VIII
Accounts, Disbursements and Releases
Section 8.01. Collection of Money. Except as otherwise expressly provided
---------------------
herein, the Indenture Trustee may demand payment or delivery of, and shall
receive and collect, directly and without intervention or assistance of any
fiscal agent or other intermediary, all money and other property payable to or
receivable by the Indenture Trustee pursuant to this Indenture. The Indenture
Trustee shall apply all such money received by it as provided in this Indenture.
Except as otherwise expressly provided in this Indenture, if any default occurs
in the making of any payment or performance under any agreement or instrument
that is part of the Trust Estate, the Indenture Trustee may take such action as
may be appropriate to enforce such payment or performance, including the
institution and prosecution of appropriate Proceedings. Any such action shall
be without prejudice to any right to claim an Event of Default under this
Indenture and any right to proceed thereafter as provided in Article V.
Section 8.02. Trust Accounts. (a) On or prior to the Closing Date, the Issuer
--------------
shall cause the Indenture Trustee to establish and maintain, in the name of the
Indenture Trustee, for the benefit of the Noteholders and the Certificateholders
and the Note Insurer, the Accounts as provided in Section 5.1 of the Sale and
Servicing Agreement.
(b) All moneys deposited from time to time in the Trustee Collection Account
pursuant to the Sale and Servicing Agreement and all deposits therein pursuant
to this Indenture are for the benefit of the Noteholders, the Certificateholders
and the other entities to receive payments therefrom as provided herein and in
the Sale and Servicing Agreement and all investments made with such moneys
including all income or other gain from such investments are for the benefit of
the Certificateholders as provided by the Sale and Servicing Agreement.
On or before each Payment Date, the Indenture Trustee shall make the
transfers and payments set forth in Article V of the Sale and Servicing
Agreement.
On each Payment Date, Collateral Purchase Date and Note Purchase Date,
the Indenture Trustee shall distribute all amounts on deposit in the Trustee
Collection Account to the Noteholders to the extent of amounts due and unpaid
for principal and interest in the amounts and in the order of priority as set
forth in Section 5.02 of the Sale and Servicing Agreement. The Indenture
Trustee shall invest any funds in the Trustee Collection Account as provided in
the Sale and Servicing Agreement.
Section 8.03. Opinion of Counsel. Other than as provided in Article X, the
--------------------
Indenture Trustee shall receive at least seven days notice when requested by the
Issuer to take any action pursuant to Section 8.05(a), accompanied by copies of
any instruments to be executed, and the Indenture Trustee shall also require, as
a condition to such action, an opinion of counsel, in form and substance
satisfactory to the Indenture Trustee, stating the legal effect of any such
action, outlining the steps required to complete the same, and concluding that
all conditions precedent to the taking of such action have been complied with
and such action will not materially and adversely impair the security for the
Notes or the rights of the Noteholders or the Note Insurer in contravention of
the provisions of this Indenture; provided, however, that such opinion of
counsel shall not be required to express an opinion as to the fair value of the
Trust Estate. Counsel rendering any such opinion may rely, without independent
investigation, on the accuracy and validity of any certificate or other
instrument delivered to the Indenture Trustee in connection with any such
action.
Section 8.04. Termination Upon Distribution to Noteholders. This Indenture and
--------------------------------------------
the respective obligations and responsibilities of the Issuer and the Indenture
Trustee created hereby shall terminate upon the distribution to the Noteholders,
the Swap Counterparty, the Note Insurer and the Indenture Trustee of all amounts
required to be distributed pursuant to Article VIII and the Sale and Servicing
Agreement; provided, however, that in no event shall the trust created hereby
continue beyond the expiration of 21 years from the death of the survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date hereof.
Section 8.05. Release of Trust Estate. (a) Subject to the payment of its fees
-----------------------
and expenses, the Indenture Trustee may, and when required by the provisions of
this Indenture shall, execute instruments to release property from the lien of
this Indenture, or convey the Indenture Trustee's interest in the same, in a
manner and under circumstances that are not inconsistent with the provisions of
this Indenture. No party relying upon an instrument executed by the Indenture
Trustee as provided in Article IV hereunder shall be bound to ascertain the
Indenture Trustee's authority, inquire into the satisfaction of any conditions
precedent, or see to the application of any moneys.
(b) The Indenture Trustee shall, at such time as (i) there are no Notes
Outstanding, (ii) all sums due the Indenture Trustee pursuant to this Indenture
have been paid, and (iii) all sums due the Note Insurer have been paid, release
any remaining portion of the Trust Estate that secured the Notes from the lien
of this Indenture. The Indenture Trustee shall release property from the lien
of this Indenture pursuant to this Section 8.05 only upon receipt of an request
from the Issuer accompanied by an Officers' Certificate and an opinion of
counsel.
Section 8.06. Surrender of Notes Upon Final Payment. By acceptance of any
-----------------------------------------
Note, the Holder thereof agrees to surrender such Note to the Indenture Trustee
promptly, prior to such Noteholder's receipt of the final payment thereon.
ARTICLE IX
Supplemental Indentures
Section 9.01. Supplemental Indentures Without Consent of Noteholders. (a)
----------------------------------------------------------
Without the consent of the Holders of any Notes but with the consent of the Note
Insurer and prior notice to the Rating Agencies and the Note Insurer, the Issuer
and the Indenture Trustee, when authorized by an Issuer Request, at any time and
from time to time, may enter into one or more indentures supplemental, in form
satisfactory to the Indenture Trustee, for any of the following purposes:
(i) to correct or amplify the description of any property at any time
subject to the lien of this Indenture, or better to assure, convey and confirm
unto the Indenture Trustee any property subject or required to be subjected to
the lien of this Indenture, or to subject to the lien of this Indenture
additional property;
(ii) to evidence the succession, in compliance with the applicable
provisions hereof, of another person to the Issuer, and the assumption by any
such successor of the covenants of the Issuer herein and in the Notes contained;
(iii) to add to the covenants of the Issuer, for the benefit of the
Holders of the Notes, or to surrender any right or power herein conferred upon
the Issuer;
(iv) to convey, transfer, assign, mortgage or pledge any property to or
with the Indenture Trustee;
(v) to cure any ambiguity, to correct or supplement any provision
herein or in any supplemental indenture that may be inconsistent with any other
provision herein or in any supplemental indenture or to make any other
provisions with respect to matters or questions arising under this Indenture or
in any supplemental indenture; provided, that such action shall not materially
adversely affect the interests of the Holders of the Notes; provided further
that such supplement shall be deemed not to materially adversely affect the
interests of the Holders of the Notes if the Person requesting such supplement
delivers to the Indenture Trustee a letter from each Rating Agency to the effect
that such supplement will not cause such Rating Agency to lower or withdraw its
current rating on the Notes without regard to the Note Insurance Policy; or
(vi) to evidence and provide for the acceptance of the appointment
hereunder by a successor trustee with respect to the Notes and to add to or
change any of the provisions of this Indenture as shall be necessary to
facilitate the administration of the trusts hereunder by more than one trustee,
pursuant to the requirements of Article VI;
provided, however, that no such indenture supplements shall be entered into
unless the Indenture Trustee shall have received an opinion of counsel stating
that entering into such indenture supplement will not have any material adverse
tax consequences to the Noteholders; and provided, further, that no indenture
supplement shall amend or modify the rights of the Swap Counterparty without the
consent of the Swap Counterparty.
The Indenture Trustee is hereby authorized to join in the execution of any such
supplemental indenture and to make any further appropriate agreements and
stipulations that may be therein contained.
(b) The Issuer and the Indenture Trustee, when authorized by an Issuer
Request, may, also without the consent of any of the Holders of the Notes but
with the consent of the Note Insurer and the Swap Counterparty and prior notice
to the Rating Agencies and the Note Insurer, enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to, or
changing in any manner or eliminating any of the provisions of, this Indenture
or of modifying in any manner the rights of the Holders of the Notes under this
Indenture; provided, however, that such action shall not, as evidenced by an
opinion of counsel, (i) adversely affect in any material respect the interests
of any Noteholder; provided further that such supplement shall be deemed not to
adversely affect the interests in any material respect of the Holders of the
Notes if the Person requesting such supplement delivers to the Indenture Trustee
a letter from each Rating Agency to the effect that such supplement will not
cause such Rating Agency to lower or withdraw its current rating on the Notes
without regard to the Note Insurance Policy; or (ii) cause the Issuer to be
subject to an entity level tax or be classified as a taxable mortgage pool
within the meaning of Section 7701(i) of the Code.
Section 9.02. Supplemental Indentures With Consent of Noteholders. The Issuer
---------------------------------------------------
and the Indenture Trustee, when authorized by an Issuer Request, also may, with
prior notice to the Rating Agencies and, with the written consent of the Note
Insurer and the Swap Counterparty and with the consent of the Holders of not
less than a majority of the Class Principal Balance of the Notes by Act of such
Holders delivered to the Issuer and the Indenture Trustee, enter into an
indenture or indentures supplemental hereto for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, this Indenture or of modifying in any manner the rights of the Holders of
the Notes under this Indenture; provided, however, that no such supplemental
indenture shall, without the consent of the Holder of each Note affected
thereby:
(i) change the date of payment of any installment of principal of or
interest on any Note, or reduce the principal amount thereof or the interest
rate thereon, change the provisions of this Indenture relating to the
application of collections on, or the proceeds of the sale of the Trust Estate
to payment of principal of or interest on the Notes, or change any place of
payment where, or the coin or currency in which, any Note or the interest
thereon is payable, or impair the right to institute suit for the enforcement of
the provisions of this Indenture requiring the application of funds available
therefor, as provided in Article V, to the payment of any such amount due on the
Notes on or after the respective due dates thereof (or, in the case of purchase
or redemption, on or after the Purchase Date) or Redemption Date;
(ii) reduce the percentage of the Class Principal Balance of the Notes,
the consent of the Holders of which is required for any such supplemental
indenture, or the consent of the Holders of which is required for any waiver of
compliance with certain provisions of this Indenture or certain defaults
hereunder and their consequences provided for in this Indenture;
(iii) modify or alter the provisions of the proviso to the definition of
the term "Outstanding" or modify or alter the exception in the definition of
the term "Noteholder";
(iv) reduce the percentage of the Class Principal Balance of the Notes
required to direct the Indenture Trustee to direct the Issuer to sell or
liquidate the Trust Estate pursuant to Section 5.04;
(v) modify any provision of this Section 9.02 except to increase any
percentage specified herein or to provide that certain additional provisions of
this Indenture or the Basic Documents cannot be modified or waived without the
consent of the Holder of each Note affected thereby;
(vi) modify any of the provisions of this Indenture in such manner as to
affect the calculation of the amount of any payment of interest or principal due
on any Note following the exercise of the Note Purchase Option or a Collateral
Purchase Option on any Payment Date; or
(vii) permit the creation of any lien ranking prior to or on a parity with
the lien of this Indenture with respect to any part of the Trust Estate or,
except as otherwise expressly permitted or contemplated herein, terminate the
lien of this Indenture on any property at any time subject hereto or deprive the
Holder of any Note of the security provided by the lien of this Indenture; and
provided, further, that such action shall not, as evidenced by an opinion of
counsel, cause the Issuer to be subject to an entity level tax or be classified
as a taxable mortgage pool within the meaning of Section 7701(i) of the Code.
The Indenture Trustee may in its discretion determine whether or not any Notes
would be affected by any supplemental indenture and any such determination shall
be conclusive upon the Holders of all Notes, whether theretofore or thereafter
authenticated and delivered hereunder. The Indenture Trustee shall not be
liable for any such determination made in good faith.
It shall not be necessary for any Act of Noteholders under this Section 9.02 to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
Promptly after the execution by the Issuer and the Indenture Trustee of any
supplemental indenture pursuant to this Section 9.02, the Indenture Trustee
shall mail to the Holders of the Notes to which such amendment or supplemental
indenture relates a notice setting forth in general terms the substance, of such
supplemental indenture. Any failure of the Indenture Trustee to mail such
notice, or any defect therein, shall not, however, in any way impair or affect
the validity of any such supplemental indenture.
Section 9.03. Execution of Supplemental Indentures. In executing, or
---------------------------------------
permitting the additional trusts created by, any supplemental indenture
permitted by this Article IX or the modification thereby of the trusts created
by this Indenture, the Indenture Trustee shall be entitled to receive, and
subject to Sections 6.01 and 6.02, shall be fully protected in relying upon, an
opinion of counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Indenture Trustee may, but shall
not be obligated to, enter into any such supplemental indenture that affects the
Indenture Trustee's own rights, duties, liabilities or immunities under this
Indenture or otherwise. The Indenture Trustee shall provide copies of each
supplemental indenture to the Rating Agencies.
Section 9.04. Effect of Supplemental Indenture. Upon the execution of any
-----------------------------------
supplemental indenture pursuant to the provisions hereof, this Indenture shall
be and shall be deemed to be modified and amended in accordance therewith with
respect to the Notes affected thereby, and the respective rights, limitations of
rights, obligations, duties, liabilities and immunities under this Indenture of
the Indenture Trustee, the Issuer and the Holders of the Notes shall thereafter
be determined, exercised and enforced hereunder subject in all respects to such
modifications and amendments, and all the terms and conditions of any such
supplemental indenture shall be and be deemed to be part of the terms and
conditions of this Indenture for any and all purposes.
Section 9.05. [Reserved].
----------
Section 9.06. Reference in Notes to Supplemental Indentures. Notes
--------------------------------------------------
authenticated and delivered after the execution of any supplemental indenture
pursuant to this Article IX may, and if required by the Indenture Trustee shall,
bear a notation in form approved by the Indenture Trustee as to any matter
provided for in such supplemental indenture. If the Issuer or the Indenture
Trustee shall so determine, new Notes so modified as to conform, in the opinion
of the Indenture Trustee and the Issuer, to any such supplemental indenture may
be prepared and executed by the Issuer and authenticated and delivered by the
Indenture Trustee in exchange for Outstanding Notes.
Section 9.07. Book Entry Notes. In addition to the supplements and amendments
----------------
contemplated under this Article IX, at such time as the total number of
beneficial owners of the Notes may exceed 100 for purposes of the Investment
Company Act of 1940, as demonstrated in an opinion of counsel acceptable to the
Indenture Trustee and the Note Insurer, the Holders of 100% of the Notes may
request with the consent of the Note Insurer (such consent not to be
unreasonably withheld), and the Issuer and Indenture Trustee shall prepare, an
amendment to this Indenture to provide for the conversion of the Notes from
physical to book entry form, permit the entering into of a contractual
depository arrangement with The Depository Trust Company or similar clearing
agency, and remove the requirements for the provision by proposed transferees of
representation letters, without any requirements for the provision of new legal
opinions or officer's Certificates by any party otherwise required hereunder.
All costs and expenses (including attorneys' fees) associated with such
conversion to book-entry form shall be borne by the Noteholders.
ARTICLE X
Note and Collateral Purchase Options
Section 10.01. Note and Collateral Purchase Options. (a) All but not
---------------------------------------
less than all of the Notes are subject to purchase on the Note Purchase Date
from the then Noteholders by the Certificateholder pursuant to the Note Purchase
Option granted to the Certificateholder under Section 3.11(a) of the Trust
Agreement. The purchase price for the Notes shall be equal to the Note Purchase
Price. In order to exercise the Note Purchase Option, the Certificateholder
must, no later than the eighth Business Day prior to the Note Purchase Date,
deliver to the Issuer, the Indenture Trustee (with copies to Bear Stearns, the
Rating Agencies, the Note Insurer and the Servicer) written notice, in the form
of Exhibit G hereto, of its intent to purchase all of the Notes and of the
Payment Date on which it intends to do so, which will constitute the Note
Purchase Date. The Indenture Trustee shall furnish notice of the exercise of
the Note Purchase Option to the Noteholders in compliance with Section 10.02. On
such Note Purchase Date, the Certificateholder shall deposit with the Indenture
Trustee cash in an amount sufficient, together with amounts on deposit (i) in
the Reserve Account otherwise to be paid to the Noteholders with respect to the
LIBOR Interest Carryover Amount on such Note Purchase Date and (ii) in the
Trustee Collection Account and available for payment on the Notes to provide for
payment of the Note Purchase Price. Such amount shall be deposited by the
Indenture Trustee into a separate sub-account of the Trustee Collection Account.
Such amounts shall be paid by the Indenture Trustee to Holders of Notes (and, if
funds are due, to the Note Insurer) as provided in Section 10.03.
(b) The Notes are subject to redemption in whole, but not in part, on the
Payment Date following the exercise of the Certificateholder Collateral Purchase
Option, granted to the Certificateholder under Section 3.11(a) of the Trust
Agreement, or following the exercise of the Bear Stearns Collateral Purchase
Option, granted to Bear, Stearns under Section 3.11(b) of the Trust Agreement
and receipt by the Indenture Trustee of the Certificateholder Collateral
Purchase Price or the Bear Stearns Collateral Purchase Price, as applicable. In
order to exercise the Certificateholder Collateral Purchase Option or the Bear
Stearns Collateral Purchase Option, the Certificateholder or Bear Stearns (or
Bear Stearns' assignee), respectively, must, no later than the eighth Business
Day prior to the Collateral Purchase Date, deliver to the Issuer, the Indenture
Trustee (with copies to the Certificateholder (in the case of the exercise of
the Bear Stearns Collateral Option), the Rating Agencies, the Note Insurer, the
Swap Counterparty and the Servicer) written notice, in the form of Exhibit H
hereto, of its intent to purchase all of the Collateral and of the Payment Date
on which it intends to do so which will constitute the Collateral Purchase Date
and the Redemption Date for the Notes. The Indenture Trustee shall furnish
notice of the exercise of the Certificateholder Collateral Purchase Option or
the Bear Stearns Collateral Purchase Option to the Noteholders in compliance
with Section 10.02. On such Collateral Purchase Date, the Certificateholder or
Bear Stearns (or Bear Stearns' assignee) shall deposit with the Indenture
Trustee cash in an amount sufficient, together with amounts on deposit (i) in
the Reserve Account and (ii) in the Trustee Collection Account and available for
payment on the Notes, to provide for payment of the Collateral Purchase Price,
plus any amounts due to the Swap Counterparty pursuant to Section 10.04(b)
below. Such amount shall be deposited by the Indenture Trustee into a separate
sub-account of the Trustee Collection Account. Such amounts shall be paid by
the Indenture Trustee to Holders of Notes (and, if funds are due, to the Note
Insurer and/or the Swap Counterparty, as applicable) as provided in Section
10.03.
(c) If the Bear Stearns Collateral Purchase Option is exercised, upon
receipt of the notice specified in with Section 10.01(b) above, the
Certificateholder shall have the option to exercise the Certificateholder
Collateral Purchase Option, in the manner specified in Section 10.01(b) above,
at any time up to and including the fifth Business Day prior to the related
Collateral Purchase Date. If both the Bear Stearns Collateral Purchase Option
and the Certificateholder Collateral Purchase Option are exercised, the
Indenture Trustee shall accept the instructions of the Certificateholder and
shall deliver the Mortgage Loans, the Pooled Certificates and (with the consent
of the Swap Counterparty) the Swap Agreements, to the Certificateholder on the
related Collateral Purchase Date, in exchange for the Certificateholder
Collateral Purchase Price, plus any amounts due to the Swap Counterparty
pursuant to Section 10.04(b) below; provided, however, that if both Collateral
-------- -------
Purchase Options are exercised and the Certificateholder fails to deliver the
Certificateholder Collateral Purchase Price on the Collateral Purchase Date, the
Certificateholder Collateral Purchase Option shall be terminated; in such event,
the Indenture Trustee shall notify Bear Stearns (or its assignee), and Bear
Stearns (or its assignee) shall have the option to exercise the Bear Stearns
Collateral Purchase Option on the second succeeding Business Day, which shall
become the new Collateral Purchase Date. In the event that Bear Stearns (or its
assignee) chooses not to re-exercise the Bear Stearns Collateral Purchase Option
or fails to deliver the Bear Stearns Collateral Purchase Price on such new
Collateral Purchase Date, the Bear Stearns Collateral Purchase Option shall also
be terminated.
(d) Notwithstanding the forgoing, if the Certificateholder or Bear Stearns
(or its assignee) exercises its Collateral Purchase Option or Note Purchase
Option, as the case may be, and fails to deliver the related Collateral Purchase
Price or Note Purchase Price, as applicable, on the related Collateral Purchase
Date or Note Purchase Date, as applicable, such exercised Collateral Purchase
Option or Note Purchase Option shall become null, void and terminated. The
failure of the Certificateholder or Bear Stearns (or its assignee), as the case
may be, to deliver the related Collateral Purchase Price or Note Purchase Price,
as applicable, on the related Collateral Purchase Date or Note Purchase Price,
as applicable, shall not affect the rights of the Certificateholder or Bear
Stearns (or its assignee), as the case may be, in any unexercised Collateral
Purchase Option or Note Purchase Option, as the case may be.
(e) In all cases of an exercise of a Collateral Purchase Option or a Note
Purchase Option, the party exercising such Collateral Purchase Option or Note
Purchase Option, as applicable, shall be solely responsible for the costs and
expenses of the Issuer, the Owner Trustee, the Indenture Trustee, and in the
case of any exercise of a Collateral Purchase Option, the Note Insurer, the Swap
Counterparty and the Servicer.
Section 10.02. Form of Option Notice. Notice of exercise of the Note
------------------------
Purchase Option, Certificateholder Collateral Purchase Option or the Bear
Stearns Collateral Purchase Option, as the case may be, under Section 10.01
shall be given by the Indenture Trustee by facsimile or by first-class mail,
postage prepaid, transmitted or mailed not less than five Business Days prior to
the Note Purchase Date or the Redemption Date, as applicable, to each Holder of
Notes, as of the close of business on the Record Date preceding such Purchase
Date or Redemption Date, as applicable, at such Holder's address appearing in
the Note Register.
All such notices shall state:
(i) the Note Purchase Date or Redemption Date upon which the
Noteholders will receive payment in full on their Notes;
(ii) the amount the Noteholders will be paid separately stating amounts
in respect of principal, interest and LIBOR Interest Carryover Amounts;
(iii) that the Record Date otherwise applicable to such Note Purchase
Date or Redemption Date is not applicable and that payments shall be made only
upon presentation and surrender of such Notes and the place where such Notes are
to be surrendered for payment of the Note Purchase Price or the Redemption Price
(which shall be the office or agency of the Issuer to be maintained as provided
in Section 3.02); and
(iv) that interest on the Notes shall cease to accrue (i) for the
benefit of the then Noteholders on such Note Purchase Date and (ii) on such
Redemption Date and no interest shall accrue on the Note Purchase Price, the
Certificateholder Collateral Purchase Price or the Bear Stearns Collateral
Purchase Price, as applicable.
The foregoing notice shall be given by the Indenture Trustee in the name
and at the expense of the party exercising the Note Purchase Option or
Collateral Purchase Option. Failure to give notice of such purchase or
redemption, or any defect therein, to any Holder of any Note shall not impair or
affect the validity of the purchase or redemption of any other Note.
Section 10.03. Notes Payable on Purchase Date. The Notes to be purchased
------------------------------
or redeemed shall, following notice as required by Section 10.02, on the Note
Purchase Date or Redemption Date become due and payable at the Note Purchase
Price or the Redemption Price, as applicable, and (unless the party exercising
such Note Purchase Option or Collateral Purchase Option shall default in the
payment of the Note Purchase Price or the Redemption Price, as applicable) no
interest shall accrue on the Note Purchase Price or the Redemption Price, as
applicable, for any period after the date to which accrued interest is
calculated for purposes of calculating the Note Purchase Price or the Redemption
Price, as applicable.
Section 10.04. The Indenture After the Exercise of the Note Purchase Option or
---------------------------------------------------------------
a Collateral Purchase Option . (a) Subsequent to the purchase of the Notes
- -------------------------------
following exercise of the Note Purchase Option, the Certificateholder shall be
the sole Noteholder. The Certificateholder may subsequently transfer some or
all of the Notes in accordance with the provisions hereof.
(b) Subsequent to the purchase of the Collateral following exercise of a
Collateral Purchase Option, this Indenture shall be satisfied and discharged in
accordance with Section 4.12 hereof. The Indenture Trustee shall release the
lien of this Indenture with respect to the purchased Collateral in accordance
with the provisions of Section 4.06 hereof; provided, however, the Swap
-------- -------
Agreements shall be terminated in accordance with their terms on such Redemption
Date unless the Swap Counterparty shall have consented in writing to the
assignment of the Swap Agreements to the Certificateholder or Bear Stearns (or
its assignee), as applicable, and if the Swap Agreements are so terminated, the
Certificateholder or Bear Stearns (or its assignee), as applicable, shall pay to
the Swap Counterparty any termination payments owed to the Swap Counterparty
under the Swap Agreements by the Issuer as a result of the termination of the
Swap Agreements; and provided, further, that if no amounts are due and owing to
-------- -------
the Note Insurer, all amounts on deposit in Swap Counterparty Reserve Account,
if any, and the Interest Rate Floor Agreement shall be transferred or assigned
to the Certificateholder or its designee.
(c) If subsequent to the purchase of the Collateral following exercise of a
Collateral Purchase Option, the Indenture Trustee receives any payment from the
Swap Counterparty, with respect to a Swap Agreement, or from the Interest Rate
Floor Provider, with respect to the Interest Rate Floor Agreement, the Indenture
Trustee shall forward such sums promptly upon receipt to the party that
purchased the Collateral, in the case of a Swap Agreement payment, or to the
Certificateholder, in the case of an Interest Rate Floor Agreement payment.
ARTICLE XI
Miscellaneous
Section 11.01. Compliance Certificates and Opinions, etc. (a) Upon any
----------------------------------------------
application or request by the Issuer to the Indenture Trustee to take any action
under any provision of this Indenture, the Issuer shall furnish to the Indenture
Trustee and to the Note Insurer (i) an Officer's Certificate stating that all
conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with, and (ii) an opinion of counsel stating
that in the opinion of such counsel all such conditions precedent, if any, have
been complied with, except that, in the case of any such application or request
as to which the furnishing of such documents is specifically required by any
provision of this Indenture, no additional certificate or opinion need be
furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(1) a statement that each signatory of such certificate or opinion has
read or has caused to be read such covenant or condition and the definitions
herein relating thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such signatory, such
signatory has made such examination or investigation as is necessary to enable
such signatory to express an informed opinion as to whether or not such covenant
or condition has been complied with;
(4) a statement as to whether, in the opinion of each such signatory,
such condition or covenant has been complied with; and
(5) if the signer of such Certificate or opinion is required to be
Independent, the Statement required by the definition of the term "Independent".
(b) (i) Prior to the deposit of any Collateral or other property or
securities with the Indenture Trustee that is to be made the basis for the
release of any property or securities subject to the lien of this Indenture, the
Issuer shall, in addition to any obligation imposed in Section 11.01(a) or
elsewhere in this Indenture, furnish to the Indenture Trustee an Officer's
Certificate certifying or stating the opinion of each person signing such
certificate as to the fair value (within 90 days of such deposit) to the Issuer
of the Collateral or other property or securities to be so deposited.
(ii) Subject to clause (iii), whenever any property or securities are
to be released from the lien of this Indenture, the Issuer shall also furnish to
the Indenture Trustee an Officer's Certificate certifying or stating the opinion
of each person signing such certificate as to the fair value (within 90 days of
such release) of the property or securities proposed to be released and stating
that in the opinion of such person the proposed release will not impair the
security under this Indenture in contravention of the provisions hereof.
(iii) Notwithstanding any provision of this Indenture, the Issuer may,
without compliance with the requirements of the other provisions of this Section
11.01, (A) collect, sell or otherwise dispose of Mortgage Loans and Properties
as and to the extent permitted or required by the Basic Documents or (B) make
cash payments out of the Accounts as and to the extent permitted or required by
the Basic Documents.
Section 11.02. Form of Documents Delivered to Indenture Trustee. In any case
-------------------------------------------------
where several matters are required to be certified by, or covered by an opinion
of, any specified Person, it is not necessary that all such matters be certified
by, or covered by the opinion of, only one such Person, or that they be so
certified or covered by only one document, but one such Person may certify or
give an opinion with respect to some matters and one or more other such Persons
as to other matters, and any such Person may certify or give an opinion as to
such matters in one or several documents.
Any certificate or opinion of an Authorized Officer of the Issuer may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate of an Authorized Officer or opinion of counsel
may be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of the Servicer, the
Issuer, the Seller or the Depositor, stating that the information with respect
to such factual matters is in the possession of the Servicer, the Issuer, the
Seller or the Depositor, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more applications,
requests, consents, certificates, statements, opinions or other instruments
under this Indenture, they may, but need not, be consolidated and form one
instrument.
Whenever in this Indenture, in connection with any application or certificate or
report to the Indenture Trustee, it is provided that the Issuer shall deliver
any document as a condition of the granting of such application, or as evidence
of the Issuer's compliance with any term hereof, it is intended that the truth
and accuracy, at the time of the granting of such application or at the
effective date of such certificate or report (as the case may be), of the facts
and opinions stated in such document shall in such case be conditions precedent
to the right of the Issuer to have such application granted or to the
sufficiency of such certificate or report. The foregoing shall not, however, be
construed to affect the Indenture Trustee's right to rely upon the truth and
accuracy of any statement or opinion contained in any such document as provided
in Article VI.
Section 11.03. Acts of Noteholders. (a) Any request, demand, authorization,
--------------------
direction, notice, consent, waiver or other action provided by this Indenture to
be given or taken by Noteholders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Noteholders in person
or by agents duly appointed in writing; and except as herein otherwise expressly
provided such action shall become effective when such instrument or instruments
are delivered to the Indenture Trustee, and, where it is hereby expressly
required, to the Issuer. Such instrument or instruments (and the action
embodied therein and evidenced thereby) are herein sometimes referred to as the
"Act" of the Noteholders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Indenture and (subject to Section 6.01)
conclusive in favor of the Indenture Trustee and the Issuer, if made in the
manner provided in this Section 11.03.
(b) The fact and date of the execution by any person of any such instrument
or writing may be proved in any manner that the Indenture Trustee deems
sufficient.
(c) The ownership of Notes shall be proved by the Note Register.
(d) Any request, demand, authorization, direction, notice, consent, waiver
or other action by the Holder of any Notes shall bind the Holder of every Note
issued upon the registration thereof or in exchange therefor or in lieu thereof,
in respect of anything done, omitted or suffered to be done by the Indenture
Trustee or the Issuer in reliance thereon, whether or not notation of such
action is made upon such Note.
Section 11.04. Notices, etc., to Indenture Trustee, Issuer, Note Insurer and
---------------------------------------------------------------
Rating Agencies. Any request, demand, authorization, direction, notice,
- ----------------
consent, waiver or Act of Noteholders or other documents provided or permitted
by this Indenture shall be in writing and if such request, demand,
authorization, direction, notice, consent, waiver or act of Noteholders is to be
made upon, given or furnished to or filed with:
(i) the Indenture Trustee by any Noteholder or by the Issuer shall be
sufficient for every purpose hereunder if made, given, furnished or filed in
writing to or with the Indenture Trustee at the Corporate Trust Office, or
(ii) the Issuer by the Indenture Trustee or by any Noteholder shall be
sufficient for every purpose hereunder if in writing and mailed first-class,
postage prepaid to the Issuer addressed to: TMA Mortgage Funding Trust I, c/o
Wilmington Trust Company, Rodney Square North, Wilmington, Delaware 19890 with a
copy to Thornburg Mortgage Asset Corporation, 119 Marcy Street, Suite 201, Santa
Fe, New Mexico 87501, Attention of Larry Goldstone, President, or at any other
address previously furnished in writing to the Indenture Trustee by the Issuer
or the Depositor. The Issuer shall promptly transmit any notice received by it
from the Noteholders to the Indenture Trustee, or
(iii) the Note Insurer by the Issuer, the Indenture Trustee or by any
Noteholders shall be sufficient for every purpose hereunder to in writing and
mailed, first-class postage pre-paid, or personally delivered or telecopied to:
Ambac Assurance Corporation, One State Street Plaza, 17th Floor, New York, New
York 10004, Attention: Structured Finance - Mortgage-Backed Securities,
Telephone: (212) 208-3387, Telecopier: (212) 363-1459.
Notices required to be given to the Rating Agencies by the Issuer, the Indenture
Trustee or the Owner Trustee shall be in writing, personally delivered or mailed
by certified mail, return receipt requested, to (i) in the case of Moody's, at
the following address: Moody's Investors Service, ABS Monitoring Department, 99
Church Street, New York, New York 10007; and (ii) in the case of S& P, at the
following address: Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., 26 Broadway (15th Floor), New York, New York 10004, Attention of Asset
Backed Surveillance Department; or as to each of the foregoing, at such other
address as shall be designated by written notice to the other parties.
Section 11.05. Notices to Noteholders; Waiver. Where this Indenture provides
-------------------------------
for notice to Noteholders of any event, such notice shall be sufficiently given
(unless otherwise herein expressly provided) if in writing and mailed,
first-class, postage prepaid to each Noteholder affected by such event, at his
address as it appears on the Note Register, not later than the latest date, and
not earlier than the earliest date, prescribed for the giving of such notice.
In any case where notice to Noteholders is given by mail, neither the failure to
mail such notice nor any defect in any notice so mailed to any particular
Noteholder shall affect the sufficiency of such notice with respect to other
Noteholders, and any notice that is mailed in the manner herein provided shall
conclusively be presumed to have been duly given.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by any Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Noteholders shall be filed with the Indenture Trustee but
such filing shall not be a condition precedent to the validity of any action
taken in reliance upon such a waiver.
In case, by reason of the suspension of regular mail service as a result of a
strike, work stoppage or similar activity, it shall be impractical to mail
notice of any event to Noteholders when such notice is required to be given
pursuant to any provision of this Indenture, then any manner of giving such
notice as shall be satisfactory to the Indenture Trustee shall be deemed to be a
sufficient giving of such notice.
Where this Indenture provides for notice to the Rating Agencies, failure to give
such notice shall not affect any other rights or obligations created hereunder,
and shall not under any circumstance constitute an Event of Default.
Section 11.06. Alternate Payment and Notice Provisions. Notwithstanding any
-----------------------------------------
provision of this Indenture or any of the Notes to the contrary, the Issuer may
enter into any agreement with any Holder of a Note providing for a method of
payment, or notice by the Indenture Trustee or any Paying Agent to such Holder,
that is different from the methods provided for in this Indenture for such
payments or notices. The Issuer will furnish to the Indenture Trustee a copy of
each such agreement and the Indenture Trustee will cause payments to be made and
notices to be given in accordance with such agreements.
Section 11.07. Rights of the Note Insurer and the Swap Counterparty. (a) So
-----------------------------------------------------
long as there does not exist a failure by the Note Insurer to make a required
payment under either the Note Insurance Policy or the Swap Insurance Policy, the
Note Insurer shall have the right to exercise and may exercise, without the
consent of the Noteholders, each and every right of the Noteholders granted
pursuant to this Indenture and the Noteholders shall not exercise any such
rights except upon the prior written consent of the Note Insurer; provided,
--------
however, that any right conferred to the Note Insurer hereunder shall be
- -------
suspended during any period in which the Note Insurer is in default in its
payment obligations under either of the Insurance Policies. At such time as the
Notes are no longer outstanding, and no amounts owed to the Note Insurer remain
unpaid, the Note Insurer's rights hereunder shall terminate.
(b) The rights of the Swap Counterparty under this Indenture shall
terminate upon the termination of the last remaining Swap Agreement and the
payment to the Swap Counterparty of all amounts due to it under the Swap
Agreements.
Section 11.08. Effect of Headings. The Article and Section headings and the
--------------------
Table of Contents herein are for convenience only and shall not affect the
construction hereof.
Section 11.09. Successors and Assigns. All covenants and agreements in this
------------------------
Indenture and the Notes by the Issuer shall bind its successors and assigns,
whether so expressed or not. All agreements of the Indenture Trustee in this
Indenture shall bind its successors, co-trustees and agents.
Section 11.10. Separability. In case any provision in this Indenture or in the
------------
Notes shall be invalid, illegal or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
Section 11.11. Benefits of Indenture. Each of the Swap Counterparty and the
-----------------------
Note Insurer and their respective successors and assigns shall be a third-party
beneficiary to the provisions of this Indenture. Nothing in this Indenture or
in the Notes, express or implied, shall give to any Person, other than the
parties hereto and their successors hereunder, and the Noteholders, and any
other party secured hereunder, and any other Person with an ownership interest
in any part of the Trust Estate, any benefit or any legal or equitable right,
remedy or claim under this Indenture.
Section 11.12. Legal Holidays. In any case where the date on which any payment
--------------
is due shall not be a Business Day, then (notwithstanding any other provision of
the Notes or this Indenture) payment need not be made on such date, but may be
made on the next succeeding Business Day with the same force and effect as if
made on the date on which nominally due, and no interest shall accrue for the
period from and after any such nominal date.
Section 11.13. GOVERNING LAW. THIS INDENTURE SHALL BE CONSTRUED IN ACCORDANCE
-------------
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW
PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER
SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 11.14. Counterparts. This Indenture may be executed in any number of
------------
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
Section 11.15. Recording of Indenture. If this Indenture is subject to
------------------------
recording in any appropriate public recording offices, such recording is to be
effected by the Issuer and at its expense accompanied by an opinion of counsel
(which may be counsel to the Indenture Trustee or any other counsel reasonably
acceptable to the Indenture Trustee) to the effect that such recording is
necessary either for the protection of the Noteholders or any other Person
secured hereunder or for the enforcement of any right or remedy granted to the
Indenture Trustee under this Indenture.
Section 11.16. Issuer Obligation. No recourse may be taken, directly or
------------------
indirectly, with respect to the obligations of the Issuer, the Owner Trustee or
the Indenture Trustee on the Notes or under this Indenture or any certificate or
other writing delivered in connection herewith or therewith, against (i) the
Indenture Trustee or the Owner Trustee in its individual capacity, (ii) any
owner of a beneficial interest in the Issuer or (iii) any partner, owner,
beneficiary, agent, officer, director, employee or agent of the Indenture
Trustee or the Owner Trustee in its individual capacity, any holder of a
beneficial interest in the Issuer, the Owner Trustee or the Indenture Trustee or
of any successor or assign of the Indenture Trustee or the Owner Trustee in its
individual capacity, except as any such Person may have expressly agreed (it
being understood that the Indenture Trustee and the Owner Trustee have no such
obligations in their individual capacity) and except that any such partner,
owner or beneficiary shall be fully liable, to the extent provided by applicable
law, for any unpaid consideration for stock, unpaid capital contribution or
failure to pay any installment or call owing to such entity. For all purposes
of this Indenture, in the performance of any duties or obligations of the Issuer
hereunder, the Owner Trustee shall be subject to, and entitled to the benefits
of, the terms and provisions of Articles VI, VII and VIII of the Trust
Agreement.
Section 11.17. No Petition. The Indenture Trustee, by entering into this
------------
Indenture, and each Noteholder, by accepting a Note, hereby covenant and agree
that they shall not, prior to the date that is one year and one day after the
termination of this Indenture institute against the Depositor or the Issuer, or
join in any institution against the Depositor or the Issuer of, any bankruptcy,
reorganization, arrangement, receivership, insolvency or liquidation
proceedings, or other proceedings under any United States Federal or state
bankruptcy or similar law in connection with any obligations relating to the
Notes, this Indenture or any of the other Basic Documents.
Section 11.18. Inspection. The Issuer agrees that, on reasonable prior
----------
notice, it will permit any representative of the Indenture Trustee, during the
Issuer's normal business hours, to examine all the books of account, records,
reports and other papers of the Issuer, to make copies and extracts therefrom,
to cause such books to be audited by Independent certified public accountants,
and to discuss the Issuer's affairs, finances and accounts with the Issuer's
officers, employees, and Independent certified public accountants, all at such
reasonable times and as often as may be reasonably requested. The Indenture
Trustee shall and shall cause its representatives to hold in confidence all such
information except to the extent disclosure may be required by law (and all
reasonable applications for confidential treatment are unavailing) and except to
the extent that the Indenture Trustee may reasonably determine that such
disclosure is consistent with its obligations hereunder.
IN WITNESS WHEREOF, the Issuer and the Indenture Trustee have caused this
Indenture to be duly executed by their respective officers, thereunto duly
authorized and duly attested, all as of the day and year first above written.
TMA MORTGAGE FUNDING TRUST I, as Issuer
By: WILMINGTON TRUST COMPANY,
not in its individual capacity
but solely as Owner Trustee
By:___________________________________
Name:
Title:
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Indenture Trustee, as Note Paying
Agent and as Note Registrar
By:___________________________________
Name:
Title:
STATE OF DELAWARE )
) ss.:
COUNTY OF )
On this 18th day of December, 1998 before me personally appeared Patricia A.
Evans, to me known, who being by me duly sworn did depose and say that she is a
Financial Services Officer of the Owner Trustee, one of the corporations
described in and which executed the above instrument, and that she signed her
name thereto by like order.
Notary Public
[Notarial Seal]
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 18th day of December, 1998 before me personally appeared David M.
Arnold, to me known, who being by me duly sworn did depose and say that he is an
Assistant Secretary of Bankers Trust Company of California, N.A., as Indenture
Trustee, one of the corporations described in and which executed the above
instrument, and that he signed his name thereto by like order.
Notary Public
[Notarial Seal]
EXHIBIT A
[FORM OF CLASS A NOTE]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE AGREES FOR
THE BENEFIT OF THE TRUST THAT THIS NOTE MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY TO A PERSON WHOM THE TRANSFEROR REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE
IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, OR TO AN INSTITUTIONAL ACCREDITED INVESTOR TO WHOM NOTICE IS GIVEN
THAT THE RESALE, PLEDGE OR TRANSFER IS BEING MADE IN RELIANCE ON REGULATION D,
AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR OTHER JURISDICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS NOTE
REPRESENTS AND AGREES FOR THE BENEFIT OF THE TRUST, THE DEPOSITOR, THE SERVICER,
THE INDENTURE TRUSTEE, THE NOTE INSURER, THE OWNER TRUSTEE AND THE INITIAL
PURCHASERS THAT IT IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE
144A OR AN INSTITUTIONAL ACCREDITED INVESTOR (AS DEFINED IN RULE 501(A)(1)-(3)
OR (7) OF REGULATION D UNDER THE SECURITIES ACT) OR AN ENTITY IN WHICH ALL THE
EQUITY OWNERS COME WITHIN SUCH PARAGRAPHS AND THAT IT IS HOLDING THIS NOTE FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION.
THE HOLDER OF THIS NOTE FURTHER UNDERSTANDS AND AGREES THAT THE NUMBER OF
BENEFICIAL OWNERS OF ALL NOTES MAY NOT EXCEED 97 IN NUMBER; THAT TRANSFERS OF
THE NOTES WILL BE RESTRICTED ACCORDINGLY; AND THAT THE HOLDER HEREOF WILL NOTIFY
THE INDENTURE TRUSTEE IF THE NUMBER OF BENEFICIAL OWNERS OF THIS NOTE WILL
CHANGE AS PROVIDED HEREIN AND IN THE INDENTURE.
THIS NOTE MAY NOT BE ACQUIRED DIRECTLY OR INDIRECTLY BY A TRANSFEREE UNLESS THE
PROPOSED TRANSFEREE REPRESENTS TO THE TRUST AND THE INDENTURE TRUSTEE, IN FORM
AND SUBSTANCE SATISFACTORY TO THE TRUST AND THE INDENTURE TRUSTEE, THAT IT
EITHER: (I) IS NOT, AND IS NOT PURCHASING A NOTE, DIRECTLY OR INDIRECTLY, FOR,
ON BEHALF OF OR WITH THE ASSETS OF, AN EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT
ARRANGEMENT WHICH IS SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED ("ERISA") OR SECTION 4975 OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), OR (II) PTCE 95-60, PTCE 96-23,
PTCE 91-38, PTCE 90-1, PTCE 84-14 OR SOME OTHER PROHIBITED TRANSACTION EXEMPTION
IS APPLICABLE TO THE PURCHASE AND HOLDING OF A NOTE BY THE TRANSFEREE.
TRANSFER OF THE THIS NOTE IS SUBJECT TO FURTHER RESTRICTIONS AS SET FORTH IN
SECTION 4.02 OF THE INDENTURE.
TMA MORTGAGE FUNDING TRUST I
COLLATERALIZED ASSET-BACKED NOTES, SERIES 1998-1, CLASS A
NO. A-___ CUSIP NO. 87257S AA 3
FIRST PAYMENT DATE : DECEMBER 28, 1998 INITIAL CLASS PRINCIPAL
BALANCE OF THIS NOTE
("DENOMINATION"): $
INDENTURE TRUSTEE : BANKERS TRUST COMPANY,
OF CALIFORNIA, N.A.
NOTE RATE : VARIABLE ORIGINAL CLASS PRINCIPAL
BALANCE OF ALL NOTES : $1,144,423,000
MATURITY DATE : JANUARY 25, 2029
THIS CERTIFIES THAT ______________________________________________________ is
the registered owner of the COLLATERALIZED ASSET-BACKED NOTES, SERIES 1998-1,
CLASS A, issued by TMA MORTGAGE FUNDING TRUST I, a business trust organized and
existing under the laws of the State of Delaware (herein referred to as the
"Issuer"). The Issuer, for value received, hereby promises to pay to the above
named registered owner, or registered assigns, the initial Class Principal
Balance of this Note listed above, payable on each Payment Date in an amount
equal to the result obtained by multiplying (i) a fraction the numerator of
which is the initial Class Principal Balance of this Note and the denominator of
which is the original Class Principal Balance of all Notes listed above, by (ii)
the aggregate amount, if any, payable from the Trustee Collection Account in
respect of principal on the Notes pursuant to Section 3.05 of the Indenture;
provided, however, that the entire unpaid principal amount of this Note shall be
due and payable on the earlier of the Maturity Date listed above and the
Redemption Date, if any, pursuant to Section 10.1 of the Indenture.
The Issuer will pay interest on this Note at the rate per annum equal to the
Note Rate (as defined on the reverse hereof), on each Payment Date until the
principal of this Note is paid or made available for payment, on the principal
amount of this Note outstanding on the preceding Payment Date (after giving
effect to all payments of principal made on the preceding Payment Date).
Interest on this Note will accrue for each Payment Date during the period
beginning on the immediately preceding Payment Date (or the Closing Date in the
case of the first Accrual Period) and ending on the calendar day prior to such
Payment Date (each an "Accrual Period") and will be calculated on the basis of
the actual number of days in each such period and a 360-day year. Such
principal of and interest on this Note shall be paid in the manner specified on
the reverse hereof.
The principal of and interest on this Note are payable in such coin or currency
of the United States of America as at the time of payment is legal tender for
payment of public and private debts.
Reference is made to the further provisions of this Note set forth on the
reverse hereof, which shall have the same effect as though fully set forth on
the face of this Note.
Unless the certificate of authentication hereon has been executed by the
Indenture Trustee whose name appears below by manual signature, this Note shall
not be entitled to any benefit under the Indenture referred to on the reverse
hereof, or be valid or obligatory for any purpose.
Capitalized terms used in this Note but not defined herein are defined in
Appendix A to the Indenture, which also contains rules as to usage that shall be
applicable herein.
IN WITNESS WHEREOF, the Issuer has caused this instrument to be signed, manually
or in facsimile, by its Authorized Officer as of the date set forth below.
Date: TMA MORTGAGE FUNDING TRUST I
By: WILMINGTON TRUST COMPANY, not in its
individual capacity but solely as Owner
Trustee under the Trust Agreement,
By:_______________________________
Authorized Signatory
INDENTURE TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Collateralized Asset-Backed Notes, Series 1998-1, Class A, of
TMA Mortgage Funding Trust I, designated above and referred to in the
within-mentioned Indenture.
Date: BANKERS TRUST COMPANY OF
CALIFORNIA, N.A., not in its individual
capacity but solely as Indenture Trustee,
By: _________________________________
Authorized Signatory
[REVERSE OF CLASS A NOTE]
This Note is one of a duly authorized issue of Notes of the Issuer, designated
as its Collateralized Asset-Backed Notes, Series 1998-1 (herein called the
"Notes"), all issued under an Indenture dated as of December 1, 1998 (such
indenture, as supplemented or amended, is herein called the "Indenture"),
between the Issuer and Bankers Trust Company of California, N.A., as indenture
trustee (the "Indenture Trustee", which term includes any successor Indenture
Trustee under the Indenture), to which Indenture and all indentures supplemental
thereto reference is hereby made for a statement of the respective rights and
obligations thereunder of the Issuer, the Indenture Trustee and the Holders of
the Notes. The Notes are subject to all terms of the Indenture.
The Notes will be issued in certificated, fully-registered form in minimum
denominations of $100,000 and increments of $1,000 in excess thereof, except for
one Note which may be issued in a different denomination.
The Notes are and will be equally and ratably secured by the collateral pledged
as security therefor as provided in the Indenture.
Principal of the Notes will be payable on each Payment Date in an amount
described on the face hereof until the principal balance of the Notes is reduced
to zero. "Payment Date" means the 25th day of each month, or, if any such date
is not a Business Day, the next succeeding Business Day, commencing in December
1998.
As described on the face hereof, the entire unpaid principal amount of this Note
shall be due and payable on the earlier of the Maturity Date and the Redemption
Date, if any, pursuant to Section 10.1 of the Indenture. Notwithstanding the
foregoing, the entire unpaid principal amount of the Notes shall be due and
payable on the date on which (i) an Event of Default shall have occurred and be
continuing and (ii) the Note Insurer, or the Indenture Trustee, with the consent
of the Note Insurer, or the Holders of the Notes, with the consent of the Note
Insurer, representing not less than a majority of the Class Principal Balance of
the Notes have declared the Notes to be immediately due and payable in the
manner provided in Section 5.02 of the Indenture. All principal payments on the
Notes shall be made pro rata to the Noteholders entitled thereto.
AS PROVIDED IN THE TRUST AGREEMENT AND THE INDENTURE, THE NOTES ARE SUBJECT TO
PURCHASE PURSUANT TO AN OPTION GRANTED TO THE HOLDER OF THE CERTIFICATES, WHICH
MAY BE EXERCISED AT ANY TIME; THE NOTES MAY ALSO BE REDEEMED AT ANY TIME
FOLLOWING THE EXERCISE OF CERTAIN COLLATERAL PURCHASE OPTIONS GRANTED TO THE
HOLDER OF THE CERTIFICATES AND TO BEAR, STEARNS & CO. INC. IF ANY SUCH OPTION
IS EXCERISED THE NOTEHOLDERS WILL BE ENTITLED TO RECEIVE THE OUTSTANDING
PRINCIPAL BALANCE OF THE NOTES, PLUS ACCRUED INTEREST THEREON AT THE LIBOR RATE
TO THE DATE OF PURCHASE AND ALL UNPAID LIBOR INTEREST CARRYOVER AMOUNTS.
As provided in the Indenture and the Sale and Servicing Agreement, the Notes
will be redeemed in whole, but not in part, if the Servicer chooses to exercise
its option to purchase the Mortgage Loans, on any Payment Date on or after the
date on which the aggregate Loan Balance is five percent or less than the
original aggregate Loan Balance.
Payments of interest on this Note due and payable on each Payment Date, together
with the installment of principal, if any, to the extent not in full payment of
this Note, will be made by check mailed to each Holder of a Note entitled
thereto at the address appearing in the Note Register to be maintained in
accordance with the provisions of the Indenture without requiring that this Note
be submitted for notation of payment or, upon timely receipt by the Indenture
Trustee of written instructions from a Noteholder which holds Notes with an
aggregate initial principal balance of $1,000,000 or more, by wire transfer to a
United States depository institution with appropriate facilities for receiving
such a wire transfer; provided, however, that the final distribution in
retirement of the Notes will be made only upon presentation and surrender of
such Notes at the office or agency of the Indenture Trustee specified in the
notice to Noteholders of such final payment. Any reduction in the principal
amount of this Note effected by any payments made on any Payment Date shall be
binding upon all future Holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange hereof or in lieu hereof, whether
or not noted hereon. If funds are expected to be available, as provided in the
Indenture, for payment in full of the then remaining unpaid principal amount of
this Note on a Payment Date, then the Indenture Trustee, in the name of and on
behalf of the Issuer, will notify the Person who was the Holder hereof as of the
Record Date preceding such Payment Date by notice mailed prior to such Payment
Date and the amount then due and payable shall be payable only upon presentation
and surrender of this Note at the Indenture Trustee's principal Corporate Trust
Office or at the office of the Indenture Trustee's agent appointed for such
purposes located in the City of New York.
On each Payment Date, the Notes will be entitled to receive interest at the
applicable Note Rate. During each Accrual Period through the Accrual Period
relating to the November 1999 Payment Date, the Notes will accrue interest at a
per annum rate equal to the lesser of (a) the London interbank offered rate for
one-month U.S. dollar deposits ("LIBOR") determined as described in the Sale and
Servicing Agreement plus 0.70%, or (b) the Available Funds Cap Rate, and during
each Accrual Period thereafter, at a per annum rate equal to the lesser of (a)
LIBOR plus 1.40% or (b) the Available Funds Cap Rate. Any excess of interest at
the LIBOR Rate over interest at the Available Funds Cap Rate will, together with
interest thereon at the applicable LIBOR Rate be carried forward and will be
payable on future Payment Dates to the extent there are funds available
therefor.
The payment on each Payment Date of interest on the Notes at the lesser of the
LIBOR Rate and the Available Funds Cap Rate and any Principal Shortfall Amount
will be guaranteed by Ambac Assurance Corporation (the "Note Insurer") pursuant
to the Note Insurance Policy.
As provided in the Indenture and subject to certain limitations set forth
therein, the transfer of this Note may be registered on the Note Register upon
surrender of this Note for registration of transfer at the office or agency
designated by the Issuer pursuant to the Indenture, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Indenture Trustee duly executed by, the Noteholder hereof or his attorney duly
authorized in writing, with such signature guaranteed by an "eligible guarantor
institution" meeting the requirements of the Note Registrar, which requirements
include membership or participation in Securities Transfer Agent's Medallion
Program ("STAMP") or such other "signature guarantee program" as may be
determined by the Note Registrar in addition to, or in substitution for, STAMP
(all in accordance with the Securities Exchange Act of 1934, as amended), and
such other documents as the Indenture Trustee may require, including either an
Institutional Accredited Investor Representation Letter or a Qualified
Institutional Buyer Representation Letter, as applicable, from the proposed
transferee, substantially in the form of Exhibits E and F, respectively, to the
Indenture, and thereupon one or more new Notes of authorized denominations and
in the same aggregate principal amount will be issued to the designated
transferee or transferees. No service charge will be charged for any
registration of transfer or exchange of this Note, but the transferor may be
required to pay a sum sufficient to cover any tax or other governmental charge
that may be imposed in connection with any such registration of transfer or
exchange.
Each Noteholder, by acceptance of a Note, covenants and agrees that no recourse
may be taken, directly or indirectly, with respect to the obligations of the
Issuer, the Owner Trustee or the Indenture Trustee on the Notes or under the
Indenture or any certificate or other writing delivered in connection therewith,
against (i) the Depositor, the Seller, the Servicer, the Indenture Trustee or
the Owner Trustee in its individual capacity, (ii) any owner of a beneficial
interest in the Issuer or (iii) any partner, owner, beneficiary, agent, officer,
director or employee of the Depositor, the Seller, the Servicer, the Indenture
Trustee or the Owner Trustee in its individual capacity, any holder of a
beneficial interest in the Issuer, the Depositor, the Seller, the Servicer, the
Owner Trustee or the Indenture Trustee or of any successor or assign of the
Depositor, the Seller, the Servicer, the Indenture Trustee or the Owner Trustee
in its individual capacity, except as any such Person may have expressly agreed
(it being understood that the Indenture Trustee and the Owner Trustee have no
such obligations in their individual capacity) and except that any such partner,
owner or beneficiary shall be fully liable, to the extent provided by applicable
law, for any unpaid consideration for stock, unpaid capital contribution or
failure to pay any installment or call owing to such entity.
Each Noteholder, by acceptance of a Note, covenants and agrees that by accepting
the benefits of the Indenture that such Noteholder (i) will not prior to one
year and one day after the Maturity Date institute against the Depositor or the
Issuer, or join in any institution against the Depositor or the Issuer of, any
bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings,
or other proceedings, under any United States federal or state bankruptcy or
similar law in connection with any obligations relating to the Notes, the
Indenture or the Basic Documents and (ii) will treat the Note as debt for all
federal, state and local income tax purposes.
Prior to the due presentment for registration of transfer of this Note, the
Issuer, the Indenture Trustee and any agent of the Issuer or the Indenture
Trustee may treat the Person in whose name this Note (as of the day of
determination or as of such other date as may be specified in the Indenture) is
registered in the Note Register as the owner hereof for all purposes, whether or
not this Note be overdue, and neither the Issuer, the Indenture Trustee nor any
such agent shall be affected by notice to the contrary.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Issuer and the rights of the Holders of the Notes under the Indenture at any
time by the Issuer with the consent of the Note Insurer and the Holders of Notes
representing a majority of the Class Principal Balance of all Notes at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
Notes representing specified percentages of the Class Principal Balance of the
Notes, on behalf of the Holders of all the Notes, with the consent of the Note
Insurer, to waive compliance by the Issuer with certain provisions of the
Indenture and certain past defaults under the Indenture and their consequences.
Any such consent or waiver by the Holder of this Note (or any one of more
predecessor Notes) shall be conclusive and binding upon such Holder and upon all
future Holders of this Note and of any Note issued upon the registration of
transfer hereof or in exchange hereof or in lieu hereof whether or not notation
of such consent or waiver is made upon this Note. The Indenture also permits
the Indenture Trustee, with the consent of the Note Insurer, to amend or waive
certain terms and conditions set forth in the Indenture without the consent of
Holders of the Notes issued thereunder. In addition, so long as the Note
Insurer is not in default under either the Note Insurance Policy or the Swap
Insurance Policy, the Note Insurer shall have and may exercise, without the
consent of the Noteholders, all of the rights of the Noteholders.
The term "Issuer" as used in this Note includes any successor to the Issuer
under the Indenture.
The Issuer is permitted by the Indenture, under certain circumstances, to merge
or consolidate, subject to the rights of the Indenture Trustee and the Holders
of Notes under the Indenture.
The Notes are issuable only in registered form in denominations as provided in
the Indenture, subject to certain limitations therein set forth.
THIS NOTE AND THE INDENTURE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND
THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER AND THEREUNDER
SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
No reference herein to the Indenture and no provision of this Note or of the
Indenture shall alter or impair the obligation of the Issuer, which is absolute
and unconditional, to pay the principal of and interest on this Note at the
times, place, and rate, and in the coin or currency herein prescribed.
Anything herein to the contrary notwithstanding, except as expressly provided in
the Indenture or the Basic Documents, neither Wilmington Trust Company in its
individual capacity, Bankers Trust Company of California, N.A. in its individual
capacity, any owner of a beneficial interest in the Issuer, nor any of their
respective partners, beneficiaries, agents, officers, directors, employees or
successors or assigns shall be personally liable for, nor shall recourse be had
to any of them for, the payment of principal of or interest on, or performance
of, or omission to perform, any of the covenants, obligations or
indemnifications contained in this Note or the Indenture, it being expressly
understood that said covenants, obligations and indemnifications have been made
by the Owner Trustee for the sole purposes of binding the interests of the Owner
Trustee in the assets of the Issuer. The Holder of this Note by the acceptance
hereof agrees that except as expressly provided in the Indenture or the Basic
Documents, in the case of an Event of Default under the Indenture, the Holder
shall have no claim against any of the foregoing for any deficiency, loss or
claim therefrom; provided, however, that nothing contained herein shall be taken
to prevent recourse to, and enforcement against, the assets of the Issuer for
any and all liabilities, obligations and undertakings contained in the Indenture
or in this Note.
ASSIGNMENT
Social Security or taxpayer I. D. or other identifying number of assignee:
- ------------------------------------
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ______________________________
- ----------------------------------------------------
(name and address of assignee)
the within Note and all rights thereunder, and hereby irrevocably constitutes
and appoints _____________________, attorney, to transfer said Note on the books
kept for registration thereof, with full power of substitution in the premises.
Dated: ___________________
________________________________ */
Signature Guaranteed:
_______________________________ */
*/ NOTICE: The signature to this assignment must correspond with the name
of the registered owner as it appears on the face of the within Note in every
particular, without alteration, enlargement or any change whatever. Such
signature must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Note Registrar, which requirements include membership or
participation in STAMP or such other "signature guarantee program" as may be
determined by the Note Registrar in addition to, or in substitution for, STAMP,
all in accordance with the Securities Exchange Act of 1934, as amended.
EXHIBIT B
SCHEDULE OF MORTGAGE LOANS
EXHIBIT C
SCHEDULE OF POOLED CERTIFICATES
1. 100% of the First Boston Mortgage Trust 1993-B Subordinated Certificates,
Series 1993-B, Class A1, in the original principal amount of $49,819,272.00 and
the outstanding principal balance as of the Cut-off Date $40,732,573.86.
2. 100% of the First Boston Mortgage Trust 1993-B Subordinated Certificates,
Series 1993-B, Class A2, in the original principal amount of $87,523,493.00 and
the outstanding principal balance as of the Cut-off Date $87,523,493.00.
EXHIBIT D
<TABLE>
<CAPTION>
SWAP ORIGINAL REVISED FIXED RATE INITIAL
COUNTERPARTY NOTIONAL ORIGINAL EFFECTIVE MATURITY (Original Fixed CALCULATION
REFERENCE AMOUNT(1) DATE DATE Rate+0.0075%) PERIOD(2)
- ------------ ----------------- ------------------ ---------- ------------------- ------------
<C> <S> <C> <C> <C> <C>
98DL1475 USD 87, 298,455 10-Jun-98 10-Jun-02 5.9325% 10-Dec-98
----------------- ------------------ ---------- ------------------- ------------
98DL1536` USD 18,000,000 10-Jun-98 10-June-02 6.2075% 10-Dec-98
----------------- ------------------ ---------- ------------------- ------------
98DL1716 USD 91,000,000 25-Jun-98 25-Jun-02 5.9175% 25-Nov-98
----------------- ------------------ ---------- ------------------- ------------
98DL1719 USD 19,000,000 25-Jun-98 25-Jun-02 6.1775% 25-Nov-98
----------------- ------------------ ---------- ------------------- ------------
98DL2169 USD 21,807,000 1-Jul-98 1-Jul-02 5.8035% 1-Dec-98
----------------- ------------------ ---------- ------------------- ------------
98DL2197 USD 7,269,000 1-Jul-98 1-Jul-02 6.0975% 1-Dec-98
----------------- ------------------ ---------- ------------------- ------------
98DL2359 USD 77,000,000 20-Aug-98 20-Aug-02 5.8125% 20-Nov-98
----------------- ------------------ ---------- ------------------- ------------
98DL2367 USD 33,000,000 20-Aug-98 20-Aug-02 6.0725% 20-Nov-98
----------------- ------------------ ---------- ------------------- ------------
98DL2620 USD 35,000,000 25-Sep-98 25-Sep-02 5.7475% 25-Nov-98
----------------- ------------------ ---------- ------------------- ------------
98DDL2622 USD 15,000,000 25-Sep-98 25-Sep-02 6.0275% 25-Nov-98
- ------------ ----------------- ------------------ ---------- ------------------- ------------
<FN>
- -------------------------------
1. Notional Amounts are subject to amortization in accordance with their attached schedules.
2. From and including the date indicated, to but excluding the same day of the immediately
succeeding month.
</TABLE>
EXHIBIT E
Institutional Accredited Investor Representation Letter
_______________ Date
Thornburg Mortgage Funding Corporation,
as Depositor
18881 Von Karman Avenue, Suite 1450
Irvine, California 92612
Attention: Rick Story
TMA Mortgage Funding Trust I
c/o Wilmington Trust Company
Rodney Square North
100 Market Street
Wilmington, Delaware 19890
Bankers Trust Company of California, N.A.
as Indenture Trustee
3 Park Plaza; 16th Floor
Irvine, California 92614
Re: Collateralized Asset-Backed Notes,
Series 1998-1, Class A
-------------------------
Ladies and Gentlemen:
In connection with our acquisition of the above Notes we certify that (a)
we understand that the Notes are not being registered under the Securities Act
of 1933, as amended (the "Securities Act"), or any state securities laws and are
being transferred to us in a transaction that is exempt from the registration
requirements of the Securities Act and any such laws, (b) we are an
institutional "accredited investor," as defined in Rule 501 (a) (1), (2), (3) or
(7) of Regulation D under the Securities Act or an entity in which all of the
equity owners come within such paragraphs , and have such knowledge and
experience in financial and business matters that we are capable of evaluating
the merits and risks of investments in the Notes, (c) we have received and
reviewed a copy of the Confidential Private Placement Memorandum, dated December
17, 1998 relating to the Notes and we have had the opportunity to ask questions
of and receive answers from the Depositor concerning the purchase of the Notes
and all matters relating thereto or any additional information deemed necessary
to our decision to purchase the Notes, (d) either: (i) we are not, and not
purchasing a Note, directly or indirectly, for, on behalf of or with the assets
of, an employee benefit plan or other retirement arrangement which is subject to
Title I of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and/or Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code"), or (ii) PTCE 96-23, PTCE 95-60, PTCE 91-38, PTCE 90-1, PTCE 84-14
or some other prohibited transaction exemption is applicable to the purchase and
holding of a Note by us, (e) we are acquiring the Notes for investment for our
own account and not with a view to any distribution of such Notes (but without
prejudice to our right at all times to sell or otherwise dispose of the Notes in
accordance with clause (g) below), (f) we have not offered or sold any Notes to,
or solicited offers to buy any Notes from, any person, or otherwise approached
or negotiated with any person with respect thereto, or taken any other action
which would result in a violation of Section 5 of the Securities Act, (g) we
will not sell, transfer or otherwise dispose of any Notes unless (1) such sale,
transfer or other disposition is made pursuant to an effective registration
statement under the Securities Act or is exempt from such registration
requirements, and if requested, we will at our expense provide an opinion of
counsel satisfactory to the addressees of this Note that such sale, transfer or
other disposition may be made pursuant to an exemption from the Securities Act,
(2) the purchaser or transferee of such Note has executed and delivered to you a
certificate to substantially the same effect as this certificate and (3) the
purchaser or transferee has otherwise complied with any conditions for transfer
set forth in the Indenture relating to the above Notes; (h) we acknowledge that
restrictive legends have been placed on our Notes relating to the foregoing and
we not in violation thereof; and (i) we understand the above addressees and
others are relying on our acknowledgments, representations, warranties or
agreements in this letter and agree to promptly notify such addressees if any of
the acknowledgments, representations, warranties or agreements made or deemed to
have been made by us in connection with our purchase of the Notes are no longer
accurate.
We [are] [are not] a corporation purchasing the Notes in the State of
California, and, if so, we have a net worth of at least $14,000,000 according to
our most recent audited financial statements.
For purposes of the Investment Company Act of 1940, as amended, the
number of beneficial owners of the Notes we are purchasing is ______.
Very truly yours,
_______________________________
Print Name of Transferee
By:_____________________________
Authorized Officer
EXHIBIT F
Qualified Institutional Buyer Representation Letter
Date__________________
Thornburg Mortgage Funding Corporation,
as Depositor
18881 Von Karman Avenue, Suite 1450
Irvine, California 92612
Attention: Rick Story
TMA Mortgage Funding Trust I
c/o Wilmington Trust Company
Rodney Square North
100 Market Street
Wilmington, Delaware 19890
Bankers Trust Company of California, N.A.
as Indenture Trustee
3 Park Plaza; 16th Floor
Irvine, California 92614
Re: Collateralized Asset-Backed Notes,
Series 1998-1, Class A
-------------------------
Ladies and Gentlemen:
In connection with our acquisition of the above Notes we certify that (a)
we understand that the Notes are not being registered under the Securities Act
of 1933, as amended (the "Securities Act"), or any state securities laws and are
being transferred to us in a transaction that is exempt from the registration
requirements of the Securities Act and any such laws, (b) we have such knowledge
and experience in financial and business matters that we are capable of
evaluating the merits and risks of investments in the Notes, (c) we have
received and reviewed a copy of the Confidential Private Placement Memorandum,
dated December 17, 1998 relating to the Notes, and we have had the opportunity
to ask questions of and receive answers from the Depositor concerning the
purchase of the Notes and all matters relating thereto or any additional
information deemed necessary to our decision to purchase the Notes, (d) either:
(i) we are not, and not purchasing a Note, directly or indirectly, for, on
behalf of or with the assets of, an employee benefit plan or other retirement
arrangement which is subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and/or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code"), or (ii) PTCE 96-23, PTCE 95-60,
PTCE 91-38, PTCE 90-1, PTCE 84-14 or some other prohibited transaction exemption
is applicable to the purchase and holding of a Note by us, (e) we have not, nor
has anyone acting on our behalf offered, transferred, pledged, sold or otherwise
disposed of the Notes, any interest in the Notes or any other similar security
to, or solicited any offer to buy or accept a transfer, pledge or other
disposition of the Notes, any interest in the Notes or any other similar
security from, or otherwise approached or negotiated with respect to the Notes,
any interest in the Notes or any other similar security with, any person in any
manner, or made any general solicitation by means of general advertising or in
any other manner, or taken any other action, that would constitute a
distribution of the Notes under the Securities Act or that would render the
disposition of the Notes a violation of Section 5 of the Securities Act or
require registration pursuant thereto, nor will act, nor has authorized or will
authorize any person to act, in such manner with respect to the Notes, (f) we
are a "qualified institutional buyer" as that term is defined in Rule 144A under
the Securities Act ("Rule 144A") and have completed either of the forms of
certification to that effect attached hereto as Annex 1 or Annex 2. We are
aware that the sale to us is being made in reliance on Rule 144A. We are
acquiring the Notes for our own account or for resale pursuant to Rule 144A and
further understand that such Notes may be resold, pledged or transferred only
(i) to a person reasonably believed to be a qualified institutional buyer that
purchases for its own account or for the account of a qualified institutional
buyer to whom notice is given that the resale, pledge or transfer is being made
in reliance on Rule 144A, or (ii) pursuant to another exemption from
registration under the Securities Act.
We acknowledge that restrictive legends have been placed on our Notes
relating to the foregoing and we not in violation thereof; and we understand the
above addressees and others are relying on our acknowledgments, representations,
warranties or agreements in this letter and agree to promptly notify such
addressees if any of the acknowledgments, representations, warranties or
agreements made or deemed to have been made by us in connection with our
purchase of the Notes are no longer accurate.
For purposes of the Investment Company Act of 1940, as amended, the
number of beneficial owners of the Notes we are purchasing is ______.
Very truly yours,
______________________________
Print Name of Transferee
By:_____________________________
Authorized Officer
ANNEX 1
--------
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
--------------------------------------------------------
[For Transferees Other Than Registered Investment Companies]
The undersigned (the "Buyer") hereby certifies as follows to the
parties listed in the Rule 144A Transferee Certificate to which this
certification relates with respect to the Notes described therein:
1. As indicated below, the undersigned is the President, Chief
Financial Officer, Senior Vice President or other executive officer of the
Buyer.
2. In connection with purchases by the Buyer, the Buyer is a
"qualified institutional buyer" as that term is defined in Rule 144A under the
Securities Act of 1933, as amended ("Rule 144A") because (i) the Buyer owned
and/or invested on a discretionary basis $____________________(3) in securities
(except for the excluded securities referred to below) as of the end of the
Buyer's most recent fiscal year (such amount being calculated in accordance with
Rule 144A and (ii) the Buyer satisfies the criteria in the category marked
below.
___ Corporation, etc. The Buyer is a corporation (other than a
-----------------
bank, savings and loan association or similar institution), Massachusetts or
similar business trust, partnership, or charitable organization described in
Section 501(c) (3) of the Internal Revenue Code of 1986, as amended.
___ Bank. The Buyer (a) is a national bank or banking institution
----
organized under the laws of any State, territory or the District of Columbia,
the business of which is substantially confined to banking and is supervised by
the State or territorial banking commission or similar official or is a foreign
bank or equivalent institution, and (b) has an audited net worth of at least
$25,000,000 as demonstrated in its latest annual financial statements, a copy of
---------
which is attached hereto.
- ---------------------------
- ----------------------------------
(3) Buyer must own and/or invest on a discretionary basis at least
$100,000,000 in securities unless Buyer is a dealer, and, in that case, Buyer
must own and/or invest on a discretionary basis at least $10,000,000 in
securities.
<PAGE>
___ Savings and Loan. The Buyer (a) is a savings and loan
------------------
association, building and loan association, cooperative bank, homestead
association or similar institution, which is supervised and examined by a State
or Federal authority having supervision over any such institutions or is a
foreign savings and loan association or equivalent institution, and (b) has an
audited net worth of at least $25,000,000 as demonstrated in its latest annual
financial statements, a copy of which is attached hereto.
----------------------------------------
___ Broker-dealer. The Buyer is a dealer registered pursuant to
-------------
Section 15 of the Securities Exchange Act of 1934.
___ Insurance Company. The Buyer is an insurance company whose
------------------
primary and predominant business activity is the writing of insurance or the
reinsuring of risks underwritten by insurance companies and which is subject to
supervision by the insurance commissioner or a similar official or agency of a
State, territory or the District of Columbia.
___ State or Local Plan. The Buyer is a plan established and
----------------------
maintained by a State, its political subdivisions, or any agency or
instrumentality of the State or its political subdivisions, for the benefit of
its employees.
___ ERISA Plan. The Buyer is an employee benefit plan within the
-----------
meaning of Title I of the Employee Retirement Income Security Act of 1974.
___ Investment Advisor. The Buyer is an investment advisor
-------------------
registered under the Investment Advisors Act of 1940.
___ Small Business Investment Company. Buyer is a small business
----------------------------------
investment company licensed by the U.S. Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Act of 1958.
___ Business Development Company. Buyer is a business development
----------------------------
company as defined in Section 202(a) (22) of the Investment Advisors Act of
1940.
3. The term "securities" as used herein does not include (i)
---------- ----------------
securities of issuers that are affiliated with the Buyer; (ii) securities that
are part of an unsold allotment to or subscription by the Buyer, if the Buyer is
a dealer; (iii) securities issued or guaranteed by the U.S. or any
instrumentality thereof; (iv) bank deposit notes and certificates of deposit;
(v) loan participations; (vi) repurchase agreements; (vii) securities owned but
subject to a repurchase agreement; and (viii) currency, interest rate and
commodity swaps.
4. For purposes of determining the aggregate amount of securities
owned and/or invested on a discretionary basis by the Buyer, the Buyer used the
cost of such securities to the Buyer and did not include any of the securities
referred to in the preceding paragraph, except (i) where the Buyer reports its
securities holdings in its financial statements on the basis of their market
value, and (ii) no current information with respect to the cost of those
securities has been published. If clause (ii) in the preceding sentence
applies, the securities may be valued at market. Further, in determining such
aggregate amount, the Buyer may have included securities owned by subsidiaries
of the Buyer, but only if such subsidiaries are consolidated with the Buyer in
its financial statements prepared in accordance with generally accepted
accounting principles and if the investments of such subsidiaries are managed
under the Buyer's direction. However, such securities were not included if the
Buyer is a majority-owned, consolidated subsidiary of another enterprise and the
Buyer is not itself a reporting company under the Securities Exchange Act of
1934, as amended.
5. The Buyer acknowledges that it is familiar with Rule 144A and
understands that the seller to it and other parties related to the Notes are
relying and will continue to rely on the statements made herein because one or
more sales to the Buyer may be in reliance on Rule 144A.
6. Until the date of purchase of the Rule 144A Securities, the
Buyer will notify each of the parties to which this certification is made of any
changes in the information and conclusions herein. Until such notice is given,
the Buyer's purchase of the Notes will constitute a reaffirmation of this
certification as of the date of such purchase. In addition, if the Buyer is a
bank or savings and loan is provided above, the Buyer agrees that it will
furnish to such parties updated annual financial statements promptly after they
become available.
___________________________________
Print Name of Buyer
By:
______________________________
Name:
Title:
Date:
____________________________
ANNEX 2
-------
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
--------------------------------------------------------
[For Transferees That are Registered Investment Companies]
The undersigned (the "Buyer") hereby certifies as follows to the
parties listed in the Rule 144A Transferee Certificate to which this
certification relates with respect to the Notes described therein:
1. As indicated below, the undersigned is the President, Chief
Financial Officer or Senior Vice President of the Buyer or, if the Buyer is a
"qualified institutional buyer" as that term is defined in Rule 144A under the
Securities Act of 1933, as amended ("Rule 144A") because Buyer is part of a
Family of Investment Companies (as defined below), is such an officer of the
Adviser.
2. In connection with purchases by Buyer, the Buyer is a
"qualified institutional buyer" as defined in SEC Rule 144A because (i) the
Buyer is an investment company registered under the Investment Company Act of
1940, as amended, and (ii) as marked below, the Buyer alone, or the Buyer's
Family of Investment Companies, owned at least $100,000,000 in securities (other
than the excluded securities referred to below) as of the end of the Buyer's
most recent fiscal year. For purposes of determining the amount of securities
owned by the Buyer or the Buyer's Family of Investment Companies, the cost of
such securities was used, except (i) where the Buyer or the Buyer's Family of
Investment Companies reports its securities holdings in its financial statements
on the basis of their market value, and (ii) no current information with respect
to the cost of those securities has been published. If clause (ii) in the
preceding sentence applies, the securities may be valued at market.
___ The Buyer owned $_________________ in securities (other than
the excluded securities referred to below) as of the end of the Buyer's most
recent fiscal year (such amount being calculated in accordance with Rule 144A).
___ The Buyer is part of a Family of Investment Companies which
owned in the aggregate $_______ in securities (other than the excluded
securities referred to below) as of the end of the Buyer's most recent fiscal
year (such amount being calculated in accordance with Rule 144A).
3. The term "Family of Investment Companies" as used herein means
------------------------------
two or more registered investment companies (or series thereof) that have the
same investment adviser or investment advisers that are affiliated (by virtue of
being majority owned subsidiaries of the same parent or because one investment
adviser is a majority owned subsidiary of the other).
4. The term "securities" as used herein does not include (i)
----------
securities of issuers that are affiliated with the Buyer or are part of the
Buyer's Family of Investment Companies; (ii) securities issued or guaranteed by
the U.S. or any instrumentality thereof; (iii) bank deposit notes and
certificates of deposit; (iv) loan participations; (v) repurchase agreements;
(vi) securities owned but subject to a repurchase agreement; and (vii) currency,
interest rate and commodity swaps.
5. The Buyer is familiar with Rule 144A and understands that the
parties listed in the Rule 144A Transferee Certificate to which this
certification relates are relying and will continue to rely on the statements
made herein because one or more sales to the Buyer will be in reliance on Rule
144A. In addition, the Buyer will only purchase for the Buyer's own account.
6. Until the date of purchase of the Notes, the undersigned will
notify the parties listed in the Rule 144A Transferee Certificate to which this
certification relates of any changes in the information and conclusions herein.
Until such notice is given, the Buyer's purchase of the Notes will constitute a
reaffirmation of this certification by the undersigned as of the date of such
purchase.
___________________________________
Print Name of Buyer or Adviser
By:
______________________________
Name:
Title:
IF AN ADVISER:
___________________________________
Print Name of Buyer
Date:
____________________________
EXHIBIT G
---------
<TABLE>
<CAPTION>
FORM OF NOTICE OF EXERCISE OF
NOTE PURCHASE OPTION
Date__________________
<S> <C>
TMA Mortgage Funding Trust I Bankers Trust Company of California, N.A.
c/o Wilmington Trust Company, as Indenture Trustee
Owner Trustee 3 Park Plaza; 16th Floor
Rodney Square North Irvine, California 92614
1100 Market Street Attention: Corporate Trust - TMA
Wilmington, Delaware 19890 Mortgage Funding Trust I
Bear, Stearns & Co. Inc. Moody's Investors Service
245 Park Avenue 99 Church Street
New York, NY 10167 New York, NY 10007
Attention: Mortgage-Backed Securities Attention: ABS Monitoring Department
Ambac Assurance Corporation Standard & Poors Corporation
One State Street Plaza, 17th Floor 26 Broadway, 12th Floor
New York, NY 10004 New York, NY 10281
Attention: Structured Finance- Attention: Asset-Backed Surveillance Department
Mortgage-Backed Securities
PNC Mortgage Securities Corp.
75 North Fairway Drive
Vernon Hills, IL 60061
Attention: General Counsel
(with copy to the Master Servicing
Department)
</TABLE>
Re: TMA Mortgage Funding Trust I,
Collateralized Asset-Backed Notes, Series 1998-1, Class A
---------------------------------------------------------------
Ladies and Gentlemen:
We are the Holder of 100% of the outstanding Certificates and the Note
Purchase Option. Pursuant to the terms of the Indenture (the "Indenture"),
dated as of December 1, 1998, between TMA Mortgage Funding Trust I (the
"Issuer") and Bankers Trust Company of California, N.A., as indenture trustee
(the "Indenture Trustee"), we hereby give notice of our exercise of the Note
Purchase Option. We intend to purchase the Notes on the Payment Date in
________, [199_] [20__], which will be the Note Purchase Date. On the Note
Purchase Date we will deposit the Note Purchase Price plus all other required
sums with the Indenture Trustee. Capitalized terms used herein shall have the
meanings ascribed to such terms in the Indenture.
Very truly yours,
__________________________
Print Name of Certificateholder
By:______________________
Authorized Officer
EXHIBIT H
---------
EXHIBIT H
---------
<TABLE>
<CAPTION>
FORM OF NOTICE OF EXERCISE OF
[CERTIFICATEHOLDER] [BEAR STEARNS]
COLLATERAL PURCHASE OPTION
Date__________________
<S> <C>
TMA Mortgage Funding Trust I Bankers Trust Company of California, N.A.
c/o Wilmington Trust Company, as Indenture Trustee
Owner Trustee 3 Park Plaza; 16th Floor
Rodney Square North Irvine, California 92614
1100 Market Street Attention: Corporate Trust - TMA
Wilmington, Delaware 19890 Mortgage Funding Trust I
[NAME AND ADDRESS OF Moody's Investors Service
CERTIFICATEHOLDER OR 99 Church Street
Bear Stearns & Co. Inc. New York, NY 10007
245 Park Avenue Attention: ABS Monitoring Department
New York, NY 10167
Attention: Mortgage-Backed Securities] Standard & Poors Corporation
26 Broadway, 12th Floor
Ambac Assurance Corporation New York, NY 10281
One State Street Plaza, 17th Floor Attention: Asset-Backed Surveillance Department
New York, NY 10004
Attention: Structured Finance- PNC Mortgage Securities Corp.
Mortgage-Backed Securities 75 North Fairway Drive
Vernon Hills, IL 60061
Attention: General Counsel
(with a copy to the Master Servicing
Department)
</TABLE>
Re: TMA Mortgage Funding Trust I,
Collateralized Asset-Backed Notes, Series 1998-1, Class A
---------------------------------------------------------------
Ladies and Gentlemen:
[We are the Holder of 100% of the outstanding Certificates and the
Collateral Purchase Option.] [We are the holder of the Bear Stearns Collateral
Purchase Option.] Pursuant to the terms of the Indenture (the "Indenture"),
dated as of December 1, 1998, between TMA Mortgage Funding Trust I (the
"Issuer") and Bankers Trust Company of California, N.A., as indenture trustee
(the "Indenture Trustee"), we hereby give notice of our exercise of the
[Certificateholder] [Bear Stearns] Collateral Purchase Option. We intend to
purchase the Collateral on the Payment Date in ________, [199_] [20__], which
will be the Redemption Date. On the Redemption Date we will deposit the
applicable Collateral Purchase Price plus all other required sums with the
Indenture Trustee. Capitalized terms used herein shall have the meanings
ascribed to such terms in the Indenture.
Very truly yours,
__________________________
[Print Name of Certificateholder
or BEAR, STEARNS & CO. INC.]
By:______________________
Authorized Officer
<PAGE>
EXHIBIT 10.7
EXECUTION COPY
--------------
TMA MORTGAGE FUNDING TRUST I,
as Issuer,
THORNBURG MORTGAGE FUNDING CORPORATION,
as Depositor,
PNC MORTGAGE SECURITIES CORP.,
as Servicer,
and
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Indenture Trustee
SALE AND SERVICING AGREEMENT
Dated as of December 1, 1998
COLLATERALIZED ASSET-BACKED NOTES,
Series 1998-1
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C>
ARTICLE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Use of Words and Phrases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3. Captions; Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Conveyance of Mortgage Loans, Pooled Certificates and Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.1. Conveyance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.2. Acceptance by Indenture Trustee; Certain Substitutions of Mortgage Loans; Certification by Indenture Trustee 3
Section 2.3. Cooperation Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Representations, Warranties and Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.1. Representations and Warranties of the Depositor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.2. Representations and Warranties of the Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.3. Covenants of the Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.4. Representations and Warranties of the Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Servicing and Administration of Mortgage Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.1. General Servicing Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.2 [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.3 Subservicing Agreements Between Servicer and Subservicers . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.4 Successor Subservicers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.5 [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.6 [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.7 Assumption or Termination of Subservicing Agreement by Indenture Trustee. . . . . . . . . . . . . . . . . . . 14
Section 4.8 Principal and Interest Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.8A. The Servicer Collection Account; Eligible Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 4.9. Delinquency Advances and Servicing Advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4.9A Nonrecoverable Advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 4.10. Compensating Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 4.10A Permitted Withdrawals from the Servicer Collection Account and Principal and Interest Accounts. . . . . . . 18
Section 4.11. Maintenance of Insurance; Collections Thereunder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 4.12. Due-on-Sale Clauses; Assumption and Substitution Agreements . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 4.13. Realization Upon Defaulted Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 4.14. Indenture Trustee to Cooperate; Release of Mortgage Files . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 4.15. Compensation to the Servicer and the Subservicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 4.16. Annual Statement as to Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 4.17. Annual Independent Public Accountants' Servicing Report . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 4.18. Access to Certain Documentation and Information Regarding the Mortgage Loans. . . . . . . . . . . . . . . . 24
Section 4.19. Assignment of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 4.20. ARMs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 4.21. Inspections by Note Insurer and Account Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 4.22. Reports to the Indenture Trustee; Servicer Collection Account Statement . . . . . . . . . . . . . . . . . . 24
Section 4.23 Designated Depository Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 4.24. Appointment of Custodian. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 4.25. [Reserved]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 4.26. Year 2000 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 4.27. Performance of Obligations; Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 4.28. Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Accounts; Payments; Statements to Certificateholders and Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 5.1 Establishment of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 5.2 Flow of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 5.3 Investment of Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 5.4 Reports by Indenture Trustee to Owners and Depositor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 5.5 Drawings under the Policy and Reports by Indenture Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 5.6 Allocation of Realized Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 5.7 The Reserve Account and the Swap Counterparty Reserve Account . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 5.8 Calculation of LIBOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE VI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
The Servicer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 6.1 Liabilities of the Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 6.2 Merger or Consolidation of the Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 6.3 Limitation on Liability of the Servicer and Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 6.4. The Servicer not to Resign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE VII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Removal of Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 7.1 Removal of Servicer; Resignation of Servicer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 7.2 Notification to Certificateholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE VIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 8.1 Termination of Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 8.2 Termination Upon Exercise of Collateral Purchase Options and Servicer's Optional Termination Right. . . . . . 41
Section 8.3 Disposition of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 8.4 Optional Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE IX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Miscellaneous Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 9.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 9.2. Notices and Copies to Rating Agencies and the Note Insurer . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 9.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 9.4 Limitations on Rights of Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 9.5 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 9.6 Separate Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 9.7 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 9.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 9.9 Assignment to Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 9.10 Limitation of Liability of Owner Trustee and Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . 46
Section 9.11 Independence of the Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 9.12 No Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 9.13 Note Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 9.14 Rights of the Note Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 9.15 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
</TABLE>
Appendix A-Definitions
Exhibit A-[Reserved]
Exhibit B-Indenture Trustee's Acknowledgment of Receipt
Exhibit C-Pool Certification
Exhibit D-Representations, Warranties and Covenants with Respect to the Mortgage
Loans
Exhibit E-[Reserved]
Exhibit F-Certificate Re: Prepaid Loans
Exhibit G-Form of Servicer's Trust Receipt
Exhibit H-Notice of Charge-offs/Liquidation Loan Report
Exhibit I-Form of Monthly Report to the Certificateholder
THIS SALE AND SERVICING AGREEMENT (this "Agreement") is made and entered
into as of December 1, 1998, by and among TMA Mortgage Funding Trust I, a
statutory business trust formed under the laws of the State of Delaware, as
issuer (the "Issuer"), Thornburg Mortgage Funding Corporation, a Delaware
corporation, as depositor (the "Depositor"), PNC Mortgage Securities Corp., a
Delaware corporation, as servicer (the "Servicer"), and Bankers Trust Company of
California, N.A., a national banking association (in its capacity as indenture
trustee under the Indenture referred to below, the "Indenture Trustee").
PRELIMINARY STATEMENT
The Issuer was formed for the purpose of issuing asset backed notes secured
by mortgage collateral and asset backed certificates. The Issuer has entered
into a trust indenture, dated as of December 1, 1998 (the "Indenture"), between
the Issuer and the Indenture Trustee, pursuant to which the Issuer intends to
issue its Collateralized Asset-Backed Notes, Series 1998-1, in the aggregate
initial principal amount of $1,144,423,000 (the "Notes"). Pursuant to the
Indenture, as security for the indebtedness represented by such Notes, the
Issuer is and will be pledging to the Indenture Trustee, or granting the
Indenture Trustee a security interest in, the Trust Estate, including, among
other things, certain Mortgage Loans and Pooled Certificates and its rights
under this Agreement.
The parties desire to enter into this Agreement to provide, among other
things, for the sale by the Depositor of certain assets, including the Mortgage
Loans and the Pooled Certificates, to the Issuer and the servicing of the
Mortgage Loans by the Servicer. The Servicer acknowledges that, in order
further to secure the Notes, the Issuer is and will be granting to the Indenture
Trustee a security interest in, among other things, its rights under this
Agreement. For its services hereunder, the Servicer will receive a Servicing Fee
and the Subservicers will receive Subservicing Fees (each as defined herein)
with respect to each Mortgage Loan serviced hereunder.
The Depositor agrees that all covenants and agreements made or assigned by
the Depositor herein with respect to the Mortgage Loans or otherwise shall also
be for the benefit and security of the Indenture Trustee, the Owners, the Note
Insurer and the Swap Counterparty.
ARTICLE I
Definitions
Section 1.1. Definitions For all purposes of this Agreement, capitalized
-----------
terms used herein shall have the meanings set forth in Appendix A, unless the
context clearly indicates otherwise.
Section 1.2. Use of Words and Phrases. "Herein", "hereby", "hereunder",
-------------------------
"hereof", "hereinbefore", "hereinafter" and other equivalent words refer to this
Agreement as a whole and not solely to the particular section of this Agreement
in which any such word is used. The definitions set forth in Section 1.1 hereof
include both the singular and the plural. Whenever used in this Agreement, any
pronoun shall be deemed to include both singular and plural and to cover all
genders.
Section 1.3. Captions; Table of Contents The captions or headings in this
---------------------------
Agreement are for convenience only and in no way define, limit or describe the
scope and intent of any provisions of this Agreement.
ARTICLE II
Conveyance of Mortgage Loans, Pooled Certificates and Other Assets
Section 2.1. Conveyance
----------
(a) As of the Cut-off Date, the Depositor hereby sells, transfers,
assigns, sets over and conveys, without recourse, to the Issuer for the benefit
of the Owners, the Certificateholders and the Note Insurer, subject to the terms
of this Agreement, all of the Depositor's right, title and interest in and to
the Trust Estate, including the Mortgage Loans and the Pooled Certificates and
all principal and interest due on each such Mortgage Loan and Pooled Certificate
after the respective Cut-off Date; provided, however, that the Depositor
reserves and retains all of its right, title and interest in and to principal
and interest due on each such Mortgage Loan and Pooled Certificate and all
prepayments collected on each Mortgage Loan on or prior to the respective
Cut-off Date. In connection with such purchase, sale, transfer and assignment
(i) pursuant to Section 2.1 of the Collateral Sale Agreement, the Depositor
hereby assigns to the Issuer all of the Depositor's right, title and interest in
its rights and benefits, but none of its obligations or burdens, under the
Collateral Sale Agreement, including without limitation, the delivery
requirements, representations, warranties and the cure, repurchase or
substitution obligations of the Seller under the Collateral Sale Agreement
(including, all rights of the Depositor in and to the agreements listed in
Exhibit E thereto) and the rights to enforce the representations and warrantees
of sellers of the Mortgage Loans to the Seller, to the extent assignable and
(ii) the Depositor hereby sells, transfers, assigns, sets over and conveys to
the Issuer all of the Depositor's rights, title and interest in its rights and
benefits, but subject to the obligations and burdens, under the Swap Agreements.
It is the express intent of the parties hereto that the conveyance of the Trust
Estate to the Issuer by the Depositor as provided in this Section 2.1 be, and be
construed as, an absolute sale of the Trust Estate. It is, further, not the
intention of the parties that such conveyance be deemed a pledge of the Trust
Estate by the Depositor to the Issuer to secure a debt or other obligation of
the Depositor. However, in the event that, notwithstanding the intent of the
parties, the Trust Estate is held to be the property of the Depositor, or if for
any other reason this Agreement is held or deemed to create a security interest
in the Trust Estate, then (w) this Agreement shall also be deemed to be a
security agreement within the meaning of Articles 8 and 9 of the UCC as in
effect in the State of New York; (x) the transfer of the assets provided for
herein shall be deemed to be a grant by the Depositor to the Issuer of a
security interest in all of the Depositor's right, title and interest in and to
the Trust Estate and all amounts payable on the Trust Estate in accordance with
the terms thereof and all proceeds of the conversion, voluntary or involuntary,
of the foregoing into cash, instruments, securities or other property; (y) the
possession by the Issuer, the Indenture Trustee or their respective agents of
the Mortgage Notes, Pooled Certificates and Swap Agreements and such other items
of property as constitute instruments, money, negotiable documents or chattel
paper shall be deemed to be "possession by the secured party" for purposes of
perfecting the security interest pursuant to Section 9-305 of the UCC as in
effect in the State of New York and the UCC of any other applicable
jurisdiction; and (z) notifications to persons holding such property, and
acknowledgments, receipts or confirmations from persons holding such property,
shall be deemed notifications to, or acknowledgments, receipts or confirmations
from, securities intermediaries, bailees or agents (as applicable) of the Issuer
or the Indenture Trustee, as applicable, for the purpose of perfecting such
security interest under applicable law. Any assignment of the interest of the
Issuer to the Indenture Trustee pursuant to any provision hereof shall also be
deemed to be an assignment of any security interest created hereby. The
Depositor and the Issuer shall, to the extent consistent with this Agreement,
take such actions as may be necessary to ensure that, if this Agreement were
deemed to create a security interest in the Trust Estate, such security interest
would be deemed to be a perfected security interest of first priority under
applicable law and will be maintained as such throughout the term of this
Agreement.
The Depositor and the Indenture Trustee at the direction and expense of the
Depositor shall, to the extent consistent with this Agreement, take such actions
as may be necessary to ensure that, if this Agreement were deemed to create a
security interest in the Trust Estate, such security interest would be deemed to
be a perfected security interest of first priority under applicable law and will
be maintained as such throughout the term of the Agreement. In connection
herewith, the Indenture Trustee shall have all of the rights and remedies of a
secured party and creditor under the UCC as in force in the relevant
jurisdiction.
(b) Pursuant to Section 2.1(c) of the Collateral Sale Agreement, the Seller
has agreed to take the actions specified in Part I of Exhibit D attached hereto.
(c) The actions required pursuant to Part I of Exhibit D hereto are not,
and shall not be construed to be, conditions subsequent; the parties hereto
declaring that the sale of the Mortgage Loans and Pooled Certificates to be made
hereunder on the Closing Date shall be a completed, absolute and final sale.
Section 2.2. Acceptance by Indenture Trustee; Certain Substitutions of
------------------------------------------------------------
Mortgage Loans; Certification by Indenture Trustee
----------------------------------------------------
(a) The Indenture Trustee, on behalf of the Issuer and as Indenture
Trustee, agrees to execute and deliver on the Closing Date an acknowledgment of
receipt of the items specified in Part I of Exhibit D and delivered by or at the
direction of the Issuer with respect to the Trust in the form attached as
Exhibit B hereto, and declares that it will hold such documents and any
amendments, replacements or supplements thereto, as well as any other assets
included in the definition of the Trust Estate and delivered to the Indenture
Trustee, as Indenture Trustee upon and subject to the conditions set forth
herein and in the Indenture for the benefit of the Owners, the
Certificateholders and the Note Insurer. The Indenture Trustee agrees, for the
benefit of the Owners, the Certificateholders and the Note Insurer, to review
such items with respect to the Issuer delivered to it (i) within 45 days after
the Closing Date and (ii) within 180 days after the Closing Date with respect to
each Mortgage Loan as to which the assignment is required to be recorded (or,
with respect to any document delivered after the Closing Date pursuant to Part I
of Exhibit D, within 45 days of receipt and with respect to any Qualified
Replacement Mortgage, within 45 days after the related Replacement Cut-off Date)
and to deliver to the Depositor, the Seller and the Note Insurer a pool
certification (the "Pool Certification") in the form attached hereto as Exhibit
C to the effect that, as to each Mortgage Loan listed in the Schedule of
Mortgage Loans (other than any Mortgage Loan paid in full or any Mortgage Loan
specifically identified in such Pool Certification as not covered by such Pool
Certification), (i) all documents required to be delivered to it pursuant to
Part I of Exhibit D are in its possession, (ii) such documents have been
reviewed by it and have not been mutilated, damaged, torn or otherwise
physically altered and relate to such Mortgage Loan and (iii) based on its
examination and only as to the foregoing documents, the information set forth on
the Schedule of Mortgage Loans as to loan number, address (including state) of
the Property, the Original Principal Balance, whether such Mortgage Loan is an
ARM or a 5/1 ARM Mortgage Loan, for each 5/1 ARM Mortgage Loan, the Coupon Rate,
and for each ARM and for each 5/1 ARM, the Index, the Gross Margin, the Periodic
Rate Cap, the Lifetime Cap, the Lifetime Floor, and the maturity date,
accurately reflects the information set forth in the related File. The Indenture
Trustee shall be under no duty or obligation to inspect, review or examine any
such documents, instruments, certificates or other papers to determine that they
are genuine, valid, recordable, sufficient, suitable, insurable, collectable,
enforceable, or appropriate for the represented purpose or that they are other
than what they purport to be on their face, nor shall the Indenture Trustee be
under any duty to determine independently whether there are any intervening
assignments or assumption or modification agreements with respect to any
Mortgage Loan.
(b) If the Indenture Trustee during such 45-day or 180 day period finds any
document constituting a part of a File which is not executed, has not been
received, or is unrelated to the Mortgage Loans identified in the Schedule of
Mortgage Loans or that any Mortgage Loan does not conform in a material respect
to the description thereof as set forth in the Schedule of Mortgage Loans as set
forth in Section 2.2(a)(iii) above, the Indenture Trustee shall promptly so
notify the Depositor, the Seller and the Note Insurer. In the event any Pool
Certification delivered after the 180 day period reflects any exceptions, the
Indenture Trustee shall deliver Pool Certifications on each subsequent Payment
Date to the Note Insurer, the Depositor, and the Seller until all such
exceptions have been cured (or waived by the Note Insurer) or the related
Mortgage Loans have been repurchased. In performing any such review, the
Indenture Trustee may conclusively rely on the purported genuineness of any such
document and any signature thereon. It is understood that the scope of the
Indenture Trustee's review of the items delivered by or on behalf of the
Depositor pursuant to Part I of Exhibit D is limited solely to confirming that
the documents listed in Part I of Exhibit D have been executed and received,
where required to be original documents are originals, relate to the Files
identified in the Schedule of Mortgage Loans and conform materially to the
description thereof in the Schedule of Mortgage Loans as set forth in Section
2.2(a)(iii) above. The Seller has agreed, pursuant to the Collateral Sale
Agreement, to use reasonable efforts to remedy a material defect in a document
constituting part of a File of which it is so notified by the Indenture Trustee
or the Note Insurer. If, however, within 90 days after the Indenture Trustee's
or the Note Insurer's notice to the Seller respecting such defect, the Seller
has not remedied, or caused to be remedied, the defect and the defect materially
and adversely affects the interest of the Owners or the Note Insurer in the
related Mortgage Loan, the Depositor, at the Depositor's option, will (or will
cause the Seller to) on the next succeeding Remittance Date either (i) if within
two years of the Closing Date, substitute in lieu of such Mortgage Loan a
Qualified Replacement Mortgage and deliver any Substitution Adjustment Amount
applicable thereto to the Servicer for deposit in the Servicer Collection
Account or (ii) purchase such Mortgage Loan at a purchase price equal to the
Loan Purchase Price thereof, which purchase price shall be delivered to the
Servicer for deposit in the Servicer Collection Account, and provided, in either
case, that an opinion of counsel, acceptable to the Indenture Trustee, to the
effect that such substitution or purchase will not have a material adverse tax
consequence to the Noteholders or the Note Insurer, is delivered in connection
therewith. Notwithstanding the foregoing, if any exception described in the
Indenture Trustee's 45-day or 180-day review relates solely to the inability of
the Seller to deliver the original security instrument, or intervening
assignments thereof that are required to be recorded, or a certified copy,
because the originals of such documents, or a certified copy, have not been
returned by the applicable jurisdiction, the Seller shall not be required to
purchase such Mortgage Loan if the Seller delivers such original documents or
certified copy promptly upon receipt, but in no event later than 360 days after
the Closing Date.
(c) Notwithstanding any requirement to the contrary herein, at any time the
Indenture Trustee discovers that with respect to any file any of the documents
required to be delivered pursuant to Part I of Exhibit D (i) have not been
executed or received, (ii) are not original documents where required to be
original documents, or (iii) fail to conform materially to the description
thereof in the Schedule of Mortgage Loans as set forth in Section 2.2(a)(iii)
hereof, the Indenture Trustee shall be permitted to seek the remedies described
in Section 2.2(b).
Section 2.3. Cooperation Procedures
-----------------------
(a) The Depositor shall or shall cause the Seller to, in connection with
the delivery of each Qualified Replacement Mortgage, provide the Indenture
Trustee with the information as of the Replacement Cut-Off Date set forth in the
Schedule of Mortgage Loans with respect to such Qualified Replacement Mortgage.
(b) The Depositor, the Servicer, the Issuer, and the Indenture Trustee
covenant to provide each other and the Note Insurer with all data and
information required to be provided by them hereunder at the times required
hereunder, and additionally covenant to reasonably cooperate with each other and
with the Note Insurer in providing any additional information required by any of
them in connection with their respective duties hereunder. The Depositor
covenants to cause the Seller to provide such information and reasonable
cooperation.
ARTICLE III
Representations, Warranties and Covenants
Section 3.1. Representations and Warranties of the Depositor.
----------------------------------------------------
(a) The Depositor hereby represents, warrants and covenants to the
Issuer, the Servicer, the Indenture Trustee, and the Note Insurer as of the
Closing Date as follows:
(i) The Depositor is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. The Depositor
has all requisite corporate power and authority to own and operate its
properties, to carry out its business as presently conducted and as
proposed to be conducted, to enter into and discharge its obligations under
this Agreement. The Depositor is duly qualified to do business and is in
good standing in each jurisdiction necessary to perform its obligations
under this Agreement.
(ii) The execution and delivery of this Agreement by the Depositor and
its performance and compliance with the terms of this Agreement have been
duly authorized by all necessary corporate action on the part of the
Depositor and will not violate the Depositor's Certificate of Incorporation
or Bylaws or constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default), under, or result in a breach
of, any material contract, agreement or other instrument to which the
Depositor is a party or by which the Depositor is bound or violate any
statute or any order, rule or regulation of any court, governmental agency
or body or other tribunal having jurisdiction over the Depositor or any of
its properties.
(iii) Assuming due authorization, execution and delivery by the other
parties hereto, this Agreement constitutes a valid, legal and binding
obligation of the Depositor, enforceable against it in accordance with the
terms hereof, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally and by general
principles of equity (whether considered in a proceeding or action in
equity or at law).
(iv) The Depositor is not in default with respect to any order or
decree of any court or any order, regulation or demand of any federal,
state, municipal or governmental agency, which is likely to have
consequences that would materially and adversely affect the condition
(financial or other) or operations of the Depositor or its properties or is
likely to have consequences that would materially and adversely affect its
performance hereunder.
(v) No litigation is pending or, to the best of the Depositor's
knowledge, threatened against the Depositor the consequences of which would
(A) prohibit its entering into this Agreement or that would materially and
adversely affect the condition (financial or otherwise) or operations of
the Depositor or its properties, (B) materially and adversely affect its
performance hereunder or thereunder, or (C) draw into question the validity
of the Mortgage Loans, the Pooled Certificates, the Swap Agreements or the
Collateral Sale Agreement or of any action taken or to be taken in
connection with the obligations of the Depositor contemplated herein.
(vi) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required
to be taken, given or obtained, as the case may be, by or from any federal,
state or other governmental authority or agency (other than any such
actions, approvals, etc., under any state securities laws, real estate
syndication or "Blue Sky" statutes, as to which the Depositor makes no such
representation or warranty), that are necessary or advisable in connection
with the sale of the Mortgage Loans, the Pooled Certificates and the other
assets being sold hereunder and the execution and delivery by the Depositor
of this Agreement, have been duly taken, given or obtained, as the case may
be, are in full force and effect on the date hereof, are not subject to any
pending proceeding or appeals (administrative, judicial or otherwise) and
either the time within which any appeal therefrom may be taken or review
thereof may be obtained has expired or no review thereof may be obtained or
appeal therefrom taken, and are adequate to authorize this Agreement and
the performance by the Depositor of its obligations hereunder.
(vii) No certificate of an officer, statement furnished in writing,
report or electronic tape delivered pursuant to the terms hereof by the
Depositor contains or will contain any untrue statement of a material fact
or omits or will omit to state any material fact necessary to make the
certificate, statement or report not misleading.
(viii) Immediately prior to the transfer and assignment contemplated
by this Agreement, the Depositor was the sole owner of each Mortgage Loan
and each Pooled Certificate, subject to no liens, charges, mortgages,
encumbrances or rights of others except liens which will be released
simultaneously with such transfer or assignment; and immediately upon the
transfer and assignment contemplated by this Agreement, the Indenture
Trustee will hold good and indefeasible title to, and will be the sole
owner of, each Mortgage Loan and each Pooled Certificate subject to no
liens, charges, mortgages, encumbrances or rights of others.
(b) It is understood and agreed that the representations and warranties
set forth in this Section 3.1 shall survive delivery of the Mortgage Loans and
Pooled Certificates to the Indenture Trustee. Upon discovery by the Issuer, the
Servicer, the Depositor, any Subservicer, the Note Insurer or the Indenture
Trustee of a breach of any of the representations and warranties set forth in
this Section 3.1 which materially and adversely affects the interests of the
Owners or of the Note Insurer, the party discovering such breach shall give
prompt written notice to the other Persons listed in this sentence.
Section 3.2. Representations and Warranties of the Servicer.
----------------------------------------------
(a) The Servicer hereby represents, warrants and covenants to the Issuer,
the Depositor, and the Indenture Trustee, as of the Closing Date, that:
(i) The Servicer is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has all
licenses necessary to carry out its business as now being conducted, and is
licensed and qualified to transact business in and is in good standing
under the laws of each state in which any Property is located or is
otherwise exempt under applicable law from such licensing or qualification
or is otherwise not required under applicable law to effect such licensing
or qualification and no demand for such licensing or qualification has been
made upon the Servicer by any such state, and in any event the Servicer is
in compliance with the laws of any such state to the extent necessary to
ensure the enforceability of each Mortgage Loan and the servicing of the
Mortgage Loans in accordance with the terms of this Agreement.
(ii) The Servicer has the full power and authority and legal right to
enter into and consummate all transactions contemplated by this Agreement
and to conduct its business as presently conducted, has duly authorized the
execution, delivery and performance of this Agreement and any agreements
contemplated hereby, has duly executed and delivered this Agreement, and
any agreements contemplated hereby, and, assuming the due authorization,
execution and delivery of this Agreement by the other parties hereto, this
Agreement constitutes a legal, valid and binding obligation of the
Servicer, enforceable against it in accordance with its terms, and all
requisite corporate action has been taken by the Servicer to make this
Agreement and all agreements contemplated hereby valid and binding upon the
Servicer in accordance with their terms.
(iii) None of the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby, or the fulfillment of
or compliance with the terms and conditions of this Agreement will conflict
with any of the terms, conditions or provisions of the Servicer's charter
or by-laws or materially conflict with or result in a material breach of
any of the terms, conditions or provisions of any legal restriction or any
agreement or instrument to which the Servicer is now a party or by which it
is bound, or constitute a default or result in an acceleration under any of
the foregoing, or result in the material violation of any law, rule,
regulation, order, judgment or decree to which the Servicer or its property
is subject or impair the ability of the Issuer or the Indenture Trustee, as
the case may be, to realize on the Mortgage Loans or impair the value of
the Mortgage Loans.
(iv) There is no litigation, suit, proceeding or investigation pending
or threatened, or any order or decree outstanding, with respect to the
Servicer that is reasonably likely to have a material adverse effect on the
sale or servicing of the Mortgage Loans, the execution, delivery,
performance or enforceability of this Agreement, or which is reasonably
likely to have a material adverse effect on the financial condition of the
Servicer.
(v) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Servicer of or compliance by the Servicer with this
Agreement, except for consents, approvals, authorizations and orders that
have been obtained.
(vi) The Servicer is an approved servicer of residential mortgage
loans for Fannie Mae and Freddie Mac, with such facilities, procedures and
personnel necessary for the sound servicing of such mortgage loans. The
Servicer is duly qualified, licensed, registered and otherwise authorized
under all applicable federal, state and local laws, and regulations, if
applicable, meets the minimum capital requirements set forth by the Office
of the Comptroller of the Currency, and is in good standing to sell
mortgage loans to and service mortgage loans for Fannie Mae or Freddie Mac
and no event has occurred that would make Servicer unable to comply with
eligibility requirements or that would require notification to either
Fannie Mae or Freddie Mac.
(vii) The Servicer does not believe, nor does it have any cause or
reason to believe, that it cannot perform each and every covenant contained
in this Agreement.
(viii) The Servicer acknowledges and agrees that the Servicing Fee
represents reasonable compensation for performing such services as are
required of it as master servicer and that the Subservicing Fee represents
reasonable compensation to a Subservicer for performing the servicing of
the Mortgage Loans under this Agreement and that the entire Servicing Fee
(and, to the extent received by the Servicer, the Subservicing Fee) shall
be treated by the Servicer, for accounting and tax purposes, as
compensation for the master servicing and administration of the Mortgage
Loans pursuant to this Agreement (or the servicing and administration of
the Mortgage Loans, as the case may be).
(b) It is understood and agreed that the representations and warranties
set forth in this Section 3.2 shall survive the Closing Date. Upon discovery by
any of the Issuer, the Servicer, the Depositor, the Note Insurer or the
Indenture Trustee of a breach of any of the representations and warranties set
forth in this Section 3.2 which materially and adversely affects the interest of
the Owners or of the Note Insurer, the party discovering such breach shall give
prompt written notice to the other parties. Within 30 days of its discovery or
its receipt of notice of breach, the Servicer shall cure such breach in all
material respects and, upon the Servicer's continued failure to cure such
breach, the Servicer may thereafter be removed by the Indenture Trustee pursuant
to Section 7.1 hereof; provided, however, that if the Servicer can demonstrate
to the reasonable satisfaction of the Note Insurer that it is diligently
pursuing remedial action, then the cure period shall be extended for up to an
additional 30 days.
Section 3.3. Covenants of the Depositor. (a) Pursuant to Section 2.1
----------------------------
hereof, the Depositor has conveyed to the Issuer all of the Depositor's (i)
right, title and interest in its rights and benefits, but none of its
obligations or burdens, under the Collateral Sale Agreement, including without
limitation, the benefit of the representations, warranties and covenants and
cure, repurchase or substitution obligations of the Seller thereunder, and (ii)
right, title and interest, subject to its obligations and burdens, under the
Swap Agreements. The Depositor hereby represents and warrants to the Issuer, the
Indenture Trustee for the benefit of the Owners, the Certificateholders and the
Note Insurer that such assignment is valid, enforceable and effective to permit
the Indenture Trustee to enforce the obligations of the Seller under the
Collateral Sale Agreement and of the Swap Counterparty under the Swap
Agreements. The Seller has made the representations and warranties regarding the
Mortgage Loans and the Pooled Certificates as set forth in Part II of Exhibit D
hereto and in Section 3.1 of the Collateral Sale Agreement, and has agreed to
take certain actions as specified in Part III of Exhibit D hereto and in Section
3.2 of the Collateral Sale Agreement.
(b) It is understood and agreed that the representations and warranties set
forth in Part II of Exhibit D and in Section 3.1 of the Collateral Sale
Agreement and the covenants set forth in Part III of Exhibit D and in Section
3.2 of the Collateral Sale Agreement shall survive delivery of the respective
Mortgage Loans (including Qualified Replacement Mortgages) and the Pooled
Certificates to the Issuer and the grant thereof to the Indenture Trustee.
(c) Neither the Seller nor any Affiliate has made any representations or
warranties, whether express or implied, to the Issuer, the Depositor or to the
Indenture Trustee as to the collectability of the Mortgage Loans or the Pooled
Certificates or the solvency of the Mortgagors, or any guarantor(s),
endorser(s), co-maker(s), assuming party(ies) or the sufficiency or value, as of
the date of this Agreement, of any Property, or the yield to maturity of the
Pooled Certificates, except as specifically listed in Part II of Exhibit D and
in Section 3.2 of the Collateral Sale Agreement.
Section 3.4. Representations and Warranties of the Issuer.
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(a) The Issuer hereby represents, warrants and covenants to the Depositor,
the Servicer, the Indenture Trustee, and the Note Insurer as of the Closing Date
as follows:
(i) The Issuer is a statutory business trust duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Issuer has all requisite power and authority to own and operate its
properties, to carry out its business as presently conducted and as
proposed to be conducted and to enter into and discharge its obligations
under this Agreement. The Issuer is duly qualified to do business and is in
good standing in each jurisdiction necessary to perform its obligations
under this Agreement.
(ii) The execution and delivery of this Agreement by the Issuer and
its performance and compliance with the terms of this Agreement have been
duly authorized by all necessary action on the part of the Issuer and will
not violate the Trust Agreement or Certificate of Trust or constitute a
default (or an event which, with notice of lapse of time, or both, would
constitute a default), under, or result in a breach of, any material
contract, agreement or other instrument to which the Issuer is a party or
by which the Issuer is bound or violate any statute or any order, rule or
regulation of any court, governmental agency or body or other tribunal
having jurisdiction over the Issuer or any of its properties.
(iii) Assuming due authorization, execution and delivery by the other
parties hereto, this Agreement constitutes a valid, legal and binding
obligation of the Issuer, enforceable against it in accordance with the
terms hereof, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditor's rights generally and by general
principles of equity (whether considered in a proceeding or action in
equity or at law).
(iv) The Issuer is not in default with respect to any order or decree
of any court or any order, regulation or demand of any federal, state,
municipal or governmental agency, which is likely to have consequences that
would materially and adversely affect the condition (financial or other) or
operations of the Issuer or its properties or is likely to have
consequences that would materially and adversely affect its performance
hereunder.
(v) No litigation is pending or, to the best of the Issuer's
knowledge, threatened against the Issuer the consequences of which would
prohibit its entering into this Agreement or that would materially and
adversely affect the condition (financial or otherwise) or operations of
the Issuer or its properties or the consequences of which would materially
and adversely affect its performance hereunder.
(vi) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required
to be taken, given or obtained, as the case may be, by or from any federal,
state or other governmental authority or agency (other than any such
actions, approvals, etc., under any state securities laws, real estate
syndication or "Blue Sky" statutes, as to which the Issuer makes no such
representation or warranty), that are necessary or advisable in connection
with the purchase of the Mortgage Loans, the Pooled Certificates and the
other assets being purchased hereunder and the execution and delivery by
the Issuer of this Agreement have been duly taken, given or obtained, as
the case may be, are in full force and effect on the date hereof, are not
subject to any pending proceeding or appeals (administrative, judicial or
otherwise) and either the time within which any appeal therefrom may be
taken or review thereof may be obtained has expired or no review thereof
may be obtained or appeal therefrom taken, and are adequate to authorize
this Agreement and the performance by the Issuer of its obligations
hereunder.
(b) It is understood and agreed that the representations and warranties
set forth in this Section 3.4 shall survive delivery of the Mortgage Loans and
Pooled Certificates to the Indenture Trustee. Upon discovery by the Issuer, the
Servicer, the Depositor, any Subservicer, the Note Insurer or the Indenture
Trustee of a breach of any of the representations and warranties set forth in
this Section 3.4 which materially and adversely affects the interests of the
Owners or of the Note Insurer, the party discovering such breach shall give
prompt written notice to the Persons listed in this sentence.
ARTICLE IV
Servicing and Administration
of Mortgage Loans
Section 4.1. General Servicing Procedures. (a) The Servicer shall master
----------------------------
service and administer the various agreements with the Subservicers to service
the Mortgage Loans on behalf of the Issuer and for the benefit of the Indenture
Trustee, the Note Insurer, Certificateholders and Noteholders in accordance with
the terms hereof and in the same manner in which, and with the same care, skill,
prudence and diligence with which, it master services and administers similar
servicing agreements for mortgage loans for other portfolios, and shall have
full power and authority to do or cause to be done any and all things in
connection with such master servicing and administration which it may deem
necessary or desirable, including, without limitation, the power and authority
to bring actions and defend the Trust Estate on behalf of the Issuer in order to
enforce the terms of the Mortgage Notes and such servicing agreements. The
Servicer may perform its master servicing responsibilities through agents or
independent contractors, but shall not thereby be released from any of its
responsibilities hereunder, and the Servicer shall diligently pursue all of its
rights against such agents or independent contractors.
(b) The Servicer shall make reasonable efforts to collect or cause to be
collected all payments called for under the terms and provisions of the Mortgage
Loans and shall, to the extent such procedures shall be consistent with this
Agreement and the terms and provisions of the Note Insurance Policy, any FHA
insurance policy or VA guaranty, any hazard insurance policy, and federal flood
insurance, cause to be followed such collection procedures as are followed with
respect to mortgage loans comparable to the Mortgage Loans and held in
portfolios of responsible mortgage lenders in the local areas where each
Property is located. The Servicer shall enforce "due-on-sale" clauses with
respect to the related Mortgage Loans, to the extent permitted by law, subject
to the provisions set forth in Section 4.12.
(c) Consistent with the foregoing, the Servicer may in its discretion (i)
waive or cause to be waived any assumption fee or late payment charge in
connection with the prepayment of any Mortgage Loan and (ii) only upon
determining that the coverage of any applicable Insurance Policy or guaranty
related to a Mortgage Loan will not be materially adversely affected, arrange a
schedule, running for no more than 180 days after the first delinquent Due Date,
for payment of any delinquent installment on any Mortgage Note or for the
liquidation of delinquent items (provided that coverage of applicable Insurance
Policies will not be materially adversely affected).
(d) Consistent with the terms of this Section 4.1, the Servicer may waive,
modify or vary any term of any Mortgage Loan or consent to the postponement of
strict compliance with any such term or in any manner grant indulgence to any
Mortgagor if it has determined, exercising its good faith business judgment in
the same manner as it would if it were the owner of the related Mortgage Loan,
that the security for, and the timely and full collectability of, such Mortgage
Loan would not be adversely affected by such waiver, modification, postponement
or indulgence; provided, however, that (unless the Mortgagor is in default with
respect to the Mortgage Loan or in the reasonable judgment of the Servicer such
default is imminent) the Servicer shall not permit any modification with respect
to any Mortgage Loan that would (i) change the applicable Coupon Rate, defer or
forgive the payment of any principal or interest, reduce the outstanding
principal balance (except for actual payments of principal) or extend the final
maturity date with respect to such Mortgage Loan, or (ii) be inconsistent with
the terms of the Note Insurance Policy, and any applicable FHA insurance policy
or VA guaranty, hazard insurance policy or federal flood insurance policy.
Notwithstanding the foregoing, the Servicer shall not permit any modification
with respect to any Mortgage Loan that would both constitute a sale or exchange
of such Mortgage Loan within the meaning of Section 1001 of the Code (including
any proposed, temporary or final regulations promulgated thereunder) (other than
in connection with a proposed conveyance or assumption of such Mortgage Loan
that is treated as a Prepayment or in a default situation or upon receipt of
advice of counsel that such a sale or exchange would not have an adverse tax
effect on the Issuer, the Noteholders and the Certificateholders).
(e) The Servicer is hereby authorized and empowered by the Issuer and the
Indenture Trustee to execute and deliver or cause to be executed and delivered
on behalf of the Noteholders, and the Issuer or any of them, any and all
instruments of satisfaction or cancellation, or of partial or full release,
discharge or modification, assignments of Mortgages and endorsements of Mortgage
Notes in connection with refinancings (in jurisdictions where such assignments
are the customary and usual standard of practice of mortgage lenders) and all
other comparable instruments, with respect to the Mortgage Loans and with
respect to the Properties. The Indenture Trustee shall execute and furnish to
the Servicer, at the Servicer's direction, any powers of attorney and other
documents prepared by the Servicer and determined by the Servicer to be
necessary or appropriate to enable the Servicer to carry out its supervisory,
servicing and administrative duties under this Agreement.
(f) The Servicer shall, and shall cause each Subservicer to, obtain (to the
extent generally commercially available from time to time) and maintain fidelity
bond and errors and omissions coverage acceptable to Fannie Mae or Freddie Mac
with respect to their obligations under this Agreement and the applicable
Subservicing Agreement, respectively. The Servicer or each Subservicer, as
applicable, shall establish escrow accounts for, or pay when due (by means of an
advance), any tax liens in connection with the Properties that are not paid by
the Mortgagors when due to the extent that any such payment would not constitute
a Nonrecoverable Advance when made. Notwithstanding the foregoing, the Servicer
shall not permit any modification with respect to any Mortgage Loan that would
both constitute a sale or exchange of such Mortgage Loan within the meaning of
Section 1001 of the Code (including any proposed, temporary or final regulations
promulgated thereunder) (other than in connection with a proposed conveyance or
assumption of such Mortgage Loan that is treated as a Principal Prepayment or in
a default situation or upon receipt of advice of counsel that such a sale or
exchange would not have an adverse tax effect on the Issuer, the Noteholders and
the Certificateholders). The Servicer shall be entitled to approve a request
from a Mortgagor for a partial release of the related Property, the granting of
an easement thereon in favor of another Person, any alteration or demolition of
the related Property or other similar matters if it has determined, exercising
its good faith business judgment in the same manner as it would if it were the
owner of the related Mortgage Loan, that the security for, and the timely and
full collectability of, such Mortgage Loan would not be adversely affected
thereby.
(g) In connection with the servicing and administering of each Mortgage
Loan, the Servicer and any affiliate of the Servicer (i) may perform services
such as appraisals, default management and brokerage services that are not
customarily provided by servicers of mortgage loans, and shall be entitled to
reasonable compensation therefor and (ii) may, at its own discretion and on
behalf of the Issuer, obtain credit information in the form of a "credit score"
from a credit repository.
Section 4.2 [Reserved].
Section 4.3 Subservicing Agreements Between Servicer and Subservicers. The
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Servicer may directly or indirectly enter into Subservicing Agreements for any
servicing and administration of Mortgage Loans (to the extent permitted in any
applicable agreement governing the servicing of Mortgage Loans) with any
institution which is in compliance with the laws of each state necessary to
enable it to perform its obligations under such Subservicing Agreement and
(x)(i) has been designated an approved seller-servicer by Freddie Mac or Fannie
Mae for first mortgage loans and (ii) has equity of at least $15,000,000, as
determined in accordance with generally accepted accounting principles by a firm
of certified public accountants of national reputation or (y) is a Servicer
Affiliate or (z) is approved by the Note Insurer. The Servicer shall give notice
to the Depositor, the Indenture Trustee, the Owner Trustee, the Rating Agencies
and the Note Insurer of the appointment of any Subservicer. For purposes of this
Agreement, the Servicer shall be deemed to have received payments on Mortgage
Loans when any such Subservicer has received such payments. Any such
Subservicing Agreement shall be consistent with and not violate the provisions
of this Agreement. The Subservicers as of the Closing Date and the Mortgage
Loans which they subservice are identified on the Schedule of Mortgage Loans.
Section 4.4 Successor Subservicers. The Servicer shall be entitled to
-----------------------
terminate any Subservicing Agreement on any agreement between a Subservicer and
the Issuer in accordance with the terms and conditions of such Subservicing
Agreement and to either itself directly service the related Mortgage Loans or
enter into a Subservicing Agreement with a successor Subservicer which qualifies
under Section 4.3.
Section 4.5 [Reserved].
Section 4.6 [Reserved].
Section 4.7 Assumption or Termination of Subservicing Agreement by
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Indenture Trustee. In the event the Servicer, or any successor Servicer, shall
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for any reason no longer be the Servicer (including by reason of a Servicer
Termination Event), the Indenture Trustee as Indenture Trustee hereunder or its
designee shall thereupon assume all of the rights and obligations of the
Servicer under the Subservicing Agreements with respect to the related Mortgage
Loans unless the Indenture Trustee elects to terminate the Subservicing
Agreements with respect to such Mortgage Loans in accordance with the terms
thereof. The Indenture Trustee, its designee or the successor Subservicer for
the Indenture Trustee shall be deemed to have assumed all of the Servicer's
interest therein with respect to the related Mortgage Loans and to have replaced
the Servicer as a party to the Subservicing Agreements to the same extent as if
the rights and duties under the Subservicing Agreements relating to such
Mortgage Loans had been assigned to the assuming party, except that the Servicer
shall not thereby be relieved of any liability or obligations under the
Subservicing Agreements with respect to the Servicer's duties to be performed
prior to its termination hereunder.
The Servicer at its expense shall, upon request of the Indenture Trustee,
deliver to the assuming party all documents and records relating to the
Subservicing Agreements and the Mortgage Loans then being master serviced by the
Servicer and an accounting of amounts collected and held by the Servicer and
otherwise use its best efforts to effect the orderly and efficient transfer of
the rights and duties under the related Subservicing Agreements relating to such
Mortgage Loans to the assuming party.
Section 4.8 Principal and Interest Accounts.
----------------------------------
(a) (i) The Servicer shall cause to be established and maintained by each
Subservicer under the Servicer's supervision at Designated Depository
Institutions one or more separate accounts, each a Principal and Interest
Account, and shall deposit or cause to be deposited therein daily collections
other than amounts escrowed for taxes and insurance related to the Mortgage
Loans required by the Subservicing Agreement to be so deposited no later than
the first Business Day after receipt. Proceeds received with respect to
individual Mortgage Loans from any title, hazard, or FHA insurance policy, VA
guaranty, primary mortgage guaranty insurance policy, or other Insurance Policy
covering such Mortgage Loans shall be deposited first into one or more separate
escrow accounts to be held at Designated Depository Institutions if required for
the restoration or repair of the related Property. Proceeds from such Insurance
Policies not so applied shall be deposited in the related Principal and Interest
Account, and shall be applied to the balances of the related Mortgage Loans as
payments of interest and principal.
(b) The Servicer is hereby authorized to make withdrawals from and to issue
drafts against the Principal and Interest Accounts for the purposes required or
permitted by this Agreement. Each Principal and Interest Account shall bear a
designation clearly showing the respective interests of the applicable
Subservicer, the Indenture Trustee, and the Servicer, in substantially the
following forms:
(i) [Subservicer's Name], as agent for Indenture Trustee and/or bailee
of principal and interest custodial account for PNC Mortgage Securities
Corp., its successors and assigns, for various owners of interests in TMA
Mortgage Funding Trust I mortgage-backed pools; or
(ii) [Subservicer's Name] in trust for PNC Mortgage Securities Corp.;
(c) The Servicer hereby undertakes to assure remittance to the Servicer
Collection Account of all amounts relating to the Mortgage Loans that have been
collected by any Subservicer and are due to the Servicer Collection Account
pursuant to Section 4.8A of this Agreement.
(d) Investment earnings on funds held in the Principal and Interest
Accounts are for the account of the Subservicers or the Servicer, as applicable.
Section 4.8A. The Servicer Collection Account; Eligible Investments.
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(a) The Servicer shall establish and maintain at one or more Designated
Depository Institutions an account (the "Servicer Collection Account") in the
name of the Trust, which shall be a segregated account held in trust for the
benefit of the Owners of the Notes and the Note Insurer.
(b) Not later than the Subservicer Remittance Date, the Servicer shall
withdraw or direct the withdrawal of funds in the Principal and Interest
Accounts, for deposit in the Servicer Collection Account, in an amount
representing:
(i) Scheduled installments of principal and interest on the Mortgage
Loans received or advanced by the applicable Subservicers which were due on
the Due Date prior to such Subservicer Remittance Date, net of Subservicing
Fees due the applicable Subservicers and less any amounts to be withdrawn
later by the applicable Subservicers from the applicable Principal and
Interest Accounts; and
(ii) Prepayments and the proceeds of other types of liquidations of
the Mortgage Loans received by the applicable Subservicer for such Mortgage
Loans during the applicable Remittance Period, with interest to the date of
Prepayment or liquidation less any amounts to be withdrawn later by the
applicable Subservicers.
(c) At its option, the Servicer may invest funds on deposit in the Servicer
Collection Account during any period prior to the Subservicer Remittances Date
only as set forth in Section 4.8A(d). The Servicer shall bear any and all losses
incurred on any investments made with such funds and shall be entitled to retain
all gains realized on such investments as additional servicing compensation. Not
later than the Remittance Date, the Servicer shall remit such funds, net of any
gains earned thereon to the Indenture Trustee for deposit, in the Trustee
Collection Account.
(d) Funds held in the Servicer Collection Account shall be invested in (i)
one or more Eligible Investments which shall in no event mature later than the
Business Day prior to the related Remittance Date (except if such Eligible
Investments are obligations of the Indenture Trustee, such Eligible Investments
may mature on the Remittance Date), or (ii) such other instruments as shall be
required to maintain the ratings of the Notes, without regard to the Note
Insurance Policy, and acceptable to the Note Insurer.
Section 4.9. Delinquency Advances and Servicing Advances.
-----------------------------------------------
(a) To the extent described below, the Servicer is obligated to advance its
own funds to the Servicer Collection Account to cover any shortfall between (i)
payments scheduled to be received in respect of Mortgage Loans, and (ii) the
amounts actually deposited in the Servicer Collection Account on account of such
payments; the Servicer's obligation to make any advance or advances described in
this Section 4.9 is effective only to the extent that such advance is, in the
good faith judgment of the Servicer made on or before the Remittance Date,
reimbursable from Insurance Proceeds or Liquidation Proceeds of the related
Mortgage Loans or recoverable as late Monthly Payments with respect to the
related Mortgage Loans or otherwise. Such amounts so advanced are "Delinquency
Advances."
(b) On or before each Remittance Date, the Servicer shall determine whether
or not it will make a Delinquency Advance on the related Remittance Date (in the
event that the applicable Subservicer fails to make such advances) and shall
furnish a written statement to the Certificateholder, the Indenture Trustee, the
Paying Agent, if different than the Indenture Trustee, and to any Noteholder
requesting the same, setting forth the aggregate amount to be remitted on such
Remittance Date on account of principal and interest in respect of the Mortgage
Loans, stated separately. In the event that full scheduled amounts of principal
and interest in respect of the Mortgage Loans shall not have been received by or
on behalf of the Servicer prior to such Remittance Date and the Servicer shall
have determined that a Delinquency Advance shall be made in accordance with this
Section 4.9, the Servicer shall so specify and shall specify the aggregate
amount of such advance.
(c) If the amount on deposit in a Subservicer's Principal and Interest
Account as of any Subservicer Remittance Date is less than the collections from
Mortgage Loans with respect to the related Remittance Period, the Servicer shall
cause the Subservicer to deposit to such Subservicer's Principal and Interest
Account a sufficient amount of such Subservicer's own funds to make such amount
equal to the related Subservicer Monthly Remittance for such Subservicer
Remittance Date. Such amounts of the Subservicer's own funds so deposited are
also Delinquency Advances.
(d) The Servicer will pay all reasonable and customary "out-of-pocket"
costs and expenses (including reasonable legal fees) incurred in the performance
of its servicing obligations including, but not limited to, the cost of (i)
advancing Preservation Expenses, (ii) any enforcement or judicial proceedings,
including foreclosures, (iii) the management and liquidation of REO Property
(including, without limitation, advancing realtors' commissions) and (iv)
advancing taxes, insurance and other charges against the Property. Each such
expenditure will constitute a "Servicing Advance." The Servicer may recover
Servicing Advances from the Mortgagors to the extent permitted by the Mortgage
Loans or, if not theretofore recovered from the Mortgagor on whose behalf such
Servicing Advance was made, from Liquidation Proceeds realized upon the
liquidation of the related Mortgage Loan. Delinquency Advances shall be
reimbursed as provided in Section 4.10A.
(e) In the event that the Servicer shall be required to make a Delinquency
Advance, it shall on the Remittance Date either (i) deposit in the Servicer
Collection Account an amount equal to such Delinquency Advance, (ii) make an
appropriate entry in the records of the Servicer Collection Account that funds
in such account being held for future distribution or withdrawal have been, as
permitted by this Section 4.9, used by the Servicer to make such Delinquency
Advance, or (iii) make advances in the form of any combination of (i) and (ii)
aggregating the amount of such Delinquency Advance. Any funds being held for
future distribution to Noteholders and so used shall be replaced by the Servicer
by deposit in the Servicer Collection Account on the Subservicer Remittance Date
to the extent that funds in the Servicer Collection Account on such Subservicer
Remittance Date with respect to the Mortgage Loans shall be less than payments
to Noteholders required to be made on such date with respect to the Mortgage
Loans. Under each Subservicing Agreement, the Servicer is entitled to receive
from the Principal and Interest Accounts established by the Subservicers amounts
received by the applicable Subservicers on particular Mortgage Loans as late
payments of principal and interest or as Liquidation Proceeds or Insurance
Proceeds and respecting which the Servicer has made an unreimbursed Delinquency
Advance. The Servicer is also entitled to receive other amounts from the related
Principal and Interest Accounts established by the Subservicers to reimburse
itself for prior Nonrecoverable Advances respecting Mortgage Loans serviced by
such Subservicers. The Servicer shall deposit these amounts in the Servicer
Collection Account prior to withdrawal pursuant to Section 4.8A. In accordance
with Section 4.9A, Delinquency Advances are reimbursable to the Servicer from
cash in the Servicer Collection Account to the extent that the Servicer shall
determine that any such advances previously made are Nonrecoverable Advances
pursuant to Sections 4.9 and 4.9A.
Section 4.9A Nonrecoverable Advances. Any advance previously made by a
-------------------------
Subservicer pursuant to its Subservicing Agreement with respect to a Mortgage
Loan or by the Servicer that the Servicer shall determine in its good faith
judgment not to be ultimately recoverable from Insurance Proceeds or Liquidation
Proceeds or otherwise with respect to such Mortgage Loan or recoverable as late
Monthly Payments with respect to such Mortgage Loan, shall be a "Nonrecoverable
Advance." The determination by the Servicer that it or the applicable
Subservicer has made a Nonrecoverable Advance or that any advance would
constitute a Nonrecoverable Advance, shall be evidenced by an Officer's
Certificate of the Servicer delivered to the Indenture Trustee and the Note
Insurer on the Subservicer Remittance Date and shall detail the reasons for such
determination. Notwithstanding any other provision of this Agreement, any
insurance policy relating to the Mortgage Loans, or any other agreement relating
to the Mortgage Loans to which the Servicer is a party, (a) the Servicer, and
each Subservicer shall not be obligated to, and shall not, make any advance
that, after reasonable inquiry and in its sole discretion, the Servicer, or such
Subservicer shall determine would be a Nonrecoverable Advance, and (b) the
Servicer, and each Subservicer shall be entitled to reimbursement for any
advance as provided in Section 4.9 of this Agreement.
Section 4.10. Compensating Interest. A full month's interest at a rate
----------------------
equal to the applicable Coupon Rate with respect to each Mortgage Loan less the
sum of
(i) the Monthly Servicing Fee and (ii) Subservicing Fee, is due to the
Indenture Trustee on the Loan Balance of each Mortgage Loan as of the
beginning of each Remittance Period. If a Prepayment of a Mortgage Loan
occurs during any calendar month, any difference between the interest
collected from the Mortgagor during such calendar month and the full
month's interest at the applicable Coupon Rate less the Subservicing Fee
("Compensating Interest") shall be deposited by each Subservicer prior to
the Subservicer Remittance Date to the Principal and Interest Account and
shall be included in the related Subservicer Monthly Remittance to be
remitted to, or drafted by, the Servicer on the Subservicer Remittance
Date; provided, however, that the Subservicer shall not be required to
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deposit Compensating Interest in respect of Prepayments in an amount that
exceeds the Subservicing Fee received by such Subservicer for the prior
calendar month with respect to the Mortgage Loan subserviced by it. If a
Subservicer fails to make some or all of a required Compensating Interest
payment, the Servicer will pay, up to the amount of its Servicing Fee with
respect to all Mortgage Loans being subserviced by such Subservicer, plus
investment income in the Servicer Collection Account relating to all
Mortgage Loans being subserviced by such Subservicer, the Compensating
Interest payment that should have been made by such Subservicer, but was
not, by depositing such Compensating Interest into the Servicer Collection
Account on the Remittance Date. Neither the Subservicers nor the Servicer
shall be entitled to reimbursement for Compensating Interest payments.
Section 4.10A Permitted Withdrawals from the Servicer Collection Account
-------------------------------------------------------------
and Principal and Interest Accounts.
- --------------------------------------
(a) The Servicer is authorized to make withdrawals, from time to time, from
the Servicer Collection Account or the Principal and Interest Accounts
established by the Subservicers of amounts deposited therein in respect of the
Mortgage Loans, as follows:
(i) To reimburse itself or the applicable Subservicer for Delinquency
Advances made pursuant to Section 4.9 of this Agreement or a Subservicing
Agreement, such right to reimbursement pursuant to this paragraph (i) being
limited to amounts received on particular Mortgage Loans (including, for
this purpose, Insurance Proceeds and Liquidation Proceeds) which represent
late recoveries of principal and/or interest respecting which any such
Delinquency Advance was made;
(ii) To reimburse itself or the applicable Subservicer for amounts
expended by or for the account of the Servicer pursuant to Section 4.9 or
amounts expended by such Subservicer pursuant to the Subservicing Agreement
or an agreement between a Subservicer and the Issuer in connection with the
restoration of property damaged by an uninsured cause or in connection with
the liquidation of a Mortgage Loan;
(iii) To pay to itself, with respect to the related Mortgage Loans,
the Servicing Fee as to which no prior withdrawals from funds deposited by
the Servicer have been made;
(iv) To reimburse itself or the applicable Subservicer for advances
made with respect to related Mortgage Loans which the Servicer has
determined to be Nonrecoverable Advances;
(v) To pay to itself reinvestment earnings deposited or earned in the
Servicer Collection Account to which it is entitled and to reimburse itself
for expenses incurred by and reimbursable to it pursuant to Sections 4.9,
4.24 and 6.3;
(vi) To remit to the Indenture Trustee for deposit in the Trustee
Collection Account, not later than the related Remittance Date, the amounts
specified in Section 5.2(a);
(vii) To withdraw amounts that have been deposited in error; and
(viii) After making or providing for the above withdrawals, to clear
and terminate the Servicer Collection Account and the Principal and
Interest Accounts following termination of this Agreement pursuant to
Section 8.1. Since, in connection with withdrawals pursuant to paragraphs
(i) and (ii), the Servicer's entitlement thereto is limited to collections
or other recoveries on the related Mortgage Loan, the Servicer or the
applicable Subservicer shall keep and maintain separate accounting for each
Mortgage Loan, for the purpose of justifying any such withdrawals.
(b) The Servicer is authorized to make withdrawals from time to time
from the Servicer Collection Account to reimburse itself for advances it has
made pursuant to Section 4.9 hereof that it has determined to be Nonrecoverable
Advances.
Section 4.11. Maintenance of Insurance; Collections Thereunder.
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(a) The Servicer shall use commercially reasonable efforts to keep, and to
cause the Subservicers to keep, in full force and effect each primary mortgage
guaranty insurance policy required with respect to a Mortgage Loan, in the
manner set forth in the applicable Subservicing Agreement, until no longer
required. Notwithstanding the foregoing, the Servicer shall have no obligation
to maintain such primary mortgage guaranty insurance policy for a Mortgage Loan
for which the outstanding Principal Balance thereof at any time subsequent to
origination was 80% or less of the sum of (i) the value of the related Property
(as determined by the appraisal obtained at the time of origination and (ii) the
value of any Additional Collateral (as determined at the time of origination)),
unless required by applicable law.
(b) Unless required by applicable law, the Servicer shall not cancel or
refuse to renew, or allow any Subservicer under its supervision to cancel or
refuse to renew, any such primary mortgage guaranty insurance policy in effect
at the date of the initial issuance of the Notes that is required to be kept in
force hereunder; provided, however, that neither the Servicer nor any
Subservicer shall advance funds for the payment of any premium due under any
primary mortgage guaranty insurance if it shall determine that such an advance
would be a Nonrecoverable Advance.
(c) The Servicer shall cause to be maintained for each Mortgage Loan (other
than a Cooperative Loan) fire and hazard insurance with extended coverage in an
amount which is not less than the original principal balance of such Mortgage
Loan, except in cases approved by the Servicer in which such amount exceeds the
value of the improvements to the Property. The Servicer shall also require fire
and hazard insurance with extended coverage in a comparable amount on property
acquired upon foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan
(other than a Cooperative Loan). Any amounts collected under any such policies
(other than amounts to be applied to the restoration or repair of the related
Property) shall be deposited into the Principal and Interest Account, subject to
withdrawal pursuant to the applicable Subservicing Agreement and pursuant to
Sections 4.8, 4.8A and 4.10A hereof.
(d) Where any part of any improvement to the Property (other than with
respect to a Cooperative Loan) is located in a federally designated special
flood hazard area and in a community which participates in the National Flood
Insurance Program at the time of origination of the related Mortgage Loan, the
Servicer shall cause flood insurance to be provided. The hazard insurance
coverage required by this Section 4.11 may be met with blanket policies
providing protection equivalent to individual policies otherwise required. The
Servicer or the applicable Subservicer shall be responsible for paying any
deductible amount on any such blanket policy. The Servicer agrees to present, or
cause to be presented, on behalf of and for the benefit of the Indenture
Trustee, the Noteholders, the Note Insurer, and the Swap Counterparty, claims
under the hazard insurance policy respecting any Mortgage Loan, and in this
regard to take such reasonable actions as shall be necessary to permit recovery
under such policy.
(e) Any unreimbursed costs incurred in maintaining any insurance described
in this Section 4.11 shall be recoverable as an advance by the Servicer from the
Servicer Collection Account. Such insurance shall be with insurers approved by
the Servicer and Fannie Mae or Freddie Mac. Other additional insurance may be
required of a Mortgagor, in addition to that required pursuant to such
applicable laws and regulations as shall at any time be in force and as shall
require such additional insurance.
Section 4.12. Due-on-Sale Clauses; Assumption and Substitution Agreements.
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When any Property has been or is about to be conveyed by the Mortgagor, the
Servicer shall, to the extent it has knowledge of such prospective conveyance
and prior to the time of the consummation of such conveyance and to the extent
permitted in the applicable Subservicing Agreement or other agreement between
such Subservicer and the Issuer, exercise rights to accelerate the maturity of
such Mortgage Loan, to the extent that such acceleration is permitted by the
terms of the related Mortgage Note, under any "due-on-sale" clause applicable
thereto; provided, however, that the Servicer shall not exercise any such right
if the due-on-sale clause, in the reasonable belief of the Servicer, is not
enforceable under applicable law or if such exercise would result in
non-coverage of any resulting loss that would otherwise be covered under any
insurance policy. In the event the Servicer is prohibited from exercising such
right, the Servicer is authorized to take or enter into an assumption and
modification agreement from or with the Person to whom a Property has been or is
about to be conveyed, pursuant to which such Person becomes liable under the
Mortgage Note and, unless prohibited by applicable state law or unless the
Mortgage Note contains a provision allowing a qualified borrower to assume the
Mortgage Note, the Mortgagor remains liable thereon; provided that the Mortgage
Loan shall continue to be covered (if so covered before the Servicer enters such
agreement) by any related primary mortgage guaranty insurance policy. The
Servicer is also authorized to enter into a substitution of liability agreement
with such Person, pursuant to which the original Mortgagor is released from
liability and such Person is substituted as Mortgagor and becomes liable under
the Mortgage Note. The Servicer will cause the Subservicer not to enter into
any substitution or assumption with respect to a Mortgage Loan unless permitted
by applicable law and if such substitution or assumption shall constitute a
"significant modification" effecting an exchange or reissuance of such Mortgage
Loan under the Code (or Treasury regulations promulgated thereunder in the
absence of advice of counsel that a significant modification of a Mortgage Loan
would not have a material adverse effect on the Noteholders, the Issuer or the
Certificateholders). The Servicer shall notify the Indenture Trustee that any
such substitution or assumption agreement has been completed by forwarding to
the Indenture Trustee the original copy of such substitution or assumption
agreement and other documents and instruments constituting a part thereof. In
connection with any such assumption or substitution agreement, the terms of the
related Mortgage Note shall not be changed. Any fee collected by the applicable
Subservicer for entering into an assumption or substitution of liability
agreement shall be retained by such Subservicer as additional servicing
compensation.
Notwithstanding the foregoing paragraph or any other provision of this
Agreement, the Servicer shall not be deemed to be in default, breach or any
other violation of its obligations hereunder by reason of any assumption of a
Mortgage Loan by operation of law or any assumption which the Servicer or the
Subservicer may be restricted by law from preventing, for any reason whatsoever.
Section 4.13. Realization Upon Defaulted Mortgage Loans.
---------------------------------------------
(a) The Servicer shall foreclose upon or otherwise comparably convert, or
cause to be foreclosed upon or comparably converted, the ownership of any
Property securing a Mortgage Loan which comes into and continues in default and
as to which no satisfactory arrangements can be made for collection of
delinquent payments pursuant to Section 4.1. In lieu of such foreclosure or
other conversion, and taking into consideration the desirability of maximizing
net Liquidation Proceeds after taking into account the effect of Insurance
Proceeds upon Liquidation Proceeds, the Servicer may, to the extent consistent
with prudent mortgage loan servicing practices, accept a payment of less than
the outstanding Loan Balance of a delinquent Mortgage Loan in full satisfaction
of the indebtedness evidenced by the related Mortgage Note and release the lien
of the related Mortgage upon receipt of such payment. The Servicer shall not
foreclose upon or otherwise comparably convert a Property if the Servicer is
aware of evidence of toxic waste, other hazardous substances or other evidence
of environmental contamination thereon and the Servicer determines that it would
be imprudent to do so. In connection with such foreclosure or other conversion,
the Servicer shall cause to be followed such practices and procedures as it
shall deem necessary or advisable and as shall be normal and usual in general
mortgage servicing activities. The foregoing is subject to the provision that,
in the case of damage to a Property from an uninsured cause, the Servicer shall
not be required to advance its own funds towards the restoration of the property
unless it shall be determined in the sole judgment of the Servicer, (i) that
such restoration will increase the proceeds of liquidation of the Mortgage Loan
after reimbursement to itself for such expenses, and (ii) that such expenses
will be recoverable to it through Liquidation Proceeds. The Servicer shall be
responsible for all other costs and expenses incurred by it in any such
proceedings; provided, however, that it shall be entitled to reimbursement
thereof (as well as its normal servicing compensation) as an advance. The
Servicer shall maintain information required for tax reporting purposes
regarding any Property which is abandoned or which has been foreclosed or
otherwise comparably converted. The Servicer shall report such information to
the Internal Revenue Service and the Mortgagor in the manner required by
applicable law.
(b) Notwithstanding any other provision of this Agreement, the Servicer and
the Indenture Trustee, as applicable, shall comply with all federal withholding
requirements with respect to payments to Noteholders of interest or original
issue discount that the Servicer or the Indenture Trustee reasonably believes
are applicable under the Code. The consent of Noteholders shall not be required
for any such withholding. Without limiting the foregoing, the Servicer agrees
that it will not withhold with respect to payments of interest or original issue
discount in the case of a Noteholder that has furnished or caused to be
furnished an effective Form W-8 or an acceptable substitute form or a successor
form and who is not a "10 percent shareholder" within the meaning of Code
Section 871(h)(3)(B) or a "controlled foreign corporation" described in Code
Section 881(c)(3)(C) with respect to the Depositor. In the event the Indenture
Trustee withholds any amount from interest or original issue discount payments
or advances thereof to any Noteholder pursuant to federal withholding
requirements, the Indenture Trustee shall indicate the amount withheld to such
Noteholder.
Section 4.14. Indenture Trustee to Cooperate; Release of Mortgage Files.
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Upon the Prepayment in full or scheduled maturity of any Mortgage Loan, the
Servicer shall cause such final payment to be immediately deposited in the
related Principal and Interest Account or the Servicer Collection Account. Upon
notice thereof, the Servicer shall promptly notify the Indenture Trustee and the
Certificateholder by an Officer's Certificate (which certification shall include
a statement to the effect that all amounts received in connection with such
payment which are required to be deposited in either such account have been so
deposited) and shall request delivery to it of the File. Upon receipt of such
properly completed certification and request, the Indenture Trustee shall, not
later than the fifth succeeding Business Day, release the related File to the
Servicer or the applicable Subservicer indicated in such request. With any such
Prepayment in full or other final payment, the Servicer is authorized to prepare
for and procure from the Indenture Trustee or mortgagee under the Mortgage which
secured the Mortgage Note a deed of full reconveyance or other form of
satisfaction or assignment of Mortgage and endorsement of Mortgage Note in
connection with a refinancing covering the Property, which satisfaction,
endorsed Mortgage Note or assigning document shall be delivered by the Servicer
to the person or persons entitled thereto. No expenses incurred in connection
with such satisfaction or assignment shall be payable to the Servicer by the
Indenture Trustee or from the Servicer Collection Account, or the related
Principal and Interest Account. From time to time as appropriate for the
servicing or foreclosure of any Mortgage Loan, including, for this purpose,
collection under any primary mortgage guaranty insurance, the Indenture Trustee
shall, upon request of the Servicer and delivery to it of a Servicer's Trust
Receipt in the form of Exhibit G signed by an authorized Officer of the
Servicer, release not later than the fifth Business Day following the date of
receipt of such request the related File to the Servicer or the related
Subservicer as indicated by the Servicer and shall execute such documents as
shall be necessary to the prosecution of any such proceedings. Such Servicer's
Trust Receipt shall obligate the Servicer to return the File to the Indenture
Trustee when the need therefor by the Servicer no longer exists, unless the
Mortgage Loan shall be liquidated, in which case, upon receipt of a Officer's
Certificate similar to that herein above specified.
Section 4.15. Compensation to the Servicer and the Subservicers.
-------------------------------------------------------
(a) As compensation for its activities hereunder, the Servicer shall be
entitled, without duplication, to receive from the Servicer Collection Account
the Servicing Fee. The Servicer shall be required to pay all expenses incurred
by it in connection with its activities hereunder and shall not be entitled to
reimbursement therefor, except as specifically provided herein.
(b) As compensation for its activities under the applicable Subservicing
Agreement, the applicable Subservicer shall be entitled to withhold or withdraw
from the related Principal and Interest Account the amounts provided for in such
Subservicing Agreement. Each Subservicer is required to pay all expenses
incurred by it in connection with its servicing activities under its
Subservicing Agreement (including payment of premiums for primary mortgage
guaranty insurance policies, if required) and shall not be entitled to
reimbursement therefor except as specifically provided in such Subservicing
Agreement and not inconsistent with this Agreement.
(c) Additional servicing compensation in the form of prepayment charges,
release fees and similar items, to the extent collected from Mortgagors, may be
retained by the applicable subservicer.
Section 4.16. Annual Statement as to Compliance. The Servicer, at its own
---------------------------------
expense, shall deliver to the Issuer, the Indenture Trustee, the
Certificateholder, the Rating Agencies and the Note Insurer, on or before April
30 of each year, beginning with April 30, 2000, an Officer's Certificate stating
as to the signer thereof, that (i) a review of the activities of the Servicer
during the preceding calendar year and performance under this Agreement has been
made under such officer's supervision, and (ii) to the best of such officer's
knowledge, based on such review, the Servicer has fulfilled all its obligations
under this Agreement throughout such year, or, if there has been a default in
the fulfillment of any such obligation, specifying each such default known to
such officer and the nature and status thereof. Copies of such statement shall
be provided by the Servicer to Noteholders upon request or by the Indenture
Trustee (solely to the extent that such copies are available to the Indenture
Trustee) at the expense of the Servicer, should the Servicer fail to so provide
such copies.
Section 4.17. Annual Independent Public Accountants' Servicing Report. On
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or before April 30 of each year, beginning with April 30, 2000, the Servicer, at
its expense, shall cause a firm of independent public accountants reasonably
acceptable to the Note Insurer to furnish a statement to the Indenture Trustee,
the Certificateholder, the Note Insurer and the Rating Agencies to the effect
that on the basis of the examination by such firm conducted substantially in
compliance with the Uniform Single Attestation Program for Mortgage Bankers or
the Audit Guide for Audits of HUD Approved Title II Nonsupervised Mortgagees and
Loan Correspondents Program, the servicing by or on behalf of the Servicer of
the Mortgage Loans was conducted in compliance with the Sale and Servicing
Agreement, except for any significant exceptions or errors in records that, in
the opinion of the firm, the Uniform Single Attestation Program for Mortgage
Bankers or the Audit Guide for Audits of HUD Approved Title II Nonsupervised
Mortgagees and Loan Correspondents Program requires it to report. Copies of the
annual accountants' statement and the officer's statement may be obtained by
Noteholders without charge upon written request to the Servicer.
Section 4.18. Access to Certain Documentation and Information Regarding the
-------------------------------------------------------------
Mortgage Loans. In the event that the Notes are legal for investment by
- ---------------
federally-insured savings associations, the Servicer shall provide to the OTS,
the FDIC and the supervisory agents and examiners of the OTS and the FDIC access
to the documentation regarding the related Mortgage Loans required by applicable
regulations of the OTS or the FDIC, as applicable, and shall in any event
provide such access to the documentation regarding such Mortgage Loans to the
Indenture Trustee and its representatives, such access being afforded without
charge, but only upon reasonable request and during normal business hours at the
offices of the Servicer designated by it.
Section 4.19. Assignment of Agreement. The Servicer may not assign its
-------------------------
obligations under this Agreement, in whole or in part, unless (i) it shall have
first obtained the written consent of the Indenture Trustee, the Issuer and the
Note Insurer, and (ii) the Indenture Trustee, the Issuer and the Note Insurer
shall have received a confirmation letter from each Rating Agency confirming
that no downgrade in the rating of the Notes will occur, without taking the Note
Insurance Policy into account; provided, however, that any assignee must meet
the eligibility requirements set forth in Section 7.1 hereof for a successor
servicer.
Section 4.20. ARMs. The Servicer shall enforce each ARM and 5/1 ARM
----
Mortgage Loan in accordance with its terms and shall or shall cause the
applicable Subservicers to timely calculate, record, report and apply all
interest rate adjustments in accordance with the related Mortgage Note. The
Servicer's records shall, at all times, reflect the then Coupon Rate and monthly
payment and the Servicer shall or shall cause the applicable Subservicers to
timely notify the Mortgagor of any changes to the Coupon Rate or the Mortgagor's
monthly payment.
Section 4.21. Inspections by Note Insurer and Account Parties. At any
-----------------------------------------------------
reasonable time and from time to time upon reasonable notice, the Note Insurer,
the Indenture Trustee, the Issuer or any agents or representatives thereof may
inspect the Servicer's and each Subservicer's servicing operations and discuss
the servicing operations of the Servicer and each Subservicer with any of its
officers or directors. The costs and expenses incurred by the Servicer and each
Subservicer or its agents or representatives in connection with any such
examinations or discussions shall be paid by the Servicer or the applicable
Subservicer.
Section 4.22. Reports to the Indenture Trustee; Servicer Collection Account
-------------------------------------------------------------
Statement.
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(a) Not later than each Remittance Date, the Servicer shall forward a
statement to the Indenture Trustee, the Certificateholder and the Note Insurer
setting forth the status of the Servicer Collection Account as of the close of
business on the related Subservicer Remittance Date and showing, for the period
covered by such statement, the aggregate of deposits into and withdrawals from
the Servicer Collection Account for each category of deposit specified in
Sections 4.1, 4.8 and 4.8A and each category of withdrawal specified in Section
4.9 and 4.9A, and stating that all distributions required by this Agreement have
been made (or if any required distribution has not been made, specifying the
nature and amount thereof).
(b) On or before each Subservicer Remittance Date, the Servicer shall
calculate the portion of any Principal Shortfall Amount allocable to Realized
Losses on the Mortgage Loans and shall advise the Indenture Trustee and the Note
Insurer of such Principal Shortfall Amount in its report.
(c) No later than each Subservicer Remittance Date, the Servicer shall
prepare and provide a report to the Indenture Trustee, the Certificateholder and
the Note Insurer listing separately the interest and principal components of the
related Monthly Remittance.
(d) Based upon such report and the related Remittance Report regarding the
Pooled Certificates, the Indenture Trustee no later than the Business Day prior
to the Payment Date shall calculate the Available Interest Amount and the
Available Principal Amount for such Payment Date.
(e) The Indenture Trustee shall also calculate the Note Rate, the
Certificate Rate, the Excess Interest, the LIBOR Interest Carryover Amount, and
amounts payable to the Swap Counterparty pursuant to Section 5.2.
Section 4.23. Designated Depository Institutions. The Servicer shall give
-----------------------------------
the Issuer, the Indenture Trustee and the Note Insurer (a) at least thirty days'
prior written notice of any anticipated change of Designated Depository
Institution and (b) written notice of any change in the ratings of a Designated
Depository Institution of which the Servicer is aware, within two Business Days
after discovery.
Section 4.24. Appointment of Custodian. If the Servicer determines that the
------------------------
Indenture Trustee is unable to deliver Files to the Servicer as required
pursuant to Section 4.14 hereof, the Servicer shall so notify the Depositor, the
Issuer, the Note Insurer, the Rating Agencies and the Indenture Trustee, and
make request that a custodian acceptable to the Servicer and the Note Insurer,
be appointed to retain custody of the Files on behalf of the Indenture Trustee.
The Indenture Trustee, the Issuer and the Depositor agree to co-operate
reasonably with the Servicer in connection with the appointment of such
custodian. The Servicer shall pay, and be reimbursed pursuant to Section
4.10A(a) hereof for, all expenses incurred by the Indenture Trustee in
connection with the transfer of the Files to such custodian.
Section 4.25. [Reserved]
Section 4.26. Year 2000 Compliance. The Servicer represents, warrants and
--------------------
covenants that (1) it is in the process of identifying circumstances under which
its computer applications may not be able to properly perform date-sensitive
functions after December 31, 1999 and (2) it will implement, on a timely basis,
corrective action to prevent any such application from interfering in any
material respect, due to inability to properly perform such functions, with the
performance of its duties under this Agreement. The Servicer will, upon request
of the Note Insurer, the Certificateholder or the Indenture Trustee, on or
before June 30, 1999, promptly provide an Officer's Certificate to the effect
that the Servicer has implemented corrective action to prevent its computer
applications from interfering, in any material respect, due to inability to
perform date-sensitive functions, with the performance of the Servicer's duties
under this Agreement.
Section 4.27. Performance of Obligations; Indenture. The Issuer appoints
--------------------------------------
he Servicer and the Servicer agrees to perform such obligations and duties of
the Issuer pursuant to the Indenture as the Issuer may request, including, but
not limited to the duties and obligations of the Issuer pursuant to Section
3.09(b) of the Indenture.
Section 4.28. Data.
----
(a) Within a reasonable period of time after the Closing Date, the Servicer
will provide to the Note Insurer a computer tape or electronic transmission (a
"Data Tape"), in a format and containing such of the servicing data maintained
by the Servicer with respect to the Mortgage Loans as of the Cut-off Date as
shall be mutually agreed to by the Servicer and the Note Insurer (but in any
event the Data Tape shall contain the Servicer's Monthly Remittance Report and
such other information as the Note Insurer may reasonably request), together
with a written explanation (the "Data Dictionary") of each of the data fields
included in such Data Tape. Thereafter, on a monthly basis, the Servicer will
provide to the Note Insurer a Data Tape as of the end of the preceding
Remittance Period together with a written explanation of any revisions made to
the Data Dictionary during the preceding Remittance Period. The Note Insurer
shall have no duty or obligation with respect to the accuracy of the information
contained in any Data Tape or in the Data Dictionary.
(b) Each Data Tape and Data Dictionary furnished by the Servicer pursuant
to this Agreement shall be deemed confidential and of proprietary nature, and
shall not be copied or distributed to any other Person. No Person entitled to
receive copies of such tapes shall use the information therein for the purpose
of soliciting the Mortgagors or for any other purpose except as set forth in
this Agreement.
(c) Upon request by a Certificateholder, the Servicer shall provide data,
in a mutually agreeable form, to such Certificateholder. If such
Certificateholder is the Owner of 100% of the Certificates, the Servicer shall
furnish such data without additional charge, and, if mutually acceptable to the
Servicer and such Certificateholder, on a monthly basis.
ARTICLE V
Accounts; Payments; Statements to Certificateholders and Noteholders
Section 5.1 Establishment of Accounts.
---------------------------
(a) The Issuer hereby directs the Indenture Trustee to establish and
maintain the Trustee Collection Account, the Insured Amounts Account, the
Reserve Account, the Swap Counterparty Reserve Account and the Swap Counterparty
Floor Account. Each such Account shall be maintained as a segregated account at
a Designated Depository Institution to be held in the name of the Indenture
Trustee for the benefit of the related Owners and the Note Insurer, unless
otherwise specified below.
(b) The Indenture Trustee shall establish and maintain the Insured
Amounts Account to receive deposits from the Note Insurer; the Insured Amounts
Account shall be entitled "Bankers Trust Company of California, N.A. as
Indenture Trustee for Thornburg Mortgage Funding Trust I, Insured Amounts
Account."
(c) The Issuer hereby directs the Indenture Trustee to establish the
Trustee Collection Account to be maintained as a segregated account entitled
"Bankers Trust Company of California, N.A. as Indenture Trustee for Thornburg
Mortgage Funding Trust I, Trustee Collection Account." On the Closing Date, the
Depositor is remitting the amount of $1,220,971.34 in immediately available
funds representing the November 1998 distribution on the Pooled Certificates to
the Indenture Trustee for deposit into the Trustee Collection Account, and the
Indenture Trustee hereby acknowledges receipt of $1,220,971.34 for deposit into
the Trustee Collection Account. The Depositor shall (or shall cause the
Servicer to) remit any and all distributions received by the Depositor or Seller
on the Pooled Certificates on any Pooled Certificate Remittance Date after the
Closing Date to the Indenture Trustee in immediately available funds on the
Business Day after such Pooled Certificate Remittance Date for deposit into the
Trustee Collection Account.
(d) The Issuer hereby directs the Indenture Trustee to establish and
maintain the Reserve Account entitled "Bankers Trust Company of California, N.A.
as Indenture Trustee for Thornburg Mortgage Funding Trust I, Reserve Account."
Excess Interest will be deposited in the Reserve Account to be held for the
benefit of the Noteholders and the Certificateholders. On the Closing Date, the
Depositor is remitting or causing to be remitted to the Indenture Trustee, and
the Indenture Trustee hereby acknowledges receipt of $150,000 in immediately
available funds for deposit into the Reserve Account.
(e) The Indenture Trustee shall establish and maintain, for the benefit
of the Note Insurer, the Swap Counterparty Reserve Account entitled "Bankers
Trust Company of California, N.A. as Indenture Trustee for TMA Mortgage Funding
Trust I, Swap Counterparty Reserve Account." On the Closing Date, the Depositor
will remit or cause to be remitted to the Indenture Trustee, and the Indenture
Trustee hereby acknowledges receipt of $800,000 in immediately available funds
for deposit into the Swap Counterparty Reserve Fund.
(f) The Indenture Trustee shall establish and maintain, for the benefit
of the Note Insurer, the Swap Counterparty Floor Account entitled "Bankers Trust
Company of California, N.A. as Indenture Trustee for TMA Mortgage Trust I, Swap
Counterparty Floor Account."
Section 5.2 Flow of Funds. (a) Upon receipt, the Indenture Trustee
---------------
shall deposit (i) into the Trustee Collection Account (A) the Monthly Remittance
remitted by the Servicer, plus (B) any related Substitution Adjustment Amounts
and any related Loan Purchase Prices, plus (C) any amounts received from the
Swap Counterparty under the Swap Agreements, plus (D) all distributions on the
Pooled Certificates received by the Indenture Trustee pursuant to the terms
hereof, (ii) into the Reserve Account, the Excess Interest, if any, including on
the Closing Date, the initial deposit referred to in Section 5.1(d), (iii) into
the Insured Amounts Account, the amount of any Insured Amounts (other than
Insured Amounts in respect of amounts described in clause (iii) of the
definition of Insured Amounts) (iv) into the Trustee Collection Account, the
proceeds of any liquidation or termination pursuant to Article VIII hereof and
Article X of the Indenture, (v) into the Swap Counterparty Floor Account, any
amounts received on the Interest Rate Floor Agreement and (vi) into the Swap
Counterparty Reserve Account, the initial deposit referred to in Section 5.1(e).
Insured Amounts in respect of amounts described in clause (iii) of the
definition of Insured Amounts shall be paid by the Note Insurer to the Indenture
Trustee for payment to the Owners of the Notes who have complied with the
provisions of Section 5.2(j), in the same manner as payments with respect to the
Notes.
(b) The Indenture Trustee shall calculate the amount of Excess
Interest, the LIBOR Interest Carryover Amount, the amount to be transferred to
the Reserve Account and any amount on deposit in the Reserve Account to be
distributed as provided in Section 5.7 hereof.
(c) If the Indenture Trustee determines that a draw on the Note
Insurance Policy is necessary, the Indenture Trustee will take such actions as
are required under the Note Insurance Policy to inform the Note Insurer that a
payment will be required under the Note Insurance Policy and the amount thereof
in sufficient time to have funds available for payment to the Noteholders on the
applicable Payment Date. Amounts received from the Note Insurer shall be
deposited in the Insured Amounts Account.
(d) On each Payment Date, the Indenture Trustee will withdraw any
amount to be transferred from the Reserve Account pursuant to Section 5.7 hereof
and any amount paid by the Note Insurer which has been deposited in the Insured
Amounts Account pursuant to Section 5.2(c) hereof and deposit such amounts in
the Trustee Collection Account.
(e) On each Payment Date after the transfers and payments pursuant to
Section 5.2(d), the Indenture Trustee shall make the following transfers and
distributions in the priority indicated from the funds then on deposit in the
Trustee Collection Account (other than investment earnings):
(i) From the Available Interest Amount, in the following order of
priority and in each case to the extent of any remaining Available Interest
Amount after making the prior payments; provided that funds transferred from (x)
--------
the Insured Amounts Account will be used only to pay Interest Shortfall Amounts,
and (y) the Reserve Account will be used only to pay LIBOR Interest Carryover
Amounts under clause (G):
(A) to the Swap Counterparty, any net regularly scheduled monthly
amounts due the Swap Counterparty on such Payment Date under the Swap
Agreements;
(B) to the Note Insurer, all premiums due to the Note Insurer on
such Payment Date pursuant to the Insurance Agreement;
(C) to the Indenture Trustee, all amounts due as its monthly
Indenture Trustee's Fee and Custodian's Fee and any other amounts due
it pursuant to Section 6.07 of the Indenture;
(D) to the Owner Trustee, all amounts due purusant to Section
8.01 of the Trust Agreement, including the monthly Owner Trustee's
Fee;
(E) to the Owners, Current Interest at the Note Rate;
(F) to the Note Insurer for reimbursement for any payments made
(i) under the Note Insurance Policy with respect to its guarantee of
interest at the Note Rate to the Noteholders or under the Swap
Insurance Policy and (ii) any other amounts owed to the Note Insurer
under the Insurance Agreement (other than with respect to Principal
Shortfall Amounts) to the extent not reimbursed from payments from the
Available Principal Amount;
(G) to the Owners, any LIBOR Interest Carryover Amount;
(H) to the Certificate Distribution Account maintained by the
Paying Agent for distribution to the Certificateholders, Current
Interest at the Certificate Rate; and,
(I) any remainder to the Reserve Account until, on and after the
Reserve Account Limit Date, the Reserve Account Limit is reached, and
thereafter to the Certificate Distribution Account for distribution to
the Certificateholders as Additional Certificate Interest.
(ii) From the Available Principal Amount, in the following order of
priority:
(A) to the Owners, until the outstanding principal balance of the
Notes has been reduced to zero;
(B) to the Note Insurer for reimbursement for any payments made
under the Note Insurance Policy with respect to Principal Shortfall
Amounts and not previously repaid to the Note Insurer, and any other
amounts owed the Note Insurer under the Insurance Agreement (other
than amounts owed to the Note Insurer under Section 5.2(e)(i)(F) from
the Available Interest Amount); and
(C) to the Certificate Distribution Account for distribution to
the Certificateholders as principal until the Certificate Balance of
the Certificates has been reduced to zero and then as Additional
Certificate Interest.
(f) If on any Payment Date there are insufficient Available Interest
Amounts to pay the amounts due to the Swap Counterparty for net regularly
scheduled monthly amounts under the Swap Agreement pursuant to Section
5.2(e)(i)(A), the Indenture Trustee shall draw an amount up to such deficiency,
first from amounts, if any, received under the Interest Rate Floor Agreement and
on deposit in the Swap Counterparty Floor Account and second from the Swap
Counterparty Reserve Account and shall add such amounts to the payment being
made under Section 5.2(e)(i)(A). If funds are received under the Interest Rate
Floor Agreement and not used as aforesaid, they shall be deposited in the
Certificate Distribution Account for distribution to the Certificateholders as
Additional Certificate Interest.
(g) Any amounts properly distributed to the Holders of the Certificates
pursuant to the terms of this Agreement shall be distributed free of the lien of
the Indenture, and any such amounts shall in no event be required to be returned
to the Indenture Trustee or paid over to the Owners.
(h) On each Payment Date, the Paying Agent shall distribute the amounts
on deposit in the Certificate Distribution Account as provided in Article V of
the Trust Agreement.
(i) The Indenture Trustee shall (i) receive as attorney-in-fact of the
Owners any Insured Amounts from the Note Insurer, (ii) shall deposit the Insured
Amounts to the Insured Amounts Account and (iii) shall disburse the same from
such Insured Amounts Account to the Trustee Collection Account and the Owners as
set forth in Section 5.2(e)(i)(E) and 5.2(e)(ii)(A) hereof. Insured Amounts
disbursed by the Indenture Trustee from proceeds of the Note Insurance Policy
shall not be considered payment by the Trust with respect to the applicable
Notes and the Note Insurer shall become the owner of such unpaid amounts due
from the Trust in respect of Insured Amounts as the deemed assignee of such
Notes, as hereinafter provided. The Indenture Trustee, on behalf of each
Noteholder, hereby agrees for the benefit of the Note Insurer that it recognizes
that to the extent the Note Insurer pays Insured Amounts, either directly or
indirectly (as by paying through the Indenture Trustee), to the applicable
Insured Amounts Account, the Note Insurer (x) will be subrogated to the rights
of the Owners of the applicable Notes, with respect to such Insured Amounts, (y)
shall be deemed to the extent of the payments so made to be an owner of such
Notes and (z) shall receive future payments from Available Interest Amounts and
Available Principal Amounts until all such Insured Payments by the Note Insurer
have been fully reimbursed, as described in the following paragraph. The Note
Insurer shall not acquire any voting rights hereunder as a result of such
subrogation, except as otherwise described herein.
It is understood and agreed that the intention of the parties is that the
Note Insurer shall not be entitled to reimbursement from Available Interest
Amounts on any Payment Date for amounts previously paid by it unless on such
Payment Date the Owners shall also have received the full amount of the related
Current Interest or from Available Principal Amounts on any Payment Date for
amounts previously paid by it unless on such Payment Date the Outstanding
principal balance of the Notes has been reduced to zero.
(j) Subject to the terms and conditions of the Note Insurance Policy,
the Note Insurer will pay any Insured Amount that is a Preference Amount (as
defined below) on the Payment Date following receipt on a Business Day by the
Note Insurer of (i) a certified copy of the order requiring the return of the
preference payment, (ii) an opinion of counsel satisfactory to the Note Insurer
that such order is final and not subject to appeal, (iii) an assignment in such
form as is reasonably required by the Note Insurer, irrevocably assigning to the
Note Insurer all rights and claims of the Owner relating to or arising under the
applicable Notes against the debtor which made such preference payment or
otherwise with respect to such preference payment and (iv) appropriate
instruments to effect the appointment of the Note Insurer as agent for such
Owner in any legal proceeding related to such preference payment, such
instruments being in a form satisfactory to the Note Insurer, provided that if
such documents are received after 2:00 pm New York City time on such Business
Day, they will be deemed to be received on the following Business Day. Such
payments shall be disbursed to the receiver or trustee in bankruptcy named in
the final order of the court exercising jurisdiction on behalf of the Owner and
not to any Owner directly unless such Owner has returned principal or interest
paid on the Notes to such receiver or trustee in bankruptcy, in which case such
payment shall be paid to the Indenture Trustee for disbursement to such Owner.
"Preference Amount" means any amount previously distributed to an Owner of
a Note that is recoverable and sought to be recovered as a voidable preference
by a trustee in bankruptcy pursuant to the United States Bankruptcy Code (11
U.S.C.), as amended from time to time in accordance with a final nonappealable
order of a court having competent jurisdiction.
In no event shall the Note Insurer pay more than one Insured Amount in
respect of any Preference Amount. Consequently, a Noteholder shall not be
entitled to reimbursement with respect to any final order relating to the
Noteholder's receipt of funds representing Insured Amounts paid by the Note
Insurer.
Each Noteholder, by its purchase of a Note, the Servicer, the Indenture
Trustee and the Issuer hereby agree that the Note Insurer may, after making
payment of the Preference Amounts or acknowledging to Noteholders its obligation
to make payment of any Preference Amounts, at any time thereafter during the
continuation of any proceeding relating to a preference claim direct all matters
relating to such preference claim, including, without limitation, the direction
of any appeal of any order relating to such preference claim and the posting of
any surety, supersedeas or performance bond pending any such appeal. In
addition and without limitation of the foregoing, the Note Insurer, after making
payment of the Preference Amounts, shall be subrogated to the rights of the
Servicer, the Indenture Trustee, the Issuer and each Owner in the conduct of any
such preference claim, including, without limitation, all rights of any party to
an adversary proceeding action with respect to any court order issued in
connection with any such preference claim. Any expenses incurred in complying
with the direction of the Note Insurer shall be borne solely by the Note
Insurer.
(k) With respect to the Swap Agreements, if and so long as the
aggregate Principal Balance of the Mortgage Loans falls below 1.5 times the
aggregate notional amount of the Swap Agreements, the selection of the
respective amortization rates by the Depositor, as provided in the Swap
Agreements, shall be subject to the approval of the Note Insurer.
Section 5.3 Investment of Accounts.
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(a) Any amounts in any Account permitted or required to be invested by
the Indenture Trustee pursuant to this Section 5.3 shall be invested in Eligible
Investments;
(b) no such Eligible Investments shall mature later than the Business Day
immediately preceding the related Payment Date; provided that Eligible
Investments which are obligations of the financial institution serving as
Indenture Trustee may mature on the related Payment Date;
(c) every Eligible Investment made pursuant to this Section 5.3 shall be
held until maturity;
(d) amounts on deposit in the Insured Amounts Account shall not be
invested;
(e) the Indenture Trustee shall invest amounts on deposit in the
Certificate Distribution Account for the benefit of the Certificateholders at
the written direction of the Depositor;
(f) the Indenture Trustee shall invest amounts on deposit in the Trustee
Collection Account for the benefit of the Certificateholders at the written
direction of the Depositor;
(g) the Indenture Trustee shall invest amounts on deposit in the Reserve
Account for the benefit of the Certificateholders at the written direction of
the Depositor;
(h) the Indenture Trustee shall invest amounts on deposit in the Swap
Counterparty Reserve Account for the benefit of the Certificateholders at the
written direction of the Depositor;
(i) the Indenture Trustee shall invest amounts on deposit in the Swap
Counterparty Floor Account for the benefit of the Certificateholders at the
written direction of Depositor;
(j) on each Payment Date, all investment income earned on each Account
listed in clauses (e) through (i) above during such Accural Period shall be
deposited by the Indenture Trustee into the Certificate Distribution Account and
distributed to the Certificateholders as Additional Certificate Interest;
(k) all income or gain from investments in any Account held by the
Indenture Trustee shall be deposited into such Account immediately upon receipt,
and any loss resulting from such investments shall be the responsibility of the
party directing the Indenture Trustee to make such Investment;
(l) the Indenture Trustee shall not in any way be held liable by reason of
any loss or any insufficiency in any Account held by the Indenture Trustee
resulting from any loss on any Eligible Investment included therein (except to
the extent that the financial institution serving as Indenture Trustee is the
obligor thereon); and
(m) if the Indenture Trustee has not received any written direction as
contemplated in Sections 5.3(e)-(i) above, the amount on deposit in the
respective accounts shall be invested in Eligible Investments listed in Clause
(h) of the definition of Eligible Investments.
Section 5.4 Reports by Indenture Trustee to Owners and Depositor.
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On each Payment Date the Indenture Trustee shall report in writing to each
Noteholder of record, to each Paying Agent, if different than the Indenture
Trustee, to the Owner Trustee, to each Certificateholder of record, and to the
Depositor with a copy to the Note Insurer and the Rating Agencies:
(1) (A) the aggregate amount of funds available for payment on the
Notes on such Payment Date, (B) the amount of interest to be paid to the
Notes and the annualized rate of interest being paid on the Notes (based on
the original principal amount of the Notes minus all principal
distributions previously paid thereon), (C) whether such interest payment
is based upon the LIBOR Rate or the Available Funds Cap Rate and whether
the Note Insurer provided a portion of such interest payment, and (D) the
amount of principal being paid to the Notes on such Payment Date in the
aggregate and per $1,000 initial aggregate outstanding principal balance of
Notes;
(2) the amount of any Realized Losses being charged against the
Certificates, and/or the Notes (and whether the Note Insurer will be
concurrently providing a payment under the Note Insurance Policy to cover
such applied Realized Loss);
(3) the percentage of the initial principal balance of the Notes that
remains outstanding on such Payment Date, after giving effect to the
payments and Realized Loss charge-offs to be made on such Payment Date;
(4) the outstanding principal balance of the Notes after giving effect
to the payments and Realized Loss charge-offs to be made on such Payment
Date;
(5) (A) the amount of interest and Certificate Rate paid to the
Certificates on such Payment Date (separately stating any Additional
Certificate Interest not included in the calculation of the Certificate
Rate), (B) the amount of Realized Losses applied against the Certificate
Balance of the Certificates and (C) the current Certificate Balance of the
Certificates after any payments and write-downs on such Payment Date;
(6) the amount of interest paid to the Swap Counterparty (and whether
any portion thereof was paid by the Note Insurer under the Swap Insurance
Policy) and the amount of interest received from the Swap Counterparty on
such Payment Date;
(7) the amount deposited into the Reserve Account, amounts withdrawn
from the Reserve Account (and applications thereof) and balance of the
Reserve Account as of such Payment Date;
(8) the amounts reimbursed to the Note Insurer, if any, relating to
its payments under the Note Insurance Policy and the Swap Insurance Policy
or otherwise owed to the Note Insurer under the Insurance Agreement and the
amounts under each remaining unreimbursed.
(9) the LIBOR Rate for the Accrual Period beginning on such Payment
Date;
(10) the weighted average Coupon Rate of the Mortgage Loans as of the
last day of the preceding calendar month;
(11) the weighted average of the remaining term of the Mortgage Loans
as of the last day of the preceding calendar month;
(12) The number and aggregate Principal Balance of the Mortgage Loans
delinquent one, two and three months or more;
(13) The (i) number and aggregate Principal Balance of Mortgage Loans
with respect to which foreclosure proceedings have been initiated, and (ii)
the number and aggregate book value of Properties acquired through
foreclosure, deed in lieu of foreclosure or other exercise of rights
respecting the Indenture Trustee's security interest in the Mortgage Loans;
(14) The amount of Realized Losses incurred allocable to the Notes on
the related Payment Date and the cumulative amount of Realized Losses
incurred allocated to the Notes since the Cut-Off Date; and
(15) The aggregate Principal Balance of all outstanding Mortgage
Loans.
In addition, the Indenture Trustee will provide to each such Person, a copy
of the Remittance Report for the Pooled Certificates. The obligations of the
Indenture Trustee under this Section are conditioned upon such information being
received from the Servicer pursuant to Section 4.22 hereof.
In addition to the foregoing, the Indenture Trustee will also provide a
monthly report to the Issuer, the Certificateholders and the Note Insurer
containing (i) the balance in the Swap Counterparty Reserve Account and the
amount of any withdrawals therefrom as of such Payment Date, and (ii) the amount
of any receipts with respect to the Interest Rate Floor Agreement.
In addition to the foregoing, for so long as TMA Acceptance Corp. or any
Affiliate thereof is the sole Holder of the Certificates, the Servicer shall
provide to the Certificateholder a monthly report substantially in the form of
Exhibit I attached hereto.
Upon request by any Noteholder, the Indenture Trustee, as soon as
reasonably practicable, shall provide the requesting Noteholder with such
information as is necessary and appropriate, in the Indenture Trustee's sole
discretion, for purposes of satisfying applicable information requirements under
Rule 144A of the Securities Act.
Section 5.5 Drawings under the Policy and Reports by Indenture Trustee.
------------------------------------------------------------
(a) By 11:00 A.M. California Time on the Business Day preceding each Payment
Date, the Indenture Trustee shall determine whether a claim is to be made under
the Note Insurance Policy for an Insured Amount. If the Indenture Trustee
determines that a Claim should be made for an Insured Amount, the Indenture
Trustee shall furnish the Note Insurer and the Issuer with a completed Notice in
the form set forth as Exhibit A to the Note Insurance Policy. The Notice shall
specify the amount of Insured Amount and shall constitute a claim for an Insured
Amount pursuant to the Note Insurance Policy.
(b) Without limiting the generality of the foregoing, the Indenture
Trustee shall, at the request of the Note Insurer transmit promptly to the Note
Insurer copies of all accountings of receipts in respect of the Mortgage Loans
furnished to it by the Servicer.
(c) From time to time, the Indenture Trustee shall promptly report to
the Issuer and to the Note Insurer with respect to its actual knowledge, without
independent investigation, of any inaccuracies of any of the statements set
forth in Part II of Exhibit D hereto.
Section 5.6 Allocation of Realized Losses. Any Realized Losses with
--------------------------------
respect to the Mortgage Loans or the Pooled Certificates will, on the related
Payment Date, be allocated as follows, separately in the following order:
(i) to the Certificates in reduction of their Certificate Balances
until such Certificate Balances have been reduced to zero; and
(ii) to the extent not covered by the Note Insurance Policy, to the
Notes in reduction of their Class Principal Balances until such Class
Principal Balances have been reduced to zero.
Section 5.7 The Reserve Account and the Swap Counterparty Reserve Account.
-------------------------------------------------------------
(a) On the initial Payment Date, all Excess Interest received by the Indenture
Trustee shall be distributed to the Certificateholder. On each Payment Date
after the initial Payment Date, until the Reserve Account Limit Date, all Excess
Interest received by the Indenture Trustee shall be deposited in the Reserve
Account. Thereafter, Excess Interest will be so deposited only to maintain an
amount equal to the Reserve Account Limit. Any amounts on deposit in the
Reserve Account and any Excess Interest received after the Reserve Account Limit
Date in excess of the Reserve Account Limit, and all investment income on
amounts in the Reserve Account both before and after the Reserve Account Limit
Date will be paid to the Certificateholders as Additional Certificate Interest.
(b) The Note Insurer, on any Payment Date and in its sole discretion, may
direct the Indenture Trustee to release all or any part of the Swap Counterparty
Reserve Account to the Certificateholders and/or transfer ownership of the
Interest Rate Floor Agreement to the Certificateholders or their designees. The
Indenture Trustee and the Issuer will cooperate in the execution of any
documents required by the Interest Rate Floor Provider to evidence and effect
such transfer; provided, however that if the Swap Insurance Policy is no longer
in effect, the Indenture Trustee shall act upon the instructions of the
Certificateholders without obtaining the consent of the Note Insurer.
Section 5.8 Calculation of LIBOR. Until the Class Principal Balance of the
--------------------
Notes has been reduced to zero, the Indenture Trustee will determine LIBOR for
each Accrual Period in accordance with the definition thereof.
The establishment of LIBOR and the Note Rate by the Indenture Trustee shall
(in the absence of manifest error) be final, conclusive and binding upon each
Holder of a Note, the Issuer, the Depositor, the Servicer and the Note Insurer.
Each such rate of interest may be obtained by telephoning the Indenture Trustee
at (800) 735-7777.
ARTICLE VI
The Servicer
Section 6.1 Liabilities of the Servicer. The Servicer shall be liable in
----------------------------
accordance herewith only to the extent of the obligations specifically imposed
upon and undertaken by the Servicer, as applicable.
Section 6.2 Merger or Consolidation of the Servicer. Any corporation into
----------------------------------------
which or the Servicer may be merged or consolidated, or any corporation
resulting from any merger, conversion or consolidation to which the Servicer
shall be a party (a "Business Combination"), or any corporation succeeding to
the business of the Servicer, shall be the successor of the Servicer hereunder,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, anything herein to the contrary notwithstanding;
provided that such Person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, Fannie Mae or Freddie Mac and further provided that
such Business Combination does not adversely affect the then current ratings of
the Notes by the Rating Agencies without regard to the Note Insurance Policy.
Notwithstanding the foregoing, the Servicer may provide 90 days advance written
notice to the Indenture Trustee, the Note Insurer and Certificateholders of its
intention to resign in connection with a Business Combination that does not meet
the foregoing requirements, in which case, the Indenture Trustee shall appoint a
successor Servicer acceptable to the Issuer and the Note Insurer. The resigning
Servicer will in a commercially reasonable manner facilitate the transfer of
servicing to the replacement Servicer prior to the expiration of such notice
period. No removal or resignation of the Servicer will become effective until
the Indenture Trustee or a successor Servicer has assumed the Servicer's
responsibilities and delegations in accordance herewith.
Section 6.3 Limitation on Liability of the Servicer and Others. Neither
---------------------------------------------------
the Servicer nor any of the directors, officers, employees or agents of the
Servicer shall be under any liability to the Issuer or the Noteholders for any
action taken by such Person or by a Subservicer or for such Person's or
Subservicer's refraining from the taking of any action in good faith pursuant to
this Agreement, or for errors in judgment; provided, however, that this
provision shall not protect the Servicer or any such Person against any breach
of representation or warranties made by it herein or protect the Servicer or any
such Person against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of duties and obligations hereunder. The
Servicer and any director, officer, employee or agent of the Company or the
Servicer may rely in good faith on any document of any kind properly executed
and submitted by any Person respecting any matters arising hereunder. The
Servicer and any director, officer, employee or agent of the Servicer shall be
indemnified by the Trust Estate and held harmless against any loss, liability or
expense incurred in connection with any legal action relating to this Agreement
or the Notes, other than any loss, liability or expense relating to any Mortgage
Loan (other than as otherwise permitted in this Agreement) or incurred by reason
of willful misfeasance, bad faith or gross negligence in the performance of
duties hereunder or by reason of reckless disregard of obligations and duties
hereunder. The Servicer shall not be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its duties to
service the Mortgage Loans in accordance with this Agreement and which in its
opinion may involve it in any expense or liability; provided, however, that the
Servicer may in its discretion undertake any such action which it may deem
necessary or desirable with respect to the Mortgage Loans, this Agreement, the
Notes or the rights and duties of the parties hereto and the interests of the
Noteholders hereunder. In such event, the legal expenses and costs of such
action and any liability resulting therefrom shall be expenses, costs and
liabilities of the Trust Estate and the Servicer shall be entitled to be
reimbursed therefor out of the Servicer Collection Account, as provided by
Section 4.8A.
Section 6.4. The Servicer not to Resign. The Servicer shall not resign
--------------------------
from the obligations and duties hereby imposed on it except upon appointment of
a successor and receipt by the Indenture Trustee and the Issuer of a letter from
each Rating Agency that such resignation and appointment will not result in a
downgrading of the Notes without regard to the Note Insurance Policy or upon a
determination that its duties thereunder are no longer permissible under
applicable law. Any such determination permitting the resignation of the
Servicer shall be evidenced by an opinion of counsel to such effect which shall
be delivered to the Indenture Trustee, the Issuer, the Depositor and the Note
Insurer.
ARTICLE VII
Removal of Servicer
Section 7.1 Removal of Servicer; Resignation of Servicer.
-------------------------------------------------
(a) The Indenture Trustee (or the Owners acting on behalf of the
Indenture Trustee), with the consent of the Note Insurer or the Note Insurer
may remove the Servicer upon the occurrence of any of the following events
(each, a "Servicer Termination Event"):
(i) The Servicer shall (a) apply for or consent to the appointment of
a receiver, trustee in bankruptcy, liquidator or custodian or similar
entity in any bankruptcy, insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings of or relating to the
Servicer or relating to all or substantially all of its property, (b) admit
in writing its inability to pay its debts generally as they become due, (c)
make an assignment for the benefit of its creditors, (d) be adjudicated a
bankrupt or insolvent, (e) commence a voluntary case under the federal
bankruptcy laws of the United States of America or file a voluntary
petition or answer seeking reorganization, an arrangement with creditors or
an order for relief or seeking to take advantage of any insolvency law or
file an answer admitting the material allegations of a petition filed
against it in any bankruptcy, reorganization or insolvency proceeding or
(f) cause corporate action to be taken by it for the purpose of effecting
any of the foregoing; or
(ii) If without the application, approval or consent of the Servicer,
a proceeding shall be instituted in any court of competent jurisdiction,
under any law relating to bankruptcy, insolvency, reorganization or relief
of debtors, seeking in respect of the Servicer an order for relief or an
adjudication in bankruptcy, reorganization, dissolution, winding up,
liquidation, a composition or arrangement with creditors, or a readjustment
of debts, the appointment of a trustee, receiver, liquidator or custodian
or similar entity with respect to the Servicer or of all or any substantial
part of its assets, or other like relief in respect thereof under any
bankruptcy or insolvency law, and, if such proceeding is being contested by
the Servicer in good faith, the same shall (a) result in the entry of an
order for relief or any such adjudication or appointment or (b) continue
undismissed or pending and unstayed for any period of 60 consecutive days;
or
(iii) The Servicer shall fail to perform in any material respect any
one or more of its obligations under this Agreement (other than its
obligations referenced in clause (vi) below) and shall continue in default
thereof for a period of 30 days after receipt by the Servicer of a written
notice from the Indenture Trustee, the Trust, any Noteholder, the Depositor
or the Note Insurer of said failure; provided, however, that if the
Servicer demonstrates to the reasonable satisfaction of the Note Insurer
that it is diligently pursuing corrective action, the cure period may be
extended for up to an additional 30 days; or
(iv) The Servicer shall fail to cure any breach of any of its
representations and warranties set forth in this Agreement which materially
and adversely affects the interests of the Noteholders or the Note Insurer
for a period of 30 days after receipt by the Servicer of a written notice
from the Indenture Trustee, the Trust, any Noteholder, the Depositor or the
Note Insurer of such breach; provided, however, that if the Servicer
demonstrates to the reasonable satisfaction of the Note Insurer that it is
diligently pursuing corrective action, the cure period shall be extended
for up to an additional 30 days; or
(v) The failure by the Servicer to make when due any required
Servicing Advance for a period of 30 days following receipt by the Servicer
of a written notice from the Indenture Trustee, the Trust, any Noteholder,
the Depositor or the Note Insurer of such failure; or
(vi) The failure by the Servicer to make any required Delinquency
Advance or to pay any Compensating Interest or to pay over the Monthly
Remittance, Loan Purchase Prices and Substitution Adjustment Amounts; then,
and in each and every such case, so long as an Event of Default shall not
have been remedied, the Note Insurer or, with the consent of the Note
Insurer, the Indenture Trustee (or a majority in interest of the
Noteholders acting on behalf of the Indenture Trustee) may remove the
Servicer upon the occurrence of any Servicer Termination Event. Whereupon
all of the rights (other than its rights to reimburse for advances) and
obligations, including its rights to the Servicing Fee, shall terminate. In
addition, the Note Insurer, or the majority in interest of the
Certificateholders with the consent of the Note Insurer, shall have the
right to direct the Servicer to remove any Subservicer as permitted under
the related subservicing agreement. Such termination shall be final and
binding. On or after the receipt by the Servicer of such written notice,
all authority and power of the Servicer under this Agreement, whether with
respect to the Notes or the Mortgage Loans or otherwise, shall pass to and
be vested in the Indenture Trustee pursuant to and under this Section
7.1(a); and, without limitation, the Indenture Trustee is hereby authorized
and empowered to execute and deliver, on behalf of the Servicer, as
attorney-in-fact or otherwise, any and all documents and other instruments,
and to do or accomplish all other acts or things necessary or appropriate
to effect the purposes of such notice of termination, whether to complete
the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise. The Servicer agrees to cooperate with the
Indenture Trustee in effecting the termination of the Servicer's
responsibilities and rights hereunder, including, without limitation, the
transfer to the Indenture Trustee for administration by it of all cash
amounts which shall at the time be credited by the Servicer to the Servicer
Collection Account or thereafter be received with respect to the Mortgage
Loans.
(b) Notwithstanding the foregoing, if a Servicer Termination Event
described in clause (vi) of Section 7.1(a) shall occur, the Indenture Trustee
shall, by notice in writing to the Servicer, which may be delivered by telecopy,
immediately suspend all of the rights and obligations of the Servicer thereafter
arising under this Agreement, but without prejudice to any rights it may have as
a Noteholder or to reimbursement of Delinquency Advances and other advances of
its own funds, and the Indenture Trustee shall act as provided in Section 7.1(c)
to carry out the duties of the Servicer, including the obligation to make any
Delinquency Advance the nonpayment of which was a Servicer Termination Event
described in clause (vi) of Section 7.1(a). Any such action taken by the
Indenture Trustee must be prior to the related Payment Date. If the Servicer
shall within two Business Days following such suspension remit to the Indenture
Trustee the amount of any Delinquency Advance the nonpayment of which by the
Servicer was a Servicer Termination Event described in clause (vi) of this
Section 7.1(a), the Indenture Trustee shall permit the Servicer to resume its
rights and obligations as Servicer hereunder. The Servicer agrees that it will
reimburse the Indenture Trustee for actual, necessary and reasonable costs
incurred by the Indenture Trustee because of action taken pursuant to clause
(vi) Section 7.1(a). The Servicer agrees that if a Servicer Termination Event as
described in clause (vi) Section 7.1(a) shall occur more than two times in any
twelve-month period, the Indenture Trustee shall be under no obligation to
permit the Servicer to resume its rights and obligations as Servicer hereunder.
(c) On and after the time the Servicer receives a notice of termination
pursuant to Section 7.1, the Indenture Trustee shall be the successor in all
respects to the Servicer under this Agreement and under the Subservicing
Agreements with respect to the Mortgage Loans and with respect to the
transactions set forth or provided for herein and shall have all the rights and
powers and be subject to all the responsibilities, duties and liabilities
relating thereto arising after the Servicer receives such notice of termination
placed on the Servicer by the terms and provisions hereof and thereof, and shall
have the same limitations on liability herein granted to the Servicer; provided,
that the Indenture Trustee shall not under any circumstances be responsible for
any representations and warranties or any liability incurred by the Servicer at
or prior to the time the Servicer was terminated as Servicer and the Indenture
Trustee shall not be obligated to make a Delinquency Advance if it is prohibited
by law from so doing. As compensation therefor, the Indenture Trustee shall be
entitled to all funds relating to the Mortgage Loans which the Servicer would
have been entitled to retain or to withdraw from the Servicer Collection Account
if the Servicer had continued to act hereunder, except for those amounts due to
the Servicer as reimbursement for advances previously made or amounts previously
expended and that are otherwise reimbursable hereunder. Notwithstanding the
above, the Indenture Trustee may, if it shall be unwilling to so act, or shall
if it is unable to so act, appoint, or petition a court of competent
jurisdiction to appoint, any established housing and home finance institution
having a net worth of not less than $10,000,000 as the successor to the Servicer
hereunder in the assumption of all or any part of the responsibilities, duties
or liabilities of the Servicer hereunder and under any Subservicing Agreements.
Pending any such appointment, the Indenture Trustee is obligated to act in such
capacity. In connection with such appointment and assumption, the Indenture
Trustee may make such arrangements for the compensation of such successor out of
payments on Mortgage Loans as it and such successor shall agree; provided,
however, that no such compensation shall, together with the compensation to the
Indenture Trustee, be in excess of that permitted the Servicer hereunder. The
Indenture Trustee and such successor shall take such actions, consistent with
this Agreement, as shall be necessary to effectuate any such succession.
Section 7.2. Notification to Certificateholders. Upon any such termination
----------------------------------
or appointment of a successor to the Servicer, the Indenture Trustee shall give
prompt written notice thereof to Certificateholders at their respective
addresses appearing in the Register.
ARTICLE VIII
Termination
Section 8.1 Termination of Agreement. All obligations created by this
--------------------------
Agreement will terminate upon the earlier of the payment to the Note Insurer,
the Owners and Certificateholders of all amounts held by the Indenture Trustee
and required to be paid to the Note Insurer, such Owners and/or
Certificateholders pursuant to this Agreement upon the later to occur of (a) the
final payment or other liquidation (or any advance made with respect thereto) of
the last Mortgage Loan in the Trust or (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust; provided,
however, that in no event shall the trusts created hereby continue beyond the
expiration of 21 years from the death of the survivor of the issue of Joseph P.
Kennedy, the late ambassador of the United States to the Court of St. James,
living on the date hereof.
Section 8.2 Termination Upon Exercise of Collateral Purchase Options and
------------------------------------------------------------------
Servicer's Optional Termination Right.
- ----------------------------------------
(a) On the Payment Date as to which the Certificateholders Collateral
Purchase Option, the Bear Stearns Collateral Purchase Option or the Optional
Termination Right has been exercised and upon receipt of the Certificateholder
Purchase Price, the Bear Stearns Purchase Price, or the Optional Termination
Price, as applicable, and payment to the Note Insurer, Noteholders and
Certificateholders of all amounts due them, this Agreement shall terminate.
(b) Promptly following any such purchase, the Indenture Trustee will
release the Files for the related Mortgage Loans with appropriate endorsements
and transfer documents, to the Certificateholder, Bear Stearns or the Servicer
(or the Depositor in accordance with Section 8.4), or otherwise upon its
respective order.
Section 8.3 Disposition of Proceeds. The Indenture Trustee shall, upon
-------------------------
receipt thereof, deposit the proceeds of any liquidation or termination of the
Trust pursuant to this Article VIII to the Trustee Collection Account. All such
proceeds on deposit in the Trustee Collection Account shall be paid as provided
in Section 5.2 hereof. The Indenture Trustee shall withdraw from the Reserve
Account an amount equal to the funds on deposit therein and if the
Certificateholder Collateral Purchase Option or the Bear Stearns Collateral
Purchase Option is exercised apply such amounts against the Certificateholder
Purchase Price or the Bear Stearns Purchase Price, as applicable, and
otherwise, shall pay such amounts to the Certificate Distribution Account.
Section 8.4 Optional Termination. (a) On any Payment Date on or after
--------------------
the date on which the outstanding aggregate Loan Balance of the Mortgage Loans
is equal to or less than 5% of the Original Aggregate Loan Balance (the
"Optional Termination Date") and provided that the Swap Agreements are no longer
outstanding, the Servicer may purchase from the Trust all (but not fewer than
all) of the Mortgage Loans, the Pooled Certificates, and all Property
theretofore acquired in respect of any Mortgage by foreclosure, deed in lieu of
foreclosure, or otherwise then remaining in the Trust (the "Optional Termination
Right") at a price (the "Optional Termination Price") equal to the sum of (i)
100% of the aggregate Loan Balances of the Mortgage Loans as of the day of
purchase minus amounts remitted from the Servicer Collection Account to the
Trustee Collection Account, representing collections of principal on the
Mortgage Loans during the current Remittance Period, (ii) one month's interest
on such amount computed at the LIBOR Rate less the portion of Available Interest
Amounts available to pay interest on the Notes on such Payment Date, (iii) the
outstanding principal balance of the Pooled Certificates, the unpaid amounts due
and owing to the Note Insurer under the Insurance Agreement and reimbursement of
any draws under the Note Insurance Policy, (iv) the aggregate amount of any
related unreimbursed Delinquency Advances and Servicing Advances and (v) any
LIBOR Interest Carryover Amount. In connection with such purchase, the Servicer
shall remit to the Indenture Trustee all amounts then on deposit in Servicer
Collection Account for deposit to the Trustee Collection Account, which deposit
shall be deemed to have occurred immediately preceding such purchase.
(b) Promptly following any such purchase, the Indenture Trustee will
release the Files for the related Mortgage Loans with appropriate endorsements
and transfer documents, to the extent provided by the Servicer, to the Servicer
or otherwise upon its order, and deliver the Pooled Certificates together with
executed bond powers in favor of the Servicer or its designee.
(c) Notwithstanding the foregoing, the Servicer shall provide the Depositor
with 30 days' prior written notice of its intention to purchase the Mortgage
Loans, Pooled Certificates and such other Property and the Depositor may, at its
option, by notice to the Servicer and the Indenture Trustee to be given not less
than 10 Business Days prior to the next succeeding Payment Date, receive a
preferential right in lieu of the Servicer to exercise the Optional Termination
Right to purchase such Mortgage Loans, Pooled Certificates and other property on
the such Payment Date, at a price equal to Optional Termination Price. If the
Depositor deposits the Optional Termination Price with the Indenture Trustee on
such Payment Date, the Indenture Trustee will release the Files for the related
Mortgage Loans with appropriate endorsements and transfer documents, to the
Depositor or otherwise upon its order, and deliver the Pooled Certificates
together with executed bond powers in favor of the Depositor or its designee.
ARTICLE IX
Miscellaneous Provisions
Section 9.1 Amendment. This Agreement may be amended by the Issuer, the
---------
Depositor, the Servicer and the Indenture Trustee, with the consent of the Note
Insurer (which consent may not be unreasonably withheld), but without the
consent of any of the Noteholders or the Certificateholders, to cure any
ambiguity or defect, to correct or supplement any provisions in this Agreement
or for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions in this Agreement or of modifying in any
manner the rights of the Noteholders or the Certificateholders; provided,
however, that such action shall not, as evidenced by an opinion of counsel
delivered to the Indenture Trustee and the Note Insurer, adversely affect in any
material respect the interests of the Note Insurer, any Noteholder or
Certificateholder; provided further, that no such opinion of counsel shall be
required if the Person requesting such amendment furnishes the Issuer, the Note
Insurer and the Indenture Trustee with a letter from each Rating Agency to the
effect that such amendment will not cause such Rating Agency to reduce or
withdraw its rating of the Notes without giving effect to the Note Insurance
Policy.
This Agreement may also be amended from time to time by the Issuer, the
Depositor, the Servicer and the Indenture Trustee, with the consent of the Note
Insurer, the consent of the Holders of Notes evidencing not less than a majority
of the principal balance of each class of Notes and the consent of the Holders
of Certificates evidencing not less than a majority of the Certificate Balance
of the Certificates (if such Holders are adversely affected thereby), for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Agreement or of modifying in any manner the rights of
the Noteholders or the Certificateholders; provided, however, that no such
amendment shall (a) increase or reduce in any manner the amount of, or
accelerate or delay the timing of, distributions that shall be required to be
made for the benefit of the Noteholders or the Certificateholders or (b) reduce
the aforesaid percentages of the Notes and the Certificates, the Holders of
which are required to consent to any such amendment, without the consent of the
Holders of all the outstanding Notes and/or the Holders of all the outstanding
Certificates affected thereby.
Promptly after its execution of any amendment pursuant to the preceding
paragraph, the Indenture Trustee shall furnish written notification of the
substance of such amendment or consent to each Rating Agency and each
Certificateholder.
It shall not be necessary for the consent of the Certificateholders or
Noteholders pursuant to this Section to approve the particular form of any
proposed amendment or consent, but it shall be sufficient if such consent shall
approve the substance thereof.
Section 9.2. Notices and Copies to Rating Agencies and the Note
---------------------------------------------------------
Insurer.
(a) The Indenture Trustee shall notify the Rating Agencies, the
Certificateholder and the Note Insurer of the occurrence of any of the following
events, in the manner provided in Section 9.3:
(i) the occurrence of a Servicer Termination Event pursuant to Section
7.1; and
(ii) the appointment of a successor Servicer pursuant to Section 7.2.
(b) The Servicer shall notify the Rating Agencies and the Note Insurer of
the occurrence of any of the following events, or in the case of clauses (iii),
(v) and (vi) promptly upon receiving notice thereof, in the manner provided in
Section 9.3:
(i) any amendment of this Agreement pursuant to Section 9.1;
(ii) the appointment of a successor Indenture Trustee pursuant to the
Indenture;
(iii) any change in the location of the Servicer Collection Account or
any Principal and Interest Account;
(iv) [RESERVED];
(v) the repurchase of any Mortgage Loan pursuant to Sections 2.2 or
under Exhibit D, or the repurchase of the outstanding Mortgage Loans
pursuant to Section 8.4;
(vi) the occurrence of the final Payment Date or the termination of
the trust pursuant to Article VIII;
(vii) the failure of the Servicer to make a Delinquency Advance in
lieu of the related Subservicer following a determination that such
Delinquency Advance would not be a Nonrecoverable Advance pursuant to
Section 4.9A; and
(viii) the failure of the Servicer to make a determination on or
before the Remittance Date regarding whether it will make a Delinquency
Advance in lieu of the related Subservicer when a shortfall exists between
(x) payments scheduled to be received in respect of the related Mortgage
Loans and (y) the amounts actually deposited in the Servicer Collection
Account on account of such payments, pursuant to Section 4.9A.
The Servicer shall provide copies of any other statements or reports to the
Rating Agencies and the Note Insurer in such time and manner that such
statements or determinations are required to be provided to Noteholders.
Section 9.3 Notices. All notices hereunder shall be given as follows,
-------
until any superseding instructions are given to all other Persons listed below:
The Indenture Trustee: Bankers Trust Company of
California, N.A.
3 Park Plaza; 16th Floor
Irvine, California 92614
Attention: Corporate Trust - TMA Mortgage Funding
Trust I
Tel: (949) 253-7575
Fax: (949) 253-7577
The Depositor: Thornburg Mortgage Funding Corporation
18881 Von Karman Avenue, Suite 1450
Irvine, CA 92612
Attention: Richard P. Story
Tel: (949) 660-0012
Fax: (949) 660-7799
The Servicer: PNC Mortgage Securities Corp.
75 N. Fairway Dr.
Vernon Hills, IL 60061
(or such other address as may hereafter be furnished to
the Indenture Trustee in
writing by the Servicer)
Attention: General Counsel, with a copy to the
Master Servicing Department
Tel: (847) 549-2315
Fax: (847) 549-2967
Note Insurer: Ambac Assurance Corporation
One State Street Plaza, 17th Floor
New York, NY 10004
Attention: Structured Finance-Mortgage-Backed
Securities
Tel: (212) 208-3387
Fax: (212) 363-1459
The Issuer: TMA Mortgage Funding Trust I
c/o Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
Tel: (302) 651-1000
Fax: (302) 651-1576
Moody's: Moody's Investors Service
99 Church Street
New York, New York 10007
Attention: ABS Monitoring Department
S&P: Standard & Poor's
26 Broadway
15th Floor
New York, New York 10004
Attention: ABS Surveillance Dept.
Section 9.4 Limitations on Rights of Others. Nothing in this Agreement or
-------------------------------
in any Note, expressed or implied, shall give to any Person, other than the
parties hereto and their respective successors hereunder, the Note Insurer and
the Noteholders, any benefit or any legal or equitable right, remedy or claim
under this Agreement.
Section 9.5 Severability. Any provision of this Agreement that is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Section 9.6 Separate Counterparts. This Agreement may be executed by the
---------------------
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
Section 9.7 Headings. The headings of the various Articles and Sections
--------
herein are for convenience of reference only and shall not define or limit any
of the terms or provisions hereof.
Section 9.8 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
-------------
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF
LAWS PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES
HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 9.9 Assignment to Indenture Trustee. The Depositor hereby
----------------------------------
acknowledges and consents to any mortgage, pledge, assignment and grant of a
security interest by the Issuer to the Indenture Trustee pursuant to the
Indenture for the benefit of the Noteholders, the Certificateholders, the Note
Insurer and the Swap Counterparty of all right, title and interest of the Issuer
in, to and under the Trust Estate, including among other things, the Mortgage
Loans and the Pooled Certificates and/or the assignment of any or all of the
Issuer's rights and obligations hereunder, under the Collateral Sale Agreement
and under the Swap Agreements to the Indenture Trustee.
Section 9.10 Limitation of Liability of Owner Trustee and Indenture
------------------------------------------------------------
Trustee.
- -------
(a) Notwithstanding anything contained herein to the contrary, this
Agreement has been executed by Wilmington Trust Company, not in its individual
capacity but solely in its capacity as Owner Trustee of the Issuer, and in no
event shall Wilmington Trust Company, in its individual capacity, or, except as
expressly provided in the Trust Agreement, as Owner Trustee, have any liability
for the representations, warranties, covenants, agreements or other obligations
of the Issuer hereunder or under any of the certificates, notices or agreements
delivered pursuant hereto, as to all of which recourse shall be had solely to
the assets of the Issuer. For all purposes of this Agreement, in the
performance of its duties or obligations hereunder or in the performance of any
duties or obligations of the Issuer hereunder, the Owner Trustee shall be
subject to, and entitled to the benefits of, the terms and provisions of
Articles VI, VII and VIII of the Trust Agreement.
(b) Notwithstanding anything contained herein to the contrary, this
Agreement has been executed by Bankers Trust Company of California, N.A. not in
its individual capacity but solely as Indenture Trustee and Paying Agent and in
no event shall Bankers Trust Company of California, N.A. have any liability for
the representations, warranties, covenants, agreements or other obligations of
the Issuer hereunder or in any of the certificates, notices or agreements
delivered pursuant hereto, as to all of which recourse shall be had solely to
the assets of the Issuer.
Section 9.11 Independence of the Servicer. For all purposes of this
-------------------------------
Agreement, the Servicer shall be an independent contractor and shall not be
subject to the supervision of the Issuer or the Indenture Trustee with respect
to the manner in which it accomplishes the performance of its obligations
hereunder. Unless expressly authorized by the Issuer, the Servicer shall have
no authority to act for or represent the Issuer or the Indenture Trustee in any
way and shall not otherwise be deemed an agent of the Issuer or the Indenture
Trustee.
Section 9.12 No Joint Venture. Nothing contained in this Agreement (i)
-----------------
shall constitute the Servicer and either of the Issuer or the Indenture Trustee
as members of any partnership, joint venture, association, syndicate,
unincorporated business or other separate entity, (ii) shall be construed to
impose any liability as such on any of them or (iii) shall be deemed to confer
on any of them any express, implied or apparent authority to incur any
obligation or liability on behalf of the others.
Section 9.13 Note Insurer. Any right conferred on the Note Insurer
-------------
herein shall not arise until the issuance by the Note Insurer of its Note
Insurance Policy and may be suspended or terminated as provided in Section 9.14
below (except that subrogation rights which have previously arisen shall not be
so suspended). During the period of any such suspension, all such rights of the
Note Insurer shall vest in the Owners, and may be exercised by the Owners of a
majority of the Class Principal Balance of the Notes.
Section 9.14 Rights of the Note Insurer. So long as there does not
-----------------------------
exist a failure by the Note Insurer to make a required payment under either the
Note Insurance Policy or the Swap Insurance Policy, the Note Insurer shall have
the right to exercise and may exercise, without the consent of the Noteholders
or the Certificateholders, each and every right of the Noteholders granted
pursuant to this Indenture and the Noteholders shall not exercise any such
rights except upon the prior written consent of the Note Insurer hereunder;
provided, however, that any right conferred on the Note Insurer hereunder shall
be suspended during any period in which the Note Insurer is in default in its
payment obligations under either the Note Insurance Policy or the Swap Insurance
Policy. At such time as the Notes are no longer outstanding, and no amounts
owed to the Note Insurer remain unpaid, the Note Insurer's rights hereunder
shall terminate.
Section 9.15 Exhibits. The Exhibits referred to herein are incorporated
--------
herein as an integral part hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their respective duly authorized officers as
of the day and year first above written.
TMA MORTGAGE FUNDING TRUST I,
Issuer
By: WILMINGTON TRUST COMPANY,
not in its individual capacity but solely as
Owner Trustee
By:____________________________________
Name:
Title:
THORNBURG MORTGAGE FUNDING CORPORATION, Depositor
By:____________________________________
Name:
Title:
PNC MORTGAGE SECURITIES CORP., Servicer
By:____________________________________
Name:
Title:
BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as
Indenture Trustee
By:____________________________________
Name:
Title:
APPENDIX A
Definitions
EXHIBIT A
[Reserved]
EXHIBIT B
INDENTURE TRUSTEE'S ACKNOWLEDGMENT OF RECEIPT
---------------------------------------------
Bankers Trust Company of California, N.A., a national banking corporation,
in its capacity as Indenture Trustee (the "Indenture Trustee") under that
certain Sale and Servicing Agreement dated as of December 1, 1998 (the "Sale and
Servicing Agreement") among TMA Mortgage Funding Trust I, as issuer (the
"Issuer"), Thornburg Mortgage Funding Corporation, as depositor (the
"Depositor"), PNC Mortgage Securities Corp., as master servicer (the
"Servicer"), and the Indenture Trustee, hereby acknowledges receipt of the items
required to be delivered to it pursuant to Section 2.2 of the Sale and Servicing
Agreement with respect to the Mortgage Loans, the Pooled Certificates and the
Swap Agreements.
The Schedules of Mortgage Loans, Pooled Certificates and Swap Agreements
are attached to this Receipt.
The Indenture Trustee hereby additionally acknowledges that it shall review
such items as required by Section 2.2 of the Sale and Servicing Agreement.
BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Indenture Trustee
By:______________________________
Name:____________________________
Title:_____________________________
Dated: December __, 1998
EXHIBIT C
POOL CERTIFICATION
------------------
WHEREAS, the undersigned is an Authorized Officer of Bankers Trust
Company of California, N.A., a national banking corporation, acting in its
capacity as indenture trustee (the "Indenture Trustee") of a pool of mortgage
loans (the "Mortgage Loans") heretofore conveyed in trust to the Indenture
Trustee, pursuant to that certain Sale and Servicing Agreement dated as of
December 1, 1998 (the "Sale and Servicing Agreement") among TMA Mortgage Funding
Trust I, as issuer (the "Issuer"), Thornburg Mortgage Funding Corporation, as
depositor (the "Depositor"), PNC Mortgage Securities Corp., as master servicer
(the "Servicer"), and the Indenture Trustee; and
WHEREAS, the Indenture Trustee is required, pursuant to Section 2.2 of
the Sale and Servicing Agreement, to review the Files relating to the Mortgage
Loans within a specified period following the Closing Date and to notify the
Depositor, the Seller and the Note Insurer promptly of any defects with respect
to the Mortgage Loans, and the Depositor or the Seller is required to remedy
such defects or take certain other action, all as set forth in Section 2.2 of
the Sale and Servicing Agreement; and
WHEREAS, Section 2.2 of the Sale and Servicing Agreement requires the
Indenture Trustee to deliver this Pool Certification upon the satisfaction of
certain conditions set forth therein.
NOW, THEREFORE, the Indenture Trustee hereby certifies that, except as
provided in the attached exception report, it has determined that all required
documents (or certified copies of documents listed in Section 2.2 of the Sale
and Servicing Agreement) have been executed or received, and that such documents
relate to the Mortgage Loans identified in the Schedule of Mortgage Loans
pursuant to Section 2.2 of the Sale and Servicing Agreement. The Indenture
Trustee makes no representation or certification hereby, however, (i) that any
such document is genuine, valid, recordable, sufficient, suitable, insurable,
collectable, enforceable, or appropriate for the represented purpose or that
they are other than what they purport to be on their face and (ii) with respect
to any intervening assignments or assumption and modification agreements.
By:______________________________
Name:____________________________
Title:_____________________________
Dated: ______________, 199_
EXHIBIT D
Part I. Delivery Requirements
(a) On or prior to the Closing Date, the Seller shall deliver to the
Indenture Trustee, as designee of the Purchaser, the following documents with
respect to each of the Mortgage Loans sold by it on the Closing Date:
(i) the original Mortgage Note, endorsed without recourse, to the
order of the Indenture Trustee, as designee of the Purchaser, or in blank
and showing an unbroken chain of endorsements from the original payee
thereof to the person endorsing it to the Indenture Trustee, as designee of
the purchaser; provided however, that with respect to three Mortgage Notes
with an aggregate outstanding principal balance of $525,019 as of the
Cut-off Date with respect to the Mortgage Loans, the Seller will not
provide the original Mortgage Notes. In lieu thereof the Seller will
provide lost note affidavits;
(ii) either (1) the original Mortgage with evidence of recording
thereon, (2) a copy of the Mortgage certified as a true copy by the related
Originator, a third party seller, a title closer or a settlement agent or
an attorney where the original Mortgage has been transmitted for recording
until such time as the original or certified copy is returned by the public
recording office or (3) a copy of the Mortgage certified by the public
recording office in those instances where the original recorded Mortgage
has been retained by the public recording office or has been lost;
(iii) a copy of an assignment of the Mortgage to the Indenture
Trustee, as designee of the Purchaser, or in blank, in a form for recording
or filing, as may be appropriate in the state where the Property is
located;
(iv) a copy of each title insurance policy or, if such policy has not
yet been issued, a commitment or binder therefor;
(v) originals of each intervening assignment with evidence of
recording thereon showing a complete chain of title from the originator to
the Seller, or if the original of any such intervening assignment is
unavailable, a copy certified as a true copy by the related Originator, a
third party seller, a title closer or a settlement agent or an attorney
until such time as the original or a copy certified by the public recording
office is returned;
(vi) originals of all assumptions and modification agreements, if any;
(vii) with respect to each Mortgage Loan secured by Additional
Collateral, the original assignment of the related pledge agreement
concerning such Additional Collateral, together with a copy of such related
pledge agreement; a copy of each related UCC-1 filing statement, and an
original UCC-3 filing statement, where applicable, together with a copy of
all applicable and executed notices of assignment; and an original
assignment of all related servicing agreements, mortgages, guarantees and
other documents executed and delivered to the Seller in connection with
such Additional Collateral; and
(viii) with respect to each Cooperative Loan, the related Cooperative
Note, the original security agreement, the proprietary lease or occupancy
agreement, the related stock certificate and blank stock power and a copy
of the original filed financing statement together with assignments to the
Indenture Trustee in a form sufficient for filing;
provided, however, that the documents listed in clauses (ii)-(vii) above may,
- -------- -------
but need not be delivered on the Closing Date and if not so delivered shall be
delivered within 30 days after the Closing Date.
(b) Within 30 days after the Closing Date, the Seller, at its sole cost and
expense, shall cause assignments of the Mortgages from the Seller to the
Indenture Trustee, as designee of the Purchaser, promptly to be submitted for
recording in the appropriate jurisdictions; provided, however, that the Seller
is not required to submit an assignment for any Mortgage with respect to which
the original recording information is lacking or in states where, in the opinion
of counsel acceptable to the Purchaser, the Note Insurer and the Indenture
Trustee, such filing or recording is not required to protect the Purchaser's and
the Indenture Trustee's interest in the Mortgage Loan against sale, further
assignment, satisfaction or discharge by the Purchaser, the Trust, the Servicer,
the related Subservicer or the Seller.
(c) The Seller shall deliver the original or certified copies of the
Mortgages, as the case may be, and any such recorded assignments or certified
copies thereof, together with originals or duly certified copies of any and all
prior recorded assignments, to the Indenture Trustee within 30 days of receipt
thereof by the Seller (but in any event within one year after the Closing Date).
(d) Notwithstanding anything to the contrary contained in this Part I, in
those instances where the public recording office retains the original Mortgage,
the assignment of a Mortgage or the intervening assignments of the Mortgage
after it has been recorded, the Seller shall be deemed to have satisfied its
obligations hereunder upon delivery to the Indenture Trustee, as the designee of
the Purchaser, of a true and correct copy of such Mortgage, such assignment or
assignments of Mortgage, duly certified by the applicable recorder's office.
(e) The Seller covenants and agrees with respect to the Mortgage Loans (i)
to maintain (or cause to be maintained by the applicable Subservicer) on
microfiche (or other permanent storage media) a copy of each original title
insurance policy and to furnish a copy thereof to the Note Insurer upon its
request or to the Indenture Trustee, as designee of the Purchaser, or the
Servicer if necessary in order to present claims under such policy, (ii) to
provide to the Indenture Trustee, as designee of the Purchaser, or the Servicer
a certified copy of any Mortgage or intervening assignment which was not
delivered on the Closing Date and has not been subsequently delivered as
provided in (c) above if necessary to permit the Servicer to take actions with
respect to the related Mortgage Loan and (iii) to take all action necessary
under applicable state law to transfer the benefits of the lien and security
interest in the related Property to the Indenture Trustee, as the designee of
the Purchaser.
(f) In the case of any Mortgage Loan which has been prepaid in full after
the Cut-off Date with respect to the Mortgage Loans and prior to the Closing
Date, the Seller, in lieu of the foregoing, will cause the Servicer to deliver
within 15 days after the Closing Date to the Indenture Trustee and to the
Purchaser a certification of an Authorized Officer in the form set forth as
Exhibit G hereto.
(g) At the direction of the Indenture Trustee, as designee of the
Purchaser, the Seller shall (or shall cause an Affiliate to) sell, transfer,
assign, set over and otherwise convey without recourse, to the Indenture
Trustee, as designee of the Purchaser, all right, title and interest of the
Seller (or of such Affiliate) in and to any Qualified Replacement Mortgage
delivered to the Indenture Trustee by the Seller (or such Affiliate) pursuant to
Section 3.1 of the Collateral Sale Agreement (and Part III of this Exhibit D)
and all its right, title and interest to principal collected and interest
accrued on such Qualified Replacement Mortgage on and after the applicable
Replacement Cut-off Date; provided, however, that the Seller (or such Affiliate)
-------- -------
shall reserve and retain all right, title and interest in and to payments of
principal collected and interest accrued on such Qualified Replacement Mortgage
prior to the applicable Replacement Cut-off Date.
(h) As to each Mortgage Loan reconveyed by the Indenture Trustee in
connection with the conveyance of a Qualified Replacement Mortgage therefor or a
required repurchase thereof, the Purchaser shall, or shall cause the Indenture
Trustee to, sell, transfer, assign, set over and otherwise convey without
recourse, on the Seller's order, all of its right, title and interest in and to
such conveyed Mortgage Loan and all the Purchaser's or the Indenture Trustee's
right, title and interest to principal collected and interest accrued on such
released Mortgage Loan after the applicable Replacement Cut-off Date; provided,
--------
however, that the Purchaser or the Indenture Trustee shall reserve and retain
- -------
all right, title and interest in and to payments of principal collected and
interest accrued on such conveyed Mortgage Loan on or prior to the applicable
Replacement Cut-off Date.
(i) In connection with any transfer and assignment of a Qualified
Replacement Mortgage to the Indenture Trustee, as designee of the Purchaser, the
Seller agrees with respect to each Qualified Replacement Mortgage transferred
and assigned by it to (i) deliver or cause to be delivered without recourse to
the Indenture Trustee as designee of the Purchaser, on the date of delivery of
such Qualified Replacement Mortgage all documents required by Part I of this
Exhibit D, (ii) in instances required by paragraph (b) above, cause promptly to
be recorded an assignment in the appropriate jurisdiction to the Indenture
Trustee, and (iii) deliver or cause to be delivered the original Qualified
Replacement Mortgage and such recorded assignment or certified copies of each,
together with original or duly certified copies of any and all prior recorded
assignments, to the Indenture Trustee, as designee of the Purchaser, within 30
days of receipt thereof by the Seller (but in any event within one year after
the date of conveyance of such Qualified Replacement Mortgage).
(j) As to each Mortgage Loan reconveyed by the Purchaser or the Indenture
Trustee in connection with the conveyance of a Qualified Replacement Mortgage or
a required repurchase of such Mortgage Loan, the Purchaser shall or shall cause
the Indenture Trustee to deliver on the date of conveyance of such Qualified
Replacement Mortgage and on the order of the Seller (i) the original Note
relating thereto, endorsed without recourse, to the Seller (or to such other
party as the Seller directs) (ii) the original Mortgage so released and all
recorded assignments relating thereto, (iii) an assignment from the Indenture
Trustee to the Seller (or to such other party as the Seller directs) executed by
the Indenture Trustee in the same form as the assignment referred to in clause
(iii) of clause (a) above of this Part I, and (iv) such other documents as
constituted the File with respect thereto.
(k) If a Mortgage assignment is lost during the process of recording, or
is returned from the recorder's office unrecorded due to a defect therein, the
Seller shall prepare a substitute assignment or cure such defect, as the case
may be, and thereafter cause each such assignment to be duly recorded.
(l) If the Seller receives notice from the Indenture Trustee, the
Purchaser, the Servicer or the Note Insurer pursuant to Section 2.2 of the Sale
and Servicing Agreement that any required item has not been received, and such
item materially and adversely affects the interest of the Noteholders or of the
Note Insurer in the related Mortgage Loan, the Seller agrees to use reasonable
efforts to remedy a material defect in a document constituting part of a File of
which it is so notified. If, however, within 90 days after notice to it
respecting such defect the Seller has not remedied, or caused to be remedied,
the defect and the defect materially and adversely affects the interest of the
Noteholders and the Note Insurer in the related Mortgage Loan, the Seller will
on the next succeeding Remittance Date (i) substitute in lieu of such Mortgage
Loan a Qualified Replacement Mortgage and deliver the Substitution Adjustment
Amount related thereto directly to the Servicer for deposit in the Servicer
Collection Account or (ii) purchase such Mortgage Loan at a purchase price equal
to the Loan Purchase Price thereof, which purchase price shall be delivered
directly to the Servicer for deposit in the Servicer Collection Account.
(m) On or prior to the Closing Date, the Seller shall deliver to the
Indenture Trustee, as designee of the Purchaser the Pooled Certificates together
with bond powers executed in favor of "BANKERS TRUST COMPANY OF CALIFORNIA,
N.A., AS INDENTURE TRUSTEE FOR THORNBURG MORTGAGE FUNDING TRUST I, SERIES
1998-1" together with any transferor documents and opinions of counsel required
by the Trust Agreement, dated as of October 29, 1993 between CS First Boston
Mortgage Securities Corp., as seller, and First Trust National Association, as
trustee, regarding the Pooled Certificates sufficient to enable the Indenture
Trustee to effect the record transfer to its name.
(n) On the Closing Date, the Seller shall deliver to the Purchaser and the
Indenture Trustee a Confirmation of Assignment of the Swap Agreements, executed
by the Swap Counterparty, the Seller and the Trust, and dated as of the Closing
Date.
Part II. Representations and Warranties of the Seller
Concerning the Mortgage Loans
The Seller hereby represents and warrants to the Purchaser as of the
Closing Date or such other date as may be specified below with respect to each
Mortgage Loan being sold by it:
(a) The information set forth in the Schedule of Mortgage Loans is true,
complete and correct in all material respects as of the Mortgage Loan Cut-off
Date;
(b) [Reserved].
(c) As of the Mortgage Loan Cut-off Date, no Mortgage Loan is delinquent in
payment more than 89 days, no more than 1 Mortgage Loan with an aggregate
outstanding principal balance of $112,799 as of the Mortgage Loan Cut-Off Date
is 60 to 89 days delinquent and no more than 51 Mortgage Loans with an aggregate
outstanding principal balance of $22,470,003 as of the Mortgage Loan Cut-Off
Date are 30 to 59 days delinquent and no Mortgage Loan has been dishonored;
other than such payment delinquencies, there are no defaults under the terms of
the Mortgage Loan; and the Seller has not advanced funds, or induced, solicited
or knowingly received any advance of funds from a party other than the owner of
the Property subject to the Mortgage, directly or indirectly, for the payment of
any amount required by the Mortgage Loan;
(d) Except for those delinquent loans referenced in (c) above, there are no
delinquent taxes, ground rents, assessments or other outstanding charges and
with respect to Cooperative Loans, no delinquent maintenance charges, affecting
the lien priority of the related Property;
(e) The Mortgage Note and the Mortgage are not subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
nor will the operation of any of the terms of the Mortgage Note and the
Mortgage, or the exercise of any right thereunder, render the Mortgage Note or
Mortgage unenforceable, in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
and no such right of rescission, set-off, counterclaim or defense has been
asserted with respect thereto;
(f) As of the Closing Date, the Mortgage has not been satisfied, canceled
or subordinated, in whole or in part, or rescinded, and the Property has not
been released from the lien of the Mortgage, in whole or in part, except with
respect to certain releases in part that do not materially affect the value of
the Property, nor has any instrument been executed that would effect any such
satisfaction, release, cancellation, subordination or rescission;
(g) Immediately prior to the transfer and assignment to the Purchaser, the
Mortgage Note and the Mortgage were not subject to an assignment or pledge, and
the Seller had good and marketable title to and was the sole owner thereof and
had full right to transfer and sell the Mortgage Loan to the Purchaser free and
clear of any encumbrance, equity, lien, pledge, charge, claim or security
interest;
(h) Except for those delinquent Mortgage Loans referred to in (c) above,
there is no default, breach, violation or event of acceleration existing under
the Mortgage or the related Mortgage Note and no event, which, with the passage
of time or with notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event permitting acceleration; and
neither the Seller nor any prior mortgagee has waived any default, breach,
violation or event permitting acceleration;
(i) There are no mechanics, or similar liens or claims which have been
filed for work, labor or material affecting the related Property which are or
may be liens prior to or equal to the lien of the related Mortgage;
(j) All improvements subject to the Mortgage lie wholly within the
boundaries and building restriction lines of the Property (and wholly within the
project with respect to a condominium unit) except for de minimus encroachments
-- -------
permitted by the Fannie Mae Guide (MBS Special Servicing Option) and which has
been noted on the appraisal, and no improvements on adjoining properties
encroach upon the Property except those which are insured against by a title
insurance policy and all improvements on the property comply with all applicable
zoning and subdivision laws and ordinances;
(k) The Property (and in the case of a Cooperative Loan, the Cooperative
Unit related thereto) currently is free of damage and waste or any such damage
and waste is adequately covered by an insurance policy, and there currently is,
no proceeding pending for the total or partial condemnation thereof;
(l) Except with respect to nine Mortgage Loans aggregating $4,077,764.75 as
of the Mortgage Loan Cut-off Date as to which primary mortgage insurance was
subsequently purchased and which will be maintained until the Loan-to-Value
Ratio of such Mortgage Loans is reduced to 80.00%, the original Loan-to-Value
Ratio of each Mortgage Loan either was not more than 95.00% or the excess over
80.00% is insured as to payments defaults by a Primary Mortgage Insurance Policy
issued by a primary mortgage insurer acceptable to Fannie Mae and Freddie Mac
until the Loan-to-Value Ratio of such Mortgage Loan is reduced to 80.00%;
(m) (I) With respect to each Mortgage Loan other than a Cooperative Loan,
the Mortgage is a valid and enforceable first lien on the property securing the
related Mortgage Note. Where the Property consists of residential real estate,
the lien includes all buildings on the Property and all installations and
mechanical, electrical, plumbing, heating and air conditioning systems located
in or annexed to such building, and all additions, alterations, and replacements
made at any time with respect to the foregoing. Each Property is owned by the
Mortgagor in fee simple (except with respect to common areas in the case of
condominiums, PUDs and de minimis PUDs) or by leasehold for a term longer than
----------
the term of the related Mortgage, subject only to (i) the lien of current real
property taxes and assessments, (ii) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of
recording of such Mortgage, such exceptions being acceptable to mortgage lending
institutions generally or specifically reflected in the appraisal obtained in
connection with the origination of the related Mortgage Loan or referred to in
the lender's title insurance policy delivered to the originator of the related
Mortgage Loan and (iii) other matters to which like properties are commonly
subject which do not materially interfere with the benefits of the security
intended to be provided by such Mortgage. Any security agreement, chattel
mortgage or equivalent document related to and delivered in connection with the
Mortgage Loan and Additional Collateral establishes and creates a valid,
subsisting and enforceable first lien and first priority security interest on
the Property and any Additional Collateral for the Mortgage Loan and the Seller
has full right to sell and assign the same to the Purchaser; and (II) with
respect to each Cooperative Loan, the Mortgage creates a first lien or first
priority interest on the property securing the related Mortgage Note, free and
clear of all adverse claims, liens and encumbrances having priority over the
first lien of the Mortgage, subject only to (1) the lien of the related
Cooperative housing corporation for unpaid assessments, (2) the related
proprietary lease being subordinated or otherwise subject to the mortgage on the
related Cooperative building, and (3) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage or the value or marketability
of the related Property;
(n) The terms of the Mortgage Note and the Mortgage have not been impaired,
waived, altered or modified in any respect, except by written instruments which
have been recorded to the extent any such recordation is required by applicable
law, and copies of which written instruments are included in the File. No other
instrument of waiver, alteration or modification has been executed, and no
Mortgage has been released, in whole or in part, from the terms thereof except
in connection with an assumption agreement, which assumption agreement is part
of the File and the terms of which are reflected in the Schedule of Mortgage
Loans;
(o) All buildings upon the Property are insured by a generally acceptable
insurer pursuant to standard hazard policies conforming to the requirements of
the Sale and Servicing Agreement. All such standard hazard policies are in
effect and on the date of origination contained a standard mortgagee clause
naming the related originator or the Seller, as the case may be, and their
respective successors in interest as loss payee and such clause is still in
effect and all premiums due thereon have been paid. If the Property is located
in an area identified by the Federal Emergency Management Agency as having
special flood hazards under the Flood Disaster Protection Act of 1973, as
amended, such Property is covered by flood insurance as set forth in Section
4.11(d) of the Sale and Servicing Agreement. The Mortgage obligates the
Mortgagor thereunder to maintain all such insurance at the Mortgagor's cost and
expense, and on the Mortgagor's failure to do so, authorizes the holder of the
Mortgage to maintain such insurance at the Mortgagor's cost and expense and to
seek reimbursement therefor from the Mortgagor;
(p) Any and all requirements of any federal, state or local law including,
without limitation, usury, truth-in-lending, real estate settlement procedures,
consumer credit protection, equal credit opportunity or disclosure laws
applicable to the Mortgage Loan have been complied with in all material
respects;
(q) [Reserved].
(r) The Mortgage Note and the related Mortgage are original and genuine
(including in the case of a Cooperative Loan, the Cooperative Shares, the
related proprietary lease and recognition agreement) and each is the legal,
valid and binding obligation of the maker thereof, enforceable in all respects
in accordance with its terms subject to bankruptcy, insolvency and other laws of
general application affecting the rights of creditors, and the Seller has taken
all action necessary to transfer such rights of enforceability to the Purchaser.
All parties to the Mortgage Note and the Mortgage had the legal capacity to
enter into the Mortgage Loan and to execute and deliver the Mortgage Note and
the Mortgage, and with respect to a Cooperative Loan, the related proprietary
lease and recognition agreement. The Mortgage Note and the Mortgage have been
duly and properly executed by such parties. The proceeds of the Mortgage Loan
have been fully disbursed and there is no requirement for future advances
thereunder, and any and all requirements as to completion of any on-site or
off-site improvements and as to disbursements of any escrow funds therefor have
been complied with;
(s) The Mortgage Loan is covered by an ALTA lender's title insurance policy
or other generally acceptable form of policy of insurance, issued by a title
insurer qualified to do business in the jurisdiction where the Property is
located, insuring (subject to the exceptions contained in (m)(i) (1), (2) and
(3) or (ii)(1), (2) and (3) above) the related Originator or the Seller, as
applicable, and their respective successors and assigns, as to the first
priority lien of the Mortgage in the original principal amount of the Mortgage
Loan. The related Originator or the Seller, as applicable, and their respective
successors and assigns, is the sole insured of such lender's title insurance
policy, such lender's title insurance policy is in full force and effect and
will be in full force and effect upon the consummation of the transactions
contemplated by the Sale and Servicing Agreement and this Agreement and will
inure to the benefit of the Purchaser and its successors and assigns without any
further act. No claims have been made under such lender's title insurance
policy, and no prior holder of the related Mortgage has done, by act or
omission, anything which would impair the coverage of such lender's title
insurance policy;
(t) Each Mortgage Loan was originated by or for an Originator and purchased
by the Seller. Each Mortgage Loan complies in all material respects with all the
terms, conditions and requirements of such Originator's underwriting standards
in effect at the time of origination of such Mortgage Loan; provided, that
certain Mortgage Loans may have characteristics outside of such underwriting
guidelines where compensating factors are present acceptable to the mortgage
banking industry. The Mortgage Notes and Mortgages are on uniform Fannie
Mae/Freddie Mac instruments or are on forms acceptable to Fannie Mae or Freddie
Mac. The Mortgage Loan bears interest at a the rate as set forth in the Schedule
of Mortgage Loans, and monthly payments under the related Mortgage Note are due
and payable on the first day of each month. The Mortgage Loan contains the usual
and enforceable provisions of the Originator at the time of origination for the
acceleration of the payment of the unpaid principal amount if the related
Property is sold without the prior consent of the mortgagee thereunder;
(u) The related Mortgage contains customary and enforceable provisions such
as to render the rights and remedies of the holder thereof adequate for the
realization against the Property of the benefits of the security provided
thereby, including, (1) in the case of a Mortgage designated as a deed of trust,
by trustee's sale, and (2) otherwise by judicial foreclosure. There is no
homestead or other exemption available to the Mortgagor which would interfere
with the right to sell the Property at a trustee's sale or the right to
foreclose the Mortgage;
(v) If the Mortgage constitutes a deed of trust, a trustee, duly qualified
if required under applicable law to act as such, has been properly designated
and currently so serves and is named in the Mortgage, and no fees or expenses
are or will become payable by the Purchaser to the trustee under the deed of
trust, except in connection with a trustees sale or attempted sale after default
by the Mortgagor;
(w) The File contains an appraisal of the related Property made and signed
prior to the final approval of the mortgage loan application by a qualified
appraiser, approved by the originator of the related Mortgage Loan. The
appraisal is in a form generally acceptable to Fannie Mae or Freddie Mac;
(x) The related Mortgage Note is not and has not been secured by any
collateral except the lien of the corresponding Mortgage, any related Additional
Collateral, and the security interest of any applicable security agreement or
chattel mortgage referred to above and such collateral does not serve as
security for any other obligation;
(y) The related Mortgagor has received all disclosure materials required by
applicable law with respect to the making of such mortgage loans;
(z) [Reserved];
(aa) Each Mortgage Loan has an original term to maturity of not more than
30 years with interest payable in arrears on the first day of each month. No
Mortgage Loan contains terms or provisions which would result in negative
amortization;
(bb) Each of the Mortgaged Properties consists of a single parcel of real
property with a single-family residence erected thereon, or a two- to
four-family dwelling, or an individual condominium unit in a condominium project
or an individual unit in a planned unit development or a single parcel of real
property with a cooperative housing development erected thereon;
(cc) The Mortgage Loans were originated with full, alternative or reduced
documentation;
(dd) The Assignment of Mortgage is in recordable form and is acceptable for
recording under the laws of the jurisdiction in which the Property is located;
(ee) Each Mortgage Loan was originated by, (i) a savings and loan
association, savings bank, commercial bank, credit union, insurance company or
similar institution which is supervised and examined by a federal or State
authority, (ii) a mortgagee approved by the Secretary of Housing and Urban
Development pursuant to Section 203 and 211 of the National Housing Act or (iii)
a mortgage banker or broker licensed or authorized to do business in the
jurisdiction in which the related Property is located, applying the same
standards and procedures used by the applicable seller in originating Mortgage
Loans directly;
(ff) Except for 18 Mortgage Loans with an aggregate outstanding principal
balance as of the Cut-off Date of $5,847,863, no Mortgage Loan is secured by a
leasehold estate, and with respect to each Mortgage Loan secured by a leasehold
estate, the term of the leasehold exceeds the term of the related mortgage by
not less than 24 months;
(gg) The Coupon Rate on each ARM, and each 5/1 ARM Mortgage Loan which has
reached its Change Date, has been adjusted in accordance with the terms of the
related Mortgage Note;
(hh) No Mortgage Loan has been selected in a manner adverse to the
interests of the Noteholders or the Note Insurer;
(ii) Any escrow agreements with respect to each Mortgage Loan comply with
applicable law and the terms of the related Mortgage Note;
(jj) With respect to each Cooperative Loan (i) there is no provision in the
related proprietary lease which requires the Mortgagor to offer for sale the
shares owned by such Mortgagor first to the Cooperative for a price less than
the outstanding amount of the Cooperative Loan, and (ii) there is no prohibition
in the related proprietary lease against pledging such shares or assigning the
proprietary lease that has been violated in connection with the origination of
the Cooperative Loan;
(kk) With respect to each Cooperative Loan, as of the closing of such
Cooperative Loan, the related Subservicer, obtained evidence that, if the
Cooperative Building is in a federally designated flood area, a flood insurance
policy has been obtained in an amount equal to at least that required by
applicable law, which insurance the Cooperative is obligated to maintain at the
Cooperative's cost and expense;
(ll) With respect to each Cooperative Loan, as of the Mortgage Loan Closing
Date, such Cooperative Loan is secured by shares held by a "tenant-stockholder"
of a corporation that qualifies as a "cooperative housing corporation" as such
terms are defined in section 216 (b) (1) of the Internal Revenue Code of 1986,
as amended, and to the best of the Seller's knowledge, no Cooperative is subject
to proceedings which would, if adversely determined, result in such Cooperative
losing its status as a "cooperative housing corporation" under Section 216 (b)
(1) of the Internal Revenue Code of 1986, as amended; and
(mm) With respect to each Cooperative Loan, the related Mortgage creates a
first-priority security interest in the stock in the Cooperative and the related
proprietary lease of the related Cooperative Unit which were pledged to secure
such Cooperative Loan, and the Cooperative owns the Cooperative Building as an
estate in fee simple in real property or pursuant to a leasehold acceptable to
Fannie Mae.
Part III. Certain Covenants.
(a) Upon the discovery by the Seller, the Indenture Trustee, the
Purchaser, the Servicer or the Note Insurer that any statement set forth in Part
II of Exhibit D was untrue (disregarding any qualification with respect to
knowledge) as of the Closing Date, with the result that the interests of the
Noteholders or the Note Insurer are materially and adversely affected, the party
discovering such breach shall give prompt written notice to the other parties
and the Note Insurer. Upon the earliest to occur of the Seller's discovery, its
receipt of notice of breach, or such time as a situation resulting from an
existing statement which is untrue materially and adversely affects the
interests of the Noteholders or the Note Insurer, the Seller hereby covenants
and warrants that it shall promptly cure such breach in all material respects
or, unless otherwise directed by the Indenture Trustee, as designee of the
Purchaser, it shall (or shall cause an Affiliate of the Seller to) on the second
Remittance Date next succeeding such discovery, receipt of notice or such time
(i) substitute in lieu of each Mortgage Loan which has given rise to the
requirement for action by the Seller, a Qualified Replacement Mortgage and
deliver the Substitution Adjustment Amount applicable thereto to the Indenture
Trustee for deposit in the Trustee Collection Account or (ii) purchase such
Mortgage Loan from the Indenture Trustee at a purchase price equal the Loan
Purchase Price thereof, which purchase price shall be delivered to the Indenture
Trustee for deposit in the Trustee Collection Account. It is understood and
agreed that the obligation of the Seller so to cure, substitute or purchase any
Mortgage Loan as to which such a representation or warranty contained in Part II
of this Exhibit D is untrue in any material respect and has not been remedied
shall constitute the sole remedy respecting a discovery of any such statement
which is untrue in any material respect in Part II of this Exhibit D available
to the Purchaser or the Indenture Trustee, as designee of the Purchaser.
(b) In the event that any Qualified Replacement Mortgage is
delivered by the Seller to the Indenture Trustee pursuant to Section 2.1 or
Section 3.1 of the Collateral Sale Agreement, the Seller shall be obligated to
take the actions described in clause (a) of Part III of Exhibit D with respect
to such Qualified Replacement Mortgage upon the discovery by the Seller, the
Purchaser, the Depositor or the Note Insurer that any statement set forth in
Part II of Exhibit D is untrue (disregarding any qualification with respect to
knowledge) on the date such Qualified Replacement Mortgage is conveyed to the
Indenture Trustee such that the interests of Noteholders or the Note Insurer in
the related Qualified Replacement Mortgage are materially and adversely
affected; provided, however, that for the purposes of this subsection (b) the
-------- -------
statements in Part II of Exhibit D referring to items "as of the Cut-off Date"
or "as of the Closing Date" shall be deemed to refer to such items as of the
date such a Qualified Replacement Mortgage is conveyed to the Indenture Trustee.
EXHIBIT E
[Reserved]
EXHIBIT F
CERTIFICATE RE: PREPAID LOANS
I, _______________, ________________ of PNC Mortgage Securities Corp.
as Servicer, hereby certify that between the "Cut-Off Date" (as defined in the
Sale and Servicing Agreement dated as of December 1, 1998 among PNC Mortgage
Securities Corp., as Servicer, TMA Mortgage Funding Trust I, as Issuer,
Thornburg Mortgage Funding Corporation, as Depositor, and Bankers Trust Company
of California, N.A., as Indenture Trustee (the "Sale and Servicing Agreement")),
and the Closing Date (as defined in the Sale and Servicing Agreement) the
following schedule of Mortgage Loans (as defined in the Sale and Servicing
Agreement) have been prepaid in full.
Dated: December __, 1998
By:______________________________
Name:
Title:
EXHIBIT G
FORM OF SERVICER'S TRUST RECEIPT
To: Bankers Trust Company of California, N.A.
3 Park Plaza; 16th Floor
Irvine, California 92614
Attn.: Corporate Trust - TMA Mortgage Funding Trust I, Series 1998-1
Date:
In connection with the administration of the Mortgage Loans serviced
by PNC Mortgage Securities Corp. (the "Servicer") pursuant to a Sale and
Servicing Agreement dated as of December 1, 1998 (the "Sale and Servicing
Agreement"), among the Servicer, you, as Indenture Trustee, and Thornburg
Mortgage Funding Trust I, as Issuer, the Servicer hereby requests a release of
the File held by you as Indenture Trustee with respect to the following
described Mortgage Loan for the reason indicated below.
Mortgagor's Name:
Loan No.:
Reason for requesting file:
_______ 1. Mortgage Loan paid in full.
(The Servicer hereby certifies that all amounts received in
connection with the loan and required to be remitted to the Indenture Trustee
have been or will be remitted to the Indenture Trustee pursuant to the Sale and
Servicing Agreement.)
_______ 2. The Mortgage Loan is being foreclosed.
_______ 3. Other. (Describe)
The undersigned acknowledges that the above File will be held by the
undersigned in accordance with the provisions of the Sale and Servicing
Agreement and will be returned to you, except if the Mortgage Loan has been paid
in full (in which case the File will be retained by us permanently) and except
if the Mortgage Loan is being foreclosed (in which case the File will be
returned when no longer required by us for such purpose).
Capitalized terms used herein shall have the meanings ascribed to them
in the Sale and Servicing Agreement.
PNC MORTGAGE SECURITIES CORP.
By:___________________________________
Name:
Title:
EXHIBIT H
NOTICE OF CHARGE-OFFS/LIQUIDATION LOAN REPORT
I, , hereby certify that I am the duly elected
of PNC Mortgage Securities Corp. (the "Servicer") acting as servicer pursuant to
a Sale and Servicing Agreement dated as of December 1, 1998 among the Servicer,
Thornburg Mortgage Funding Corporation, as Depositor, TMA Mortgage Funding Trust
I, as Issuer, and Bankers Trust Company of California, N.A., as Indenture
Trustee, and further certify, to the best of my knowledge and after due inquiry
that the following is a summary of the facts and circumstances surrounding the
"charge-off" of any Mortgage Loans during the Remittance Period from
______________ through ____________;
Insert the following information for each "charged-off" Mortgage Loan:
Loan #
Borrower Name
Property Address
Date of "charge-off"/onset of foreclosure proceedings and date of foreclosure
sale
Original Mortgage Loan Principal Balance
Outstanding Mortgage Loan Principal Balance
Coupon Rate
Accrued Interest at time of "charge off" or foreclosure sale
Unreimbursed Servicing Advances at time of "charge off" or foreclosure sale
Unreimbursed Delinquency Advances at time of "charge off" or foreclosure sale
# days in default at time of "charge off" or foreclosure sale
Original appraised value
Current appraised value based upon "drive by"
Estimate of Foreclosure Costs/Actual Foreclosure Costs
Broker Fees
Legal Fees
Repair and Miscellaneous Expenses
Projected Marketing Period/Actual Marketing Period
Estimate of Loss on Foreclosure and Liquidation
Capitalized terms not otherwise defined herein have the meanings set forth
in the Sale and Servicing Agreement.
IN WITNESS WHEREOF, I have certified the foregoing to the best of the
knowledge of the Servicer.
Dated: By:___________________________________
Name:
Title:
EXHIBIT I
FORM OF MONTHLY REPORT TO THE CERTIFICATE HOLDER
<PAGE>
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This schedule contains summary financial information extracted from the December
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</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1998
<CASH> 36431
<SECURITIES> 4243978
<RECEIVABLES> 64424
<ALLOWANCES> 2046
<INVENTORY> 0
<CURRENT-ASSETS> 1846
<PP&E> 0
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<TOTAL-ASSETS> 4344633
<CURRENT-LIABILITIES> 4032810
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0
65805
<OTHER-SE> 245798
<TOTAL-LIABILITY-AND-EQUITY> 4344633
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