Mortgage
Loan Pass-Through Certificates, Series 2006-2
Class
Approximate
Principal Balance
Pass-Through
Rate
Class
A1A
$430,392,000
Variable
Class
A1B
$179,330,000
Variable
Class
A1C
$107,598,000
Variable
Class X
Notional
Amount
Variable
Class
PO
$
100
N/A
Class
A-R
$
100
Weighted
Average
Class
B-1
$
29,653,000
Variable
Class
B-2
$
18,434,000
Variable
Class
B-3
$
11,221,000
Variable
Greenwich
Capital Acceptance, Inc.
Depositor
Luminent
Mortgage Trust 2006-2
Issuing
Entity
Luminent
Mortgage Capital, Inc.
Sponsor
Wells
Fargo Bank, N.A.
Master
Servicer
Consider
carefully the risk factors beginning on page S-12 in this prospectus
supplement and on page 6 in the prospectus.
The
certificates represent obligations of the trust fund only and do
not
represent an interest in or obligation of the sponsor, the depositor,
their affiliates or any other entity.
This
prospectus supplement may be used to offer and sell the certificates
only
if accompanied by the
prospectus.
The
Trust Fund
·
The
trust fund will issue twelve classes of certificates, of which the
nine
classes listed above are offered by this prospectus supplement and
the
accompanying prospectus.
·
The
assets of the trust fund will consist primarily of adjustable rate
residential mortgage loans.
The
Certificates
·
The
certificates represent ownership interests in the trust
fund.
·
The
initial class principal balances or class notional amounts, as applicable,
of the classes of the offered certificates may vary in the aggregate
by
10%.
·
Each
class of offered certificates will bear interest at the applicable
interest rate calculated as described in this prospectus
supplement.
·
Credit
enhancement for the offered certificates includes subordination and
loss
allocation features. The Class A1C Certificates will have the benefit
of a
financial guaranty insurance policy issued by Financial Security
Assurance
Inc. Subject to the exceptions and limitations that are described
in this
prospectus supplement, the financial guaranty insurance policy will
guarantee payments of interest and principal to holders of such
certificates as described in this prospectus
supplement.
·
Principal
and interest will be payable monthly, as described in this prospectus
supplement. The first expected distribution date will be March 25,2006.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved these securities or determined that this prospectus supplement or
the
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Greenwich
Capital Markets, Inc. and WaMu Capital Corp. (the “Underwriters”) will offer the
certificates pursuant to this prospectus supplement from time to time in
negotiated transactions or otherwise at varying prices to be determined at
the
time of sale. Proceeds to the depositor with respect to the offered certificates
are estimated to be approximately103.49%
of their initial aggregate principal balance plus accrued interest, if
applicable, before deducting issuance expenses payable by the depositor,
estimated to be approximately $770,000. See
“Method
of
Distribution”
in
this
prospectus supplement.
FOR
EUROPEAN PURCHASERS ONLY: IN RELATION TO EACH MEMBER STATE OF THE EUROPEAN
ECONOMIC AREA WHICH HAS IMPLEMENTED THE PROSPECTUS DIRECTIVE (EACH, A “RELEVANT
MEMBER STATE”), EACH UNDERWRITER HAS REPRESENTED AND AGREED THAT WITH EFFECT
FROM AND INCLUDING THE DATE ON WHICH THE PROSPECTUS DIRECTIVE IS IMPLEMENTED
IN
THAT RELEVANT MEMBER STATE (THE “RELEVANT IMPLEMENTATION DATE”) IT HAS NOT MADE
AND WILL NOT MAKE AN OFFER OF SECURITIES TO THE PUBLIC IN THAT RELEVANT MEMBER
STATE PRIOR TO THE PUBLICATION OF A PROSPECTUS IN RELATION TO THE SECURITIES
WHICH HAS BEEN APPROVED BY THE COMPETENT AUTHORITY IN THAT RELEVANT MEMBER
STATE
OR, WHERE APPROPRIATE, APPROVED IN ANOTHER RELEVANT MEMBER STATE AND NOTIFIED
TO
THE COMPETENT AUTHORITY IN THAT RELEVANT MEMBER STATE, ALL IN ACCORDANCE WITH
THE PROSPECTUS DIRECTIVE, EXCEPT THAT IT MAY, WITH EFFECT FROM AND INCLUDING
THE
RELEVANT IMPLEMENTATION DATE, MAKE AN OFFER OF SECURITIES TO THE PUBLIC IN
THAT
RELEVANT MEMBER STATE AT ANY TIME: (A) TO LEGAL ENTITIES WHICH ARE AUTHORISED
OR
REGULATED TO OPERATE IN THE FINANCIAL MARKETS OR, IF NOT SO AUTHORISED OR
REGULATED, WHOSE CORPORATE PURPOSE IS SOLELY TO INVEST IN SECURITIES; (B) TO
ANY
LEGAL ENTITY WHICH HAS TWO OR MORE OF (1) AN AVERAGE OF AT LEAST 250 EMPLOYEES
DURING THE LAST FINANCIAL YEAR; (2) A TOTAL BALANCE SHEET OF MORE THAN
€43,000,000 AND (3) AN ANNUAL NET TURNOVER OF MORE THAN €50,000,000, AS SHOWN IN
ITS LAST ANNUAL OR CONSOLIDATED ACCOUNTS; OR (C) IN ANY OTHER CIRCUMSTANCES
WHICH DO NOT REQUIRE THE PUBLICATION BY THE ISSUER OF A PROSPECTUS PURSUANT
TO
ARTICLE 3 OF THE PROSPECTUS DIRECTIVE.
Tables
of Contents
Prospectus
Supplement
Page
The
Offered Certificates
S-2
Summary
of Terms
S-3
Risk
Factors
S-12
Glossary
S-22
The
Mortgage Loans
S-22
Additional
Information
S-34
Static
Pool Information
S-34
The
Depositor
S-34
The
Sponsor and the Seller
S-35
Affiliations
and Relationships
S-36
Mortgage
Loan Origination
S-37
The
Master Servicer
S-44
The
Servicers
S-44
Mortgage
Loan Servicing
S-46
The
Certificate Insurer
S-49
Servicing
and Administration of the Trust Fund
S-52
Fees
and Expenses of the Trust Fund
S-56
The
Pooling Agreement
S-58
Description
of the Certificates
S-69
Yield,
Prepayment and Maturity Considerations
S-84
Material
Federal Income Tax Consequences
S-95
State
Taxes
S-97
ERISA
Considerations
S-98
Legal
Investment Considerations
S-100
Use
of Proceeds
S-100
Method
of Distribution
S-100
Experts
S-101
Legal
Matters
S-101
Ratings
S-101
Glossary
of Terms
S-103
Annex
A: Global Clearance, Settlement and Tax Documentation
Procedures
A-1
Prospectus
Page
Important
Notice About Information in This Prospectus and Each Accompanying
Prospectus Supplement
5
Risk
Factors
6
The
Trust Fund
17
Use
of Proceeds
34
The
Depositors
35
Loan
Program
35
Description
of the Securities
39
Credit
Enhancement
48
Yield
and Prepayment Considerations
59
Operative
Agreements
63
Material
Legal Aspects of the Loans
84
Material
Federal Income Tax Consequences
107
State
Tax Considerations
154
ERISA
Considerations
155
Legal
Investment Considerations
160
Method
of Distribution
163
Legal
Matters
164
Financial
Information
164
Available
Information
164
Ratings
164
Glossary
of Terms
165
S-1
The
Offered Certificates
The
certificates consist of the classes of certificates listed in the tables below,
together with the Class B-4, Class B-5 and Class B-6 Certificates. Only the
classes of certificates listed in the tables below are offered by this
prospectus supplement.
Class
Class
Principal
Balance(1)
Interest
Rate Formula (until Optional
Termination
Date)(2)
Interest
Rate Formula (after Optional
Termination
Date)(3)
Final
Scheduled Distribution
Date(4)
Expected
Final Distribution
Date(5)
CUSIP
Number
Initial
Certificate Ratings
Moody’s
S&P
Class
A1A
$430,392,000
LIBOR
+ 0.200%(7)
LIBOR
+ 0.400%(7)
February
2046
June
2014
550279
BA 0
Aaa
AAA
Class
A1B
$179,330,000
LIBOR
+ 0.280%(7)
LIBOR
+ 0.560%(7)
February
2046
June
2014
550279
BB 8
Aaa
AAA
Class
A1C
$107,598,000
LIBOR
+ 0.210%(7)
LIBOR
+ 0.420%(7)
February
2047
June
2014
550279
BC 6
Aaa
AAA
Class X
Notional
Amount (6)
Variable(8)
Variable(8)
February
2046
June
2014
550279
BD 4
Aaa
AAA
PO
$
100
N/A
N/A
February
2046
June
2014
550279
BE 2
Aaa
AAA
A-R
$
100
Weighted
Average(9)
Weighted
Average(9)
February
2046
June
2014
550279
BF 9
Aaa
AAA
B-1
$
29,653,000
LIBOR
+ 0.480%(7)
LIBOR
+ 0.720%(7)
February
2046
June
2014
550279
BG 7
Aa2
AA
B-2
$
18,434,000
LIBOR
+ 0.900%(7)
LIBOR
+ 1.350%(7)
February
2046
June
2014
550279
BH 5
A2
A
B-3
$
11,221,000
LIBOR
+ 1.750%(7)
LIBOR
+ 2.625%(7)
February
2046
June
2014
550279
BJ 1
Baa2
BBB
(1)
These balances are approximate, as described in
this
prospectus supplement.
(2)
Reflects
the interest rate formula up to and including the earliest possible
distribution date on which the sponsor has the option to purchase
the
mortgage loans as described in this prospectus supplement under
“The
Pooling Agreement—Optional Termination of the Trust
Fund.”
(3)
Reflects
the interest rate formula after the option to purchase the mortgage
loans
is not exercised by the sponsor at the earliest possible distribution
date
as described in this prospectus supplement under “The Pooling
Agreement—Optional Termination of the Trust
Fund.”
(4)
The
final scheduled distribution date for the offered certificates (other
than
the Class AIC Certificates) is based upon the first distribution
date
following the month of the last scheduled payment of the latest maturing
mortgage loan. The final scheduled distribution date for the Class
A1C
Certificates is based upon the thirteenth distribution date following
the
month of the last scheduled payment of the latest maturing
loan.
(5)
The
expected final distribution date, based upon (a) a constant prepayment
rate of 25% annually and the structuring assumptions used in this
prospectus supplement, each as described under “Yield, Prepayment and
Maturity Considerations—Structuring Assumptions” and (b) the assumption
that the option to purchase the mortgage loans is exercised by the
sponsor
on the earliest possible distribution date as described in this prospectus
supplement under “The Pooling Agreement—Optional Termination of the Trust
Fund.” The actual final distribution date for each class of offered
certificates may be earlier or later, and could be substantially
later,
than the applicable expected final distribution date listed
above.
(6)
The
Class X Certificates are interest-only certificates and will accrue
interest on a notional amount calculated as described under “Description
of the Certificates—General.”
(7)
Subject
to a maximum interest rate equal to the lesser of (1) a cap based
on
weighted average of the net loan rates of the mortgage loans (and
in the
case of the Class A1C Certificates, less any insurance premium) and
adjusted for the related accrual period and (2) the related net maximum
rate cap adjusted for the related accrual
period.
(8)
The
Class X Certificates will accrue interest at a variable rate as described
under “Description of the Certificates—Interest—Calculation of
Interest.”
(9)
Interest
on the Class A-R Certificate for any distribution date will be calculated
at an annual rate equal to the weighted average of the net loan rates
of
the mortgage loans.
S-2
Summary
of Terms
·
This
summary highlights selected information from this document and does
not
contain all of the information that you need to consider in making
your
investment decision. To understand all of the terms of the offering
of the
offered certificates, read carefully this entire document and the
accompanying prospectus.
·
This
summary provides an overview of certain calculations, cash flow priorities
and other information to aid your understanding and is qualified
by the
full description of these calculations, cash flow priorities and
other
information in this prospectus supplement and the accompanying prospectus.
Some of the information consists of forward-looking statements relating
to
future economic performance or projections and other financial items.
Forward-looking statements are subject to a variety of risks and
uncertainties that could cause actual results to differ from the
projected
results. Those risks and uncertainties include, among others, general
economic and business conditions, regulatory initiatives and compliance
with governmental regulations, and various other matters, all of
which are
beyond our control. Accordingly, what actually happens may be very
different from what we predict in our forward-looking
statements.
·
Whenever
we refer in this prospectus supplement to a percentage of some or
all of
the mortgage loans expected to be included as trust fund assets,
that
percentage has been calculated on the basis of the total stated principal
balance of those mortgage loans as of February 1, 2006, unless stated
otherwise. We explain in this prospectus supplement under “The Mortgage
Loans—General” how the stated principal balance of a mortgage loan is
calculated. Whenever we refer in this Summary of Terms or in the
Risk
Factors section of this prospectus supplement to the aggregate principal
balance of any mortgage loans, we mean the total of their stated
principal
balances, unless we specify
otherwise.
Offered
Certificates
Except
for the Class A-R Certificate, the offered certificates will be book-entry
securities clearing through The Depository Trust Company in the U.S. or upon
request through Clearstream, Luxembourg or Euroclear in Europe, in minimum
denominations of $25,000 and integral multiples of $1 in excess thereof, except
for the Class X Certificates which will be in a minimum notional amount of
$100,000 and integral multiples of $1 in excess thereof and except for the
Class
PO Certificates which will be offered in minimum percentage interests of 0.01%;
provided,
however,
that
the underwriters will only sell offered certificates to initial investors in
minimum total investment amounts of $100,000.
The
Class
B-4, Class B-5 and Class B-6 Certificates will be issued by the trust fund
but
not offered by this prospectus supplement. The Class B-4, Class B-5 and Class
B-6 Certificates will have original aggregate principal balances of
approximately $10,419,000, $8,015,000 and $6,411,642, respectively, subject
to a
variance as described in this prospectus supplement.
See
“Description of the Certificates— General,”“—Book-Entry Registration and
Definitive Certificates” and “The Mortgage Loans” in this prospectus supplement
and “The Trust Fund—The Mortgage Loans—General” in the prospectus for additional
information.
See
“The Sponsor and Seller” in this prospectus supplement for additional
information.
Seller
Maia
Mortgage Finance Statutory Trust, an indirect, wholly-owned subsidiary of the
sponsor, will sell the mortgage loans to the depositor.
See
“The Sponsor and Seller” in this prospectus supplement for additional
information.
S-3
Depositor
Greenwich
Capital Acceptance, Inc. The depositor’s address is 600 Steamboat Road,
Greenwich, Connecticut06830, and its telephone number is
(203) 625-2700.
See
“The Depositor” in this prospectus supplement for additional
information.
Issuing
Entity
Luminent
Mortgage Trust 2006-2, a common law trust formed under the laws of the State
of
New York.
Trustee
HSBC
Bank
USA, National Association.
See
“The Pooling Agreement—The Trustee” in this prospectus supplement for additional
information.
Securities
Administrator
Wells
Fargo Bank, N.A.
See
“The Pooling Agreement—The Securities Administrator” in this prospectus
supplement for additional information.
Master
Servicer
Wells
Fargo Bank, N.A.
See
“The Master Servicer” in this prospectus supplement for more
information.
Servicers
Countrywide
Home Loans Servicing LP. and Paul Financial, LLC will service approximately
87.42% and 12.58% of the mortgage loans, respectively.
See
“The Servicers” and “Servicing of Mortgage Loans” in this prospectus supplement
for additional information.
Originators
Countrywide
Home Loans, Inc. and Paul Financial, LLC originated approximately 87.42% and
12.58% of the mortgage loans, respectively.
See
“Mortgage Loan Origination” in this prospectus supplement for additional
information.
Certificate
Insurer
Financial
Security Assurance Inc.
See
“The certificate insurer” in this prospectus supplement for additional
information.
Mortgage
Loans
The
assets of the trust fund will consist primarily of a pool of adjustable rate,
first lien, residential mortgage loans that have original principal balances
that may or may not conform to Fannie Mae and Freddie Mac guidelines and
interest rates that generally have an initial fixed rate period of one, two
or
three months and thereafter adjust on a monthly basis, having the
characteristics described in this prospectus supplement.
As
of
February 1, 2006, approximately 0.88% of all the mortgage loans were still
in
their initial fixed rate period.
The
mortgage loans will have a total principal balance of approximately $801,473,842
as of the cut-off date, subject to a variance of plus or minus 10%.
S-4
Total
Mortgage Loan Summary
Range
or Total
Average
or
Weighted
Average
Total
Percentage(1)
Number
of Mortgage Loans
1,576
—
—
Total
Stated Principal Balance
$801,473,842
—
—
Stated
Principal Balances
$46,000
to $2,003,840
$508,549
—
Mortgage
Rates
1.000%
to 8.618%
6.719%
—
Original
Terms to Maturity (in months)
360
to 480
362
—
Remaining
Terms to Maturity (in months)
351
to 479
359
—
Original
Loan-to-Value Ratios
20.00%
to 95.00%
76.01%
—
Geographic
Concentration in Excess of 10% of the Total Stated Principal
Balance:
Percentage
of Mortgage Loans in California
—
—
72.70%
Percentage
of Mortgage Loans in the Maximum Single Zip Code
Concentration
—
—
0.59%
Credit
Scores
573
to 813
703
—
Percentage
of Mortgage Loans with Prepayment Penalties at Origination
—
—
97.22%
Gross
Margins
1.000%
to 5.000%
3.145%
—
Maximum
Mortgage Rates
9.950%
to 19.900%
10.292%
—
Minimum
Mortgage Rates
1.000%
to 5.000%
3.142%
—
Months
to Next Mortgage Rate Adjustment
1
1
—
(1)
Percentages
calculated based on the total principal balance of the mortgage loans
in
all mortgage groups.
S-5
Mortgage
Loan Representations and Warranties/Defective
Documentation
Each
of
the originators and the sponsor has made certain representations and warranties
concerning the mortgage loans, including, in the case of the originators, a
representation and warranty that none of the mortgage loans in the trust fund
will be “high cost” loans under applicable federal, state or local
anti-predatory or anti-abusive lending laws. The depositor’s rights under these
representations and warranties will be assigned to the trustee for the benefit
of the certificateholders and the certificate insurer.
In
addition, within 90 days after the custodian receives the mortgage loans and
the
related documents, the custodian will review the documents in the mortgage
loan
files for defects.
After
the
discovery of a breach of any representation or warranty that materially and
adversely affects the interests of the certificateholders or the certificate
insurer in a mortgage loan or after the discovery by the custodian that a
mortgage loan or related document is defective in any material respect, the
applicable originator or, in the case of any such breach with respect to the
period during which the seller held the related mortgage loan (or in the case
of
the mortgage loans originated by Paul Financial LLC, as of the closing date),
the sponsor will be required to either (1) cure that breach, (2) repurchase
the
affected mortgage loan from the trust fund or (3) in certain circumstances,
substitute another mortgage loan.
In
order
to substitute a new mortgage loan for a mortgage loan that has been removed
from
the trust fund because of a breach of a representation or warranty or defective
documentation, (a) substitution must take place within two years from the
closing date and (b) an opinion of counsel to the effect that the substitution
will not disqualify any REMIC created under the pooling agreement or result
in a
prohibited transaction tax under the Internal Revenue Code must be provided.
See
“The Pooling Agreement—Assignment of the Mortgage Loans” in this prospectus
supplement.
Designations
Each
class of certificates will have different characteristics, some of which are
reflected in the following general designations.
·
Offered
Certificates
Class
A1A, Class A1B, Class A1C, Class X, Class PO, Class A-R, Class B-1, Class B-2
and Class B-3 Certificates.
·
LIBOR
Certificates
Class
A1A, Class A1B, Class A1C, Class B-1, Class B-2, Class B-3, Class B-4, Class
B-5
and Class B-6 Certificates.
·
Senior
Certificates
Class
A1A, Class A1B, Class A1C, Class X, Class PO and Class A-R
Certificates.
·
Subordinate
Certificates
Class
B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6
Certificates.
·
Insured
Certificates
Class
A1C
Certificates.
·
Class
X Certificates
Class
X
Certificates.
·
Book-Entry
Certificates
All
classes of offered certificates other than the Class A-R
Certificate.
·
Residual
Certificates
Class
A-R
Certificates.
·
Interest-Only
Certificates
Class
X
Certificates.
·
Principal-Only
Certificates
Class
PO
Certificates.
The
Class
PO Certificates will have a class principal balance (initially, equal to $100)
that will increase in an amount equal to net deferred interest with respect
to
the mortgage loans that is allocated to the Class X Certificates as described
under “Description of the Certificates—Interest” in this prospectus supplement.
The
Class
X Certificates are interest-only certificates that will not have a class
principal balance.
The
Class
X Certificates will accrue interest on
their
class notional amount equal, on any distribution
date,
to the
aggregate
class principal balance of the certificates immediately before that distribution
date (initially, equal to approximately $801,473,842).
S-6
Distribution
Date
Beginning
in March 2006, the securities administrator will make distributions on the
certificates on the 25th
day of
each month, or if the 25th
day is
not a business day, on the next business day.
Interest
Payments on the Certificates
General
On
each
distribution date, to the extent funds are available from the mortgage loans,
each class of certificates (other than the Class PO Certificates) will be
entitled to receive accrued and unpaid interest determined on the basis of
the
related outstanding class principal balance or class notional amount, as
applicable, immediately prior to that distribution date, the applicable
pass-through rate and interest accrual period, and, in the case of the LIBOR
certificates, any accrued and unpaid interest shortfall attributable solely
to
basis risk, but solely to the extent of funds available as described in this
prospectus supplement; provided,
however,
that
the amount of interest distributable on a distribution date with respect to
any
class of certificates shall be reduced by the amount, if any, of net deferred
interest accrued on the mortgage loans for the month before that distribution
date and allocable to such class of certificates, as described under
“Description of the Certificates—Interest” in this prospectus supplement. In the
case of any class of certificates other than the Class X Certificates, any
amount of net deferred interest allocable to such class of certificates will
be
added as principal to the outstanding class principal balance of such class
of
certificates. With respect to the Class X Certificates, any amount of net
deferred interest allocable to the Class X Certificates will instead be added
as
principal to the class principal balance of the Class PO Certificates, based
on
the amount of net deferred interest attributable to the mortgage loans, as
described under “Description of the Certificates—Interest” in this prospectus
supplement.
Net
deferred interest will equal the excess, if any, of deferred interest added
to
the principal balances of the related mortgage loans over the aggregate amount
of principal prepayments in full and partial prepayments of principal received
with respect to the mortgage loans during the related prepayment period.
Interest
on the Class X and Class A-R Certificates will accrue on the basis of a 360-day
year composed of twelve 30-day months. Interest on the Class A1A, Class A1B,
Class A1C Certificates and the subordinate certificates will accrue on the
basis
of a 360-day year and the actual number of days elapsed in the related interest
accrual period. The Class PO Certificates will not accrue interest.
With
respect to each distribution date, the interest accrual period for the Class
X
and Class A-R Certificates will be the calendar month immediately preceding
the
month in which that distribution date occurs. With respect to each distribution
date, the interest accrual period for the Class A1A, Class A1B, Class A1C
Certificates and the subordinate certificates will be the period beginning
on
the prior distribution date (or the closing date, in the case of the first
distribution date) and ending on the day immediately preceding such distribution
date.
Pass-Through
Rates
Class
A1A, Class A1B, Class A1C Certificates
Interest
on the Class A1A, Class A1B and Class A1C Certificates for any distribution
date
will be calculated at an annual rate equal to the least of (1) one-month LIBOR
plus the margin specified for the related class on page S-1 of this prospectus
supplement (which margin will be multiplied by 2.0 after the first optional
call
date), (2) a cap based on the weighted average of the net loan rates of the
mortgage loans (and in the case of the Class A1C Certificates, less the
insurance premium rate), adjusted for the related accrual period and (3) the
net
maximum rate adjusted for the related accrual period.
Class
A-R Certificate
Interest
on the Class A-R Certificate for any distribution date will be calculated at
an
annual rate equal to the weighted average of the net loan rates of the mortgage
loans.
The
net
loan rate of each mortgage loan will be equal to the loan rate on each such
mortgage loan less the rate at which the master servicing fee, the servicing
fee
and any lender paid mortgage insurance fee is calculated. The net maximum loan
rate of each mortgage loan will be equal to the maximum loan rate on each such
mortgage loan less the sum of the rates at which the master servicing fee,
the
servicing fee and any lender paid mortgage insurance fee, are calculated.
S-7
Class
X Certificates
Interest
on the Class X Certificates for any distribution date will equal the total
amount of interest accrued on the applicable class notional amount, as described
above under “—Designations,” as of the day immediately preceding the applicable
distribution date, at the related pass-through rate for the corresponding
interest accrual period.
Interest
on the Class X Certificates for any distribution date will be calculated at
an
annual rate equal
to
the quotient of (a) the product of (1) the excess, if any, of (i) the interest
accrued on the mortgage loans at the net mortgage rate for the related due
period over (ii) the sum of (x) the interest accrued for the related accrual
period on the certificates (other than the Class X Certificates) and (y) the
insurance premiums for the Class A1C Certificates for such distribution date,
multiplied by (2) 12, divided by (b) the class notional amount of the Class
X
Certificates for that distribution date.
On
each
distribution date, accrued interest that would otherwise be distributable to
the
Class X Certificates (after giving effect to any reduction in respect of net
deferred interest allocated to the Class X Certificates on that distribution
date), based on the pass-through rate described above, may be reduced by the
amount, if any, that is necessary to fund payment of any basis risk shortfalls
to the holders of the Class A1A, Class 1B and Class A1C Certificates and the
subordinate certificates, as described in this prospectus
supplement.
Class
B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6Certificates
Interest
on the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6
Certificates for any distribution date will be calculated at an annual rate
equal to the least of (1) one-month LIBOR plus the margin specified for the
related class on page S-1 of this prospectus supplement (which margin will
be
multiplied by 1.5 after the first optional call date), (2) a cap based on the
weighted average of net loan rates of the mortgage loans adjusted for the
related accrual period, and (3) a cap based on the weighted average net maximum
loan rates of the mortgage loans adjusted for the related accrual
period.
See
“Description of the Certificates—Interest” and “—Pass-Through Rates” in this
prospectus supplement.
PrincipalPaymentson
the Certificates
Principal
will be paid to holders of the offered certificates, other than the Class X
Certificates, to the extent of funds available to make payments of principal,
on
each distribution date in the amounts described in this prospectus supplement
under “Description of the Certificates—Principal.”
In
addition, the manner of allocating payments of principal to the certificates
will differ, as described in this prospectus supplement, depending upon the
occurrence of several different events or triggers:
·
up
to and including the distribution date in February 2016, the subordinate
certificates may not receive any principal prepayments unless the
senior
certificates are paid down to zero or the two times test is in
effect;
·
and
after that time, subject to certain performance triggers, the subordinate
certificates will receive increasing portions of principal prepayments
over time; and
·
a
“senior credit support depletion date” occurs on a distribution date on
which the total principal balance of the subordinate certificates
has been
reduced to zero.
The
Class
X Certificates are interest-only certificates and are not entitled to
distributions of principal.
Payment
Priorities
On
each
distribution date, the securities administrator will apply the amounts in
respect of the mortgage loans available for payment and amounts on deposit
in
the basis risk reserve fund generally in the following order of
priority:
·
interest
on the related senior certificates (other than the Class PO Certificates);
provided,
that
interest otherwise payable on the Class X Certificates (after giving
effect to any reduction in respect of net deferred interest on the
mortgage loans allocated to the Class PO Certificates on that distribution
date) on that distribution date will be deposited in the basis risk
reserve fund, to the extent of the required basis risk reserve fund
deposit for that date;
·
principal
of the related senior certificates (other than the Class X Certificates)
in the order and amounts described in this prospectus
supplement;
S-8
·
from
the basis risk reserve fund, to the Class A1A, Class A1B and Class
A1C
Certificates, any unpaid basis risk shortfall, as described in this
prospectus supplement;
·
amounts
due to the certificate insurer under the pooling
agreement;
·
interest
on, and then principal of, each class of subordinate certificates
in the
order of their numerical class designations, beginning with the Class
B-1
Certificates;
·
from
the basis risk reserve fund, to the subordinate certificates, any
unpaid
basis risk shortfall, as described in this prospectus supplement;
and
·
any
remaining available funds to the Class A-R
Certificate.
See
“Description of the Certificates” in this prospectus supplement for additional
information.
Advances
Each
servicer is required to make advances to cover delinquent payments of principal
and interest in respect of the mortgage loans unless it reasonably believes
that
the advances are not recoverable from future payments or other recoveries on
the
related mortgage loans. The master servicer (in its capacity as successor
servicer) will be obligated to make advances if a servicer fails to do so.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates and are not intended to guarantee or
insure against losses. Each servicer is also required to make certain
servicing-related advances.
See
“Servicing of Mortgage Loans—Advances” in this prospectus supplement for
additional information.
Optional
Termination of the Trust Fund
The
sponsor may purchase from the trust fund all of the assets of the trust fund
and
retire all outstanding certificates when the aggregate principal balance of
the
mortgage loans and any real estate owned by the trust fund is 10% or less of
the
aggregate principal balance of the mortgage loans as of the cut-off
date.
If
the
sponsor does not exercise such option to repurchase the mortgage loans and
REO
properties, Wells Fargo Bank, N.A., in its capacity as master servicer, may
purchase from the trust fund all mortgage loans and REO properties remaining
in
the trust fund at the purchase price set forth above when the stated principal
balance of the mortgage loans is less than 5% of their aggregate stated
principal balance as of the cut-off date.
If
the
sponsor fails to exercise its optional termination right when it is first
entitled to do so, the margin over the LIBOR component of the pass-through
rates
on the LIBOR certificates, respectively, will increase as described in the
table
on page S-1, and under “Description of the Certificates—Interest—Pass-Through
Rates” and “The Pooling Agreement—Optional Termination of the Trust Fund” in
this prospectus supplement.
See
“The Pooling Agreement—Optional Termination of the Trust Fund” in this
prospectus supplement for additional information.
Special
Foreclosure Rights
The
majority holder of the most junior class of subordinate certificates will have
a
limited right to direct the servicers not to proceed with foreclosure
proceedings with respect to delinquent mortgage loans, and if the majority
holder of the most junior class of subordinate certificates so directs, it
will
be required to purchase the delinquent mortgage loans from the trust fund at
fair market value as provided in the pooling agreement.
See
“The Pooling Agreement—Special Foreclosure Rights” in this prospectus supplement
for additional information.
Fees
and Expenses
The
master servicer, the servicers and the certificate insurer will receive the
following compensation:
·
For
the master servicer, for each mortgage loan, a monthly fee out of
interest
collections received from that mortgage loan calculated as the product
of
the outstanding principal balance of such mortgage loan and the master
servicing fee rate, equal to 0.0125% per annum, less
the monthly portion of the annual trustee
fee.
·
For
Countrywide Home Loans Servicing LP, for each mortgage loan serviced
by
Countrywide Home Loans Servicing LP, a monthly fee out of interest
collections received from that mortgage loan calculated as the product
of
the outstanding principal balance of such mortgage loan and the related
servicer fee rate, equal to 0.375% per
annum.
S-9
·
For
Paul Financial, LLC, for each mortgage loan serviced by Paul Financial,
LLC, a monthly fee out of interest collections received from that
mortgage
loan calculated as the product of the outstanding principal balance
of
such mortgage loan and the related servicer fee rate, equal to 0.3625%
per
annum.
·
For
the trustee, a fixed annual fee deducted from amounts payable to
the
master servicer as compensation.
·
For
the certificate insurer, a premium on each distribution date equal
to
0.09% of the outstanding aggregate principal balance of the Class
A1C
Certificates.
The
fees
of the securities administrator and the custodian will be paid by the master
servicer on behalf of the trust fund from the master servicer’s own funds. The
master servicer, the trustee, the securities administrator and the custodian
will also be entitled to reimbursement of certain expenses from the trust fund
before payments are made on the certificates.
See
“Fees and Expenses of the Trust Fund” in this prospectus
supplement.
Final
Scheduled Distribution Date
The
final
scheduled distribution date for each class of the offered certificates will
be
the applicable distribution date specified in the table on page S-1. The actual
final distribution date for each class of the offered certificates may be
earlier or later, and could be substantially earlier, than the applicable final
scheduled distribution date.
Credit
Enhancement
The
senior certificates will have a prior right of payment over the subordinate
certificates. Among the classes of subordinate certificates, the Class B-1
Certificates will have the highest payment priority and the Class B-6
Certificates will have the lowest payment priority.
Subordination
is designed to provide the holders of certificates with a higher payment
priority with protection against losses realized when the remaining unpaid
principal balance on a mortgage loan exceeds the amount of proceeds recovered
upon the liquidation of that mortgage loan. This loss protection is accomplished
by allocating the realized losses first,
among
the subordinate certificates, beginning with the subordinate certificates with
the lowest payment priority, and second,
to the
senior certificates (other than the Class X Certificates), on a pro
rata
basis;
provided,
that
realized
losses allocable to the Class A1A, Class A1B and Class A1C Certificates will
be
allocated to the Class A1C, Class A1B and Class A1A Certificates, in that order,
until the class principal balance of each such class has been reduced to zero
as
described in this prospectus supplement under “Description of the
Certificates—Allocation of Losses.”
In
addition, before the distribution date in March 2016, the subordinate
certificates will not receive any principal prepayments (net of deferred
interest) from the mortgage loans unless the senior certificates are paid down
to zero or the credit enhancement provided by the subordinate certificates
has
doubled and certain performance tests have been satisfied. On or after March
2016 and subject to certain performance triggers, the subordinate certificates
will receive increasing portions of principal prepayments (net of deferred
interest) over time.
See
“Description of the Certificates—Principal,”“—Allocation of Losses” and
“—Subordination of the Subordinate Certificates” in this prospectus
supplement.
The
Financial Guaranty Insurance Policy
Financial
Security Assurance Inc., a New York financial guaranty insurance company, will
issue an insurance policy for the benefit of the Class A1C Certificates. The
policy will unconditionally and irrevocably guarantee payment of (1) the
outstanding principal balance of the Class A1C Certificates on their final
maturity date and (2) for each distribution date, accrued and unpaid interest
calculated at the certificate rate due on the Class A1C Certificates and the
amount of any realized losses allocated to the Class A1C Certificates, subject
to certain terms and conditions set forth in the financial guaranty insurance
policy. The financial guaranty insurance policy will not provide credit
enhancement for any class of certificates other than the Class A1C
Certificates.
On
each
distribution date, the securities administrator will calculate to what extent
the funds available to make distributions of principal and interest are
insufficient to distribute the amounts due on the Class A1C Certificates. If
an
insufficiency exists and it is covered by the financial guaranty insurance
policy, then the securities administrator will make a draw on the
policy.
S-10
If
for
any reason the certificate insurer does not make the payments required under
the
financial guaranty insurance policy, the holders of the Class A1C Certificates
will rely solely on the mortgage loans for their distributions of interest
and
principal and certificateholders may suffer a loss.
The
financial guaranty insurance policy does not cover basis risk shortfalls or
shortfalls in interest collections on the mortgage loans that are attributable
to prepayment interest shortfalls, net deferred interest or the application
of
the Servicemembers Civil Relief Act.
See
“The Certificate Insurer” and “Description of the Certificates—The Financial
Guaranty Insurance Policy” in this prospectus supplement.
Ratings
It
is a
condition to the issuance of the certificates that the offered certificates
initially have the ratings from Moody’s Investors Service, Inc. and Standard
& Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. set
forth in the table on page S-1.
A
rating
is not a recommendation to buy, sell or hold securities and it may be lowered
or
withdrawn at any time by the assigning rating agency.
The
ratings do not address the likelihood that any basis risk shortfall will be
repaid to the holders of the LIBOR certificates.
See
“Ratings” in this prospectus supplement for additional
information.
Material
Federal Income Tax Consequences
In
the
opinion of McKee Nelson LLP, for federal income tax purposes, the trust fund
will comprise multiple “real estate mortgage investment conduits” or REMICs. An
owner of an offered certificate (other than the Class A-R Certificate) will
be
treated as having purchased REMIC “regular interests” (exclusive of the right of
any certificates to receive or obligation to make payments in respect of basis
risk shortfalls). The Class A-R Certificate will represent ownership of the
“residual interest” in one or more lower-tier REMICs which will hold the
mortgage loans. In addition, the Class A-R Certificate will represent the sole
“residual interest” in each remaining REMIC created under the pooling agreement.
The
offered certificates (other than the Class A-R Certificate) generally will
be
treated as newly originated debt instruments for federal income tax purposes.
Beneficial owners of the offered certificates (other than the Class A-R
Certificate) will be required to report income on the offered certificates
in
accordance with the accrual method of accounting.
See
“Material Federal Income Tax Consequences” in this prospectus supplement and in
the prospectus for additional information.
ERISA
Considerations
Subject
to satisfaction of certain conditions, employee retirement benefit plans and
other retirement benefit arrangements generally may purchase the offered
certificates (other than the Class A-R Certificates).
See
“ERISA Considerations” in this prospectus supplement and in the
prospectus.
Legal
Investment Considerations
The
senior certificates and the Class B-1 Certificates will be “mortgage related
securities” for purposes of the Secondary Mortgage Market Enhancement Act of
1984, or SMMEA, as long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. The Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6
Certificates will not be rated in one of the two highest rating categories
by a
nationally recognized statistical rating organization and, therefore, will
not
be “mortgage related securities” for purposes of SMMEA.
See
“Legal Investment Considerations” in this prospectus supplement and in the
prospectus.
Listing
The
certificates are not listed on any exchange, and no party to the transaction
intends to list the certificates on any exchange or to quote them in the
automated quotation system of any registered securities
organization.
S-11
Risk
Factors
The
following information, together with the information set forth under “Risk
Factors” in the prospectus which you also should carefully consider, identifies
the principal risks associated with an investment in the
certificates.
Borrowers
may prepay their mortgage loans in whole or in part at any time; however,
as of the cut-off date, approximately 97.22% of the mortgage loans require
the
payment
of a prepayment penalty in connection with any voluntary prepayment occurring
during a period of one to three years after origination. These penalties may
discourage borrowers from prepaying their mortgage loans during the penalty
period. Any prepayment penalty payments received by a servicer from collections
on the mortgage loans will be retained by the related servicer as additional
compensation. We cannot predict the rate at which borrowers will repay their
mortgage loans. A prepayment of a mortgage loan generally will result in a
payment of principal on the offered certificates (other than the Class X
Certificates).
Loan
prepayments may
adversely
affect the
average
life of, and rate
of
return on, your
certificates
Borrowers may prepay their mortgage loans in
whole or in
part at any time; however, as of the cut-off date, approximately
97.22% of
the mortgage loans require the payment of a prepayment penalty in
connection with any voluntary prepayment occurring during a period
of one
to three years after origination. These penalties may discourage
borrowers
from prepaying their mortgage loans during the penalty period. Any
prepayment penalty payments received by a servicer from collections
on the
mortgage loans will be retained by the related servicer as additional
compensation. We cannot predict the rate at which borrowers will
repay
their mortgage loans. A prepayment of a mortgage loan generally will
result in a payment of principal on the offered certificates (other
than
the Class X Certificates).
·
If
you purchase your certificates at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you
anticipate.
·
If
you purchase Class X Certificates or if you purchase other certificates
at
a premium, and principal on the related mortgage loans is repaid
faster
than you anticipate, then your yield may be lower than you
anticipate.
·
The
rate of prepayments on the mortgage loans will be sensitive to prevailing
interest rates. Generally, if prevailing interest rates decline
significantly below the interest rates on the mortgage loans, the
mortgage
loans are more likely to prepay than if prevailing rates remain above
the
interest rates on the mortgage loans. Conversely, if prevailing interest
rates rise significantly, prepayments on the mortgage loans are likely
to
decrease.
·
The
applicable originator or the sponsor, as applicable, will be required
to
purchase from the trust fund the related mortgage loans in the event
certain breaches of representations and warranties occur and are
not
cured, as described under “The Pooling Agreement—Assignment of the
Mortgage Loans” and “—Representations and Warranties” in this prospectus
supplement. These purchases will have the same effect on the holders
of
the offered certificates as a prepayment in full of the related mortgage
loans.
·
If
the rate of default or the severity of losses on the mortgage loans
is
higher than you expect, then your yield may be lower than you
expect.
·
Prospective
purchasers of the Class X Certificates should carefully consider
the risk
that a rapid rate of principal payments on the mortgage loans could
result
in the failure of such purchasers to recover their initial
investments.
S-12
See
“Yield, Prepayment and Maturity Considerations” in this prospectus supplement
for a description of factors that may influence the rate and timing of
prepayments on the mortgage loans.
The
yield on your certificates may be limited by initial fixed
mortgage
interest rates on some mortgage loans and maximum mortgage
interest rates
Borrowers
may prepay their mortgage loans in whole or in part at any time;
however,
as of the cut-off date, approximately 97.22% of the mortgage loans
require
the payment of a prepayment penalty in connection with any voluntary
prepayment occurring during a period of one to three years after
origination. These penalties may discourage borrowers from prepaying
their
mortgage loans during the penalty period. Any prepayment penalty
payments
received by a servicer from collections on the mortgage loans will
be
retained by the related servicer as additional compensation. We
cannot
predict the rate at which borrowers will repay their mortgage loans.
A
prepayment of a mortgage loan generally will result in a payment
of
principal on the offered certificates (other than the Class X
Certificates).
See
“The Mortgage Loans” in this prospectus
supplement.
The
yield and weighted average maturity of the certificates will be
subject
to any negative amortization on the mortgage
loans
After
an initial fixed rate period of generally one, two or three months
after
origination, the interest rates on the mortgage loans adjust monthly
but
their monthly payments and amortization schedules adjust annually
and are
subject to maximum interest rates and payment caps. After the end
of the
initial fixed rate period, the interest rates on some of the mortgage
loans may be lower than the sum of the index applicable at origination
and
the related margin. During a period of rising interest rates, as
well as
prior to the annual adjustment to the monthly payment made by the
borrower, the amount of interest accruing on the principal balance
of a
mortgage loan may exceed the amount of the scheduled monthly payment.
As a
result, a portion of the accrued interest on the mortgage loans
may become
deferred interest that will be added to their respective principal
balances and will also bear interest at the applicable interest
rates. In
addition, the amount by which a monthly payment may be adjusted
on an
annual payment adjustment date is limited and may not be sufficient
to
amortize fully the unpaid principal balance of a mortgage loan
over its
remaining term to maturity. If interest rates on the mortgage loans
adjust
lower prior to an adjustment in the monthly payment, a larger portion
of
the monthly payment will be applied to the unpaid principal balance
of the
mortgage loan, which may cause the certificates to amortize faster.
If the
unpaid principal balance of a mortgage loan exceeds the original
balance
of the mortgage loan by the amount specified in the related mortgage
note,
the monthly payment due on that mortgage loan will be recast without
regard to the related payment cap in order to provide for the outstanding
balance of the mortgage loan to be paid in full in equal monthly
installments at its maturity. In addition, on the fifth payment
adjustment
date of a mortgage loan, and every fifth payment adjustment date
thereafter, the monthly payment due on that mortgage loan will
be recast
without regard to the related payment cap in order to provide for
the
outstanding balance of the mortgage loan to be paid in full in
equal
monthly installments at its maturity. These features may affect
the rate
at which principal on the mortgage loans is paid and may create
a greater
risk of default if the related borrowers are unable to pay the
monthly
payments on the related increased principal balances.
Any
deferral of interest on the mortgage loans will result in a reduction
of
the amount of interest available to be distributed as interest
to the
certificates. The reduction in interest collections will be offset,
in
part, by applying certain prepayments received on the mortgage
loans to
interest distributions on the certificates. The excess of any
deferred
interest on the mortgage loans over the prepayments received
on the
mortgage loans, or net deferred interest, will be allocated among
the
classes of certificates in an amount equal to the excess of the
interest
accrued on each such class at its applicable pass-through rate
over the
amount of interest that would have accrued if the applicable
pass-through
rate for each class had been equal to a pass-through rate adjusted
for net
deferred interest on the related mortgage loans as described
under
“Description of the Certificates—Interest” in this prospectus supplement.
Accordingly, those classes of certificates that are entitled
to higher
amounts of accrued interest will receive higher allocations of
net
deferred interest. Any such allocation of net deferred interest
could, as
a result, affect the weighted average maturity of the affected
class of
certificates. The amount deducted from the interest distributable
to the
Class X Certificates will be added to the class principal balance
of the
Class PO Certificates.
S-13
If
credit enhancement is insufficient, you could experience losses
on your
certificates
Credit
enhancement will be provided for the offered certificates, first,
by the
right of the holders of offered certificates to receive payments
before
the classes subordinate to them and, second, by the allocation
of realized
losses on the mortgage loans to the subordinated classes in reverse
order
of their numerical class designations. In addition, the Class A1C
Certificates have the benefit of a financial guaranty insurance
policy.
None of the other classes of certificates are insured under such
policy.
The
first form of credit enhancement uses collections on the mortgage
loans
otherwise payable to holders of subordinated classes to pay interest
or
principal due on more senior classes of certificates. Collections
otherwise payable to subordinated classes represent the sole source
of
funds from which this type of credit enhancement is
provided.
The
second form of credit enhancement provides that, except as described
below, realized losses on the mortgage loans are
allocated:
first,
to
the subordinate certificates in the reverse order of their priority
of
payment, beginning with the subordinate certificates with the
lowest
payment priority, until the principal amount of each such class
has been
reduced to zero, and
second,
to
the senior certificates (other than the Class X Certificates),
pro
rata
based on the related class principal balance, until their respective
class
principal balances are reduced to zero, in addition to other
losses
allocated to that class of certificates, until the class principal
balance
thereof has been reduced to zero; provided,
that
realized losses allocable to the Class A1A, Class A1B and Class
A1C
Certificates will be allocated to the Class A1C, Class A1B and
Class A1A
Certificates, in that order, until the class principal balance
of each
such class has been reduced to
zero.
S-14
Accordingly, if the aggregate class principal
balance of
each subordinated class were to be reduced to zero, delinquencies
and
defaults on the mortgage loans would reduce the amount of funds
available
for monthly distributions to holders of the senior
certificates.
In
addition, if upon the optional termination of the trust fund
the
termination price is less than the total principal balance
of the offered
certificates, holders of subordinate certificates may incur
losses, as
described under “The Pooling Agreement—Optional Termination of the Trust
Fund.”
The
Class A1C Certificates will be insured by a financial guaranty
insurance
policy issued by Financial Security Assurance Inc. None of
the other
classes of certificates are insured under such policy. In the
absence of
payments under the policy, holders of the Class A1C Certificates
will
directly bear the credit risks associated with their
certificates.
See
“Description of the Certificates—Allocation of Losses” and “—Subordination
of the Subordinate Certificates” in this prospectus supplement for
additional information.
Loan
prepayments may result
in shortfalls in interest collections and reduce the yield on your
certificates
When
a mortgage loan is prepaid in full or in part, the borrower is
charged
interest only up to the date on which the payment is made, rather
than for
an entire month. This may result in a shortfall in interest collections
available for payment on the next distribution date. Each servicer
is
generally required to cover the shortfall in interest collections
attributable to prepayments in full and/or in part, as applicable,
but
only to the extent of the servicing fee.
Any
uncovered prepayment interest shortfall may adversely affect
the yield on
your investment. The financial guaranty insurance policy will
not cover
prepayment interest shortfalls allocated to the Class A1C
Certificates.
The
yields on the LIBOR Certificates may
be
affected by changes in interest rates
No
prediction can be made as to future levels of one-month LIBOR (the
applicable index in determining the pass-through rate for the LIBOR
Certificates) and the applicable index in determining the loan
rate for
the mortgage loans or as to the timing of any changes therein,
each of
which will affect the yield of the LIBOR Certificates.
The
holders of the LIBOR Certificates may not always receive interest
at a
rate equal to one-month LIBOR plus the applicable margin. With
respect to
the Class A1A, Class A1B and Class A1C Certificates, if one-month
LIBOR
plus the applicable margin is greater than either (1) the cap generally
based on the weighted average of the net loan rates of the mortgage
loans
(in the case of the Class A1C Certificates, reduced by the related
insurance premium rate) adjusted for the related accrual period
or (2) the
net maximum rate cap (adjusted for the related accrual period),
the
pass-through rate of those certificates will be reduced to the
lesser of
the applicable net rate cap or the net maximum rate cap (adjusted
for the
related accrual period). With respect to the subordinate certificates,
if
one-month LIBOR plus the applicable margin is greater than either
the cap
generally based on the weighted average net loan rates of the mortgage
loans or the cap generally based on the weighted average net maximum
loan
rates of the
mortgage loans, in each case, adjusted for the related accrual
period, the
pass-through rate of those certificates will be reduced to the
lesser of
the net rate cap or net maximum rate cap. Thus, the yield to investors
in
the LIBOR Certificates will be sensitive to fluctuations in the
level of
one-month LIBOR, and may be adversely affected by the application
of the
related net rate cap or the net maximum rate cap, as
applicable.
S-15
The
prepayment of mortgage loans with relatively higher net loan
rates may
result in a lower weighted average net loan rate. Consequently,
if on any
distribution date the application of the net rate cap results
in an
interest payment lower than one-month LIBOR plus the applicable
margin, in
the case of the LIBOR Certificates, during the related interest
accrual
period, the value of those certificates may be temporarily or
permanently
reduced.
To
the extent that the related net rate cap limits the amount
of interest
paid on the LIBOR Certificates, the excess, if any, between
the related
index plus the related margin (which will be an amount no greater
than the
net maximum rate cap for each such class), over the net rate
cap, and in
the case of the Class A1C Certificates, reduced by the related
insurance
premium rate, will create a shortfall that will carry forward,
with
interest thereon as described in this prospectus supplement.
However, any
such resulting shortfall will only be paid after any current
interest for
such distribution date has been paid to such certificates and
only to the
extent that there are amounts on deposit in the basis risk
reserve fund
funded from interest accrued on and otherwise distributable
to, with
respect to the Class A1A, Class A1B and Class A1C Certificates,
and the
subordinate certificates, the Class X Certificates. Accordingly,
these
shortfalls may remain unpaid on the final distribution date.
See
“Description of the Certificates—Distributions of Interest” in this
prospectus supplement.
Changes
in mortgage indices may reduce
the yields
on the Class X Certificates
As
described in this prospectus supplement, the Class X Certificates
will
accrue interest at a rate based, among other factors, on the weighted
average of the net loan rates on all of the mortgage loans. The
interest
rates on the mortgage loans will be calculated, after the initial
fixed
rate period, on the basis of the related index plus the applicable
margin,
as described in this prospectus supplement. As a result, declines
in the
index on which the interest rates on the mortgage loans are based,
without
a corresponding decline in the rates at which interest on the other
classes of certificates is based, could result, over time, in lower
yields
on the these certificates. The yields on the Class X Certificates
will be
particularly sensitive to declines in the index at which the mortgage
loans accrue interest because the pass-through rates of the Class
X
Certificates could also be reduced. Furthermore, any increase in
the
indices of the mortgage loans on which the interest rates are based
may
result in prepayments on the mortgage loans, payments of principal
on the
offered certificates then entitled to principal and a decrease
in the
notional amounts of the Class X Certificates. In addition, prepayments
on
mortgage loans with higher interest rates will reduce the weighted
average
of the interest rates on the mortgage loans and, consequently,
reduce the
pass-through rate of the Class X
Certificates.
S-16
Prepayments
will affect the yields on the Class X
Certificates
The
Class X Certificates receive only payments of interest. The yields
to
maturity on the Class X Certificates will be extremely sensitive
to the
level of prepayments on the mortgage loans. Generally, the faster
that the
mortgage loans prepay, the less interest the Class X Certificates
will
receive.
The
yields to maturity on the Class X Certificates will be especially
sensitive to the level of prepayments on the mortgage loans with
higher
interest rates.
The
pass-through rates for the Class X Certificates, as described
under
“Summary of Terms—Interest Payments on the Certificates—Pass-Through
Rates,” are determined generally based on the excess, if any, of interest
accrued on the mortgage loans at the net mortgage rate over the
interest
accrued on the certificates (other than the Class X
Certificates).
If
mortgage interest rates decline, the higher interest rate mortgage
loans
are more likely to be refinanced and, therefore, prepayments
in full on
these mortgage loans are more likely to occur. Generally, the
amount of
prepayments will be distributed to the classes of certificates
in the
order of priority described herein. Such order will have the
likely effect
of reducing the certificate principal balances of classes with
lower
certificate rates relative to other classes. This will have the
effect of
raising the weighted average certificate rate and lowering the
applicable
net weighted average interest rate at which interest accrues
on the
mortgage loans, which in turn will lower the pass-through rates
on the
Class X Certificates. If for any distribution date, the interest
accrued
on the mortgage loans at the net mortgage rate is equal to the
interest
accrued on the certificates (other than the Class X Certificates),
the
Class X Certificates will receive no payments of interest on
that
distribution date.
An
increase in prepayments on the mortgage loans will result in a
reduced
class notional amount and, consequently, a reduction in interest
payable
to the Class X Certificates.
You
should fully consider the risks associated with an investment
in the Class
X Certificates. If the related mortgage loans prepay faster than
expected
or if the trust fund is terminated earlier than expected, you
may not
fully recover your initial investment. See “Yield, Prepayment and Maturity
Considerations
―Yield
Considerations with Respect to the Class X Certificates” in this
prospectus supplement for a table showing expected yields at
different
prepayment rates.
Default
risk on high-balance mortgage loans
As
of the cut-off date, approximately 10.32% of all of the mortgage
loans had
principal balances greater than $1,000,000.You
should consider the risk that the loss and delinquency experience
on these
high balance mortgage loans may have a disproportionate effect
on the pool
of mortgage loans as a whole.
S-17
Risks
associated with mortgage loans secured by non-owner occupied
properties
Mortgage
loans secured by properties acquired by investors for the purposes
of
rental income or capital appreciation, or properties acquired as
second
homes, tend to have higher severities of default than properties
that are
regularly occupied by the related borrowers. In a default, real
property
investors who do not reside in the mortgaged property may be more
likely
to abandon the property, increasing the severity of the default.
Approximately 13.03% of all of the mortgage loans are secured by
investment properties, and approximately 3.75% of all of the mortgage
loans are secured by second homes.
Simultaneous
second lien risk
With
respect to approximately 35.04% of all the mortgage loans, at the
time of
origination of such first lien mortgage loan, the applicable originator
or
another lender also originated a second lien mortgage loan that
will not
be included in the trust fund. The weighted average original loan-to-value
ratio of these mortgage loans is approximately 76.54%. The original
weighted average combined loan-to-value ratio of such mortgage
loans
(including the simultaneous second lien) is approximately 87.46%.
With
respect to those mortgage loans, foreclosure frequency may be increased
relative to mortgage loans that were originated without a simultaneous
second lien because borrowers have less equity in the mortgaged
property.
Investors should also note that any borrower may obtain secondary
financing at any time subsequent to the date of origination of
their
mortgage loan from the originator or from any other
lender.
Delinquencies
due to transfer of servicing or servicing
rights
Servicing
of the mortgage loans may be transferred to other primary servicers
in the
future, provided such transfers are approved by the rating agencies
and
are accomplished in accordance with the provisions of the pooling
agreement and the applicable servicing agreement. Mortgage loans
subject
to servicing transfers may experience increased delays in
payments.
At
any time that a servicer transfers servicing responsibilities
as described
above, the mortgage loans may experience an increase in delinquencies
and
defaults during the transitions of servicing
responsibilities.
Originators
and servicers may be subject to litigation or governmental
proceedings
The
mortgage lending and servicing business involves the collection
of
numerous accounts and compliance with various federal, state and
local
laws that regulate consumer lending. Lenders and servicers may
be subject
from time to time to various types of claims, legal actions (including
class action lawsuits), investigations, subpoenas and inquiries
in the
course of their business. It is impossible to predict the outcome
of any
particular actions, investigations or inquiries or the resulting
legal and
financial liability. If any such proceeding were determined adversely
to
the originator or servicer of the mortgage loans included in the
trust
fund and were to have a material adverse effect on its financial
condition, the ability of each servicer to service the mortgage
loans in
accordance with the related servicing agreement, or the ability
of each
originator to fulfill its obligation to repurchase or substitute
for
defective mortgage loans, could be impaired.
S-18
If
the receipt of liquidation proceeds is delayed or if liquidation
proceeds
are less than the mortgage loan balance, you could suffer a loss
on your
certificates
Substantial
delays could be encountered in connection with the liquidation
of
delinquent mortgage loans. Further, liquidation expenses such as
legal
fees, real estate taxes and maintenance and preservation expenses
may
reduce the portion of liquidation proceeds payable to you. If a
mortgaged
property fails to provide adequate security for the related mortgage
loan,
you will incur a loss on your investment if the credit enhancement
is
insufficient to cover that deficiency.
An
investment in the certificates may not be appropriate for some
investors
The
offered certificates may not be an appropriate investment for investors
who do not have sufficient resources or expertise to evaluate the
particular characteristics of the offered certificates. This may
be the
case due, for example, to the following
reasons.
·
The
yield to maturity of offered certificates purchased at a price
other than
par will be sensitive to the uncertain rate and timing of principal
prepayments on the mortgage
loans.
·
The
rate of principal distributions on and the weighted average
lives of the
offered certificates will be sensitive to the uncertain rate
and timing of
principal prepayments on the mortgage loans and the priority
of principal
payments among the classes of certificates. Accordingly, the
offered
certificates may be an inappropriate investment if you require
a payment
of a particular amount of principal on a specific date or an
otherwise
predictable stream of
payments.
·
You
may not be able to reinvest distributions on an offered certificate
at a
rate at least as high as the pass-through rate applicable to
your
certificate, because distributions generally are expected to
be greater
during periods of relatively low interest
rates.
·
Your
investment in any of the offered certificates may be ended
before you
desire if the optional termination of the trust fund is
exercised.
Geographic
concentration of the mortgage loans may adversely affect your
certificates
Approximately
72.70% of all of the mortgage loans are secured by properties in
California. The rate of delinquencies, defaults and losses on the
mortgage
loans may be higher than if fewer of the mortgage loans were concentrated
in California because the following conditions in California will
have a
disproportionate impact on the mortgage loans in
general:
·
Weak
economic conditions, which may or may not affect real property
values, may
affect the ability of borrowers to repay their loans on
time.
S-19
·
Declines
in the residential real estate market in those states may reduce
the
values of properties, which would result in an increase in
the
loan-to-value ratios.
·
Properties
in California may be more susceptible than homes located in
other parts of
the country to certain types of uninsurable hazards, such as
earthquakes,
and properties in California may be more susceptible to such
hazards as
floods, wildfires, mudslides and other natural
disasters.
Natural disasters affect regions of
the
United States from time to time, and may result in increased losses
on
mortgage loans in those regions, or in insurance payments that will
constitute prepayments of those mortgage loans.
It may be difficult
to
resell
your certificates
There
is currently no secondary market for the offered certificates and
there
can be no assurance that a secondary market for the offered certificates
will develop. Consequently, you may not be able to sell your certificates
readily or at prices that will enable you to realize your desired
yield.
The market values of the certificates are likely to fluctuate.
Any of
these fluctuations may be significant and could result in significant
losses to you.
The secondary markets for asset-backed securities
have
experienced periods of illiquidity and can be expected to do so
in the
future. Illiquidity can have a severely adverse effect on the prices
of
securities that are especially sensitive to prepayment, credit,
or
interest rate risk.
Terrorist attacks
and
related
military action
The effects that terrorist attacks in the United
States,
possible future attacks or other incidents and related military
action, or
military action by U.S. forces in Iraq or other regions, may have
on the
performance of the mortgage loans or on the values of mortgaged
properties
cannot be determined at this time. Investors should consider the
possible
effects on delinquency, default and prepayment experience of the
mortgage
loans. Federal agencies and non-government lenders have and may
continue
to defer, reduce or forgive payments and delay foreclosure proceedings
in
respect of loans to borrowers affected in some way by recent and
possible
future events.
In
addition, activation of a substantial number of additional U.S.
military
reservists or members of the National Guard may significantly
increase the
proportion of mortgage loans whose interest rates are reduced
by
application of the Servicemembers Civil Relief Act, as amended,
or similar
state or local laws, referred to collectively as the “Relief Act.”
Interest payable to holders of the senior certificates and the
subordinate
certificates will be reduced on a pro
rata
basis by any reductions in the amount of interest collectible
as a result
of the application of the Relief Act. The servicers are not required
to
advance these shortfalls as delinquent payments, and such shortfalls
are
not covered by any form of credit enhancement on the certificates.
In
addition, certain persons not covered by the Relief Act may be
eligible
for similar loan payment relief under applicable state laws.
The financial
guaranty insurance policy will not cover any interest shortfalls
on the
Class A1C Certificates attributable to the application of the
Relief
Act.
S-20
Bankruptcy
or insolvency may affect the
timing
and amount of distributions on
your
certificates
The
transfer of the mortgage loans by the seller to the depositor will
be
characterized in the mortgage loan purchase agreement as a sale
transaction. Nevertheless, in the event of a bankruptcy of the
seller, the
trustee in bankruptcy could attempt to recharacterize the sale
of the
mortgage loans to the depositor as a borrowing secured by a pledge
of the
mortgage loans.
If
the attempt to recharacterize the transfer of the mortgage loans
were
successful, a trustee in bankruptcy could elect to accelerate payment
of
the certificates and liquidate the mortgage loans, with the holders
of the
certificates entitled to no more than the outstanding class principal
balances, if any, of the classes of certificates, together with
interest
thereon at the applicable pass-through rate to the date of payment.
In the
event of an acceleration of the certificates, the holders of the
certificates would lose the right to future payments of interest,
might
suffer reinvestment losses in a lower interest rate environment
and may
fail to recover their initial investment. Regardless of whether
an
acceleration takes place, delays in payments on the certificates
and
possible reductions in the amount of those payments could
occur.
S-21
Glossary
There
is
a glossary of terms beginning on page S-103 where you will find definitions
of
the capitalized terms used in this prospectus supplement. You should read the
glossary of terms carefully because it defines many concepts that are important
to understanding the certificates.
The
Mortgage Loans
General
Statistical
information in this section, unless otherwise specified, is based upon the
aggregate principal balance of the mortgage loans as of the cut-off
date.
The
assets held by Luminent Mortgage Trust 2006-2 will consist primarily of
adjustable rate, first lien, residential mortgage loans. Approximately 99.67%
of
the mortgage loans have loan rates that adjust based on MTA and approximately
0.33% of the mortgage loans have loan rates that adjust based on COFI. The
mortgage loans have original terms to maturity of not more than 480 months.
As
of the cut-off date, there are 1,576 mortgage loans with an aggregate principal
balance of approximately $801,473,842. The mortgage loans are “adjustable rate
mortgage loans” and generally have loan rates that adjust monthly depending on
the terms of the particular mortgage note.
On
the
closing date, the depositor will deposit into the trust fund the mortgage loans,
which in the aggregate will constitute the mortgage pool.
The
Stated Principal Balance of each mortgage loan as of the cut-off date reflects
the application of scheduled payments of principal due on that mortgage loan
on
or prior to the cut-off date, whether or not received, and any amounts of
deferred interest added to the unpaid principal balance of such mortgage loan
as
a result of negative amortization (as described below). Whenever reference
is
made herein to a percentage of some or all of the mortgage loans, that
percentage is determined on the basis of the Stated Principal Balances of such
mortgage loans as of the cut-off date, unless otherwise specified. The aggregate
principal balance of the mortgage loans set forth above is subject to a variance
of plus or minus ten percent.
Each
of
the mortgage loans in the trust fund is secured by a mortgage, deed of trust
or
other similar security instrument that creates a first lien on the related
mortgaged property. We refer to these instruments as “mortgages” in this
prospectus supplement. The mortgaged properties are one- to four-family dwelling
units, individual condominium units and planned unit developments.
Pursuant
to a mortgage loan purchase agreement between the seller and the depositor,
the
depositor will purchase the mortgage loans from the seller. Under the pooling
agreement, the depositor will cause the mortgage loans and all of its rights
and
interest under the mortgage loan purchase agreement to be assigned to the
trustee for the benefit of the certificateholders and the certificate insurer.
See “The Pooling Agreement” in this prospectus supplement.
The
seller purchased each of the mortgage loans in the secondary market in the
ordinary course of its business.
Approximately
87.42% of the mortgage loans were originated by Countrywide Home Loans, Inc.
(“Countrywide” or an “originator”) and approximately 12.58% of the mortgage
loans were originated by Paul Financial, LLC (“Paul Financial” or an
“originator”). The mortgage loans originated by Countrywide were originated in
accordance with the underwriting guidelines described under “Mortgage Loan
Origination—Underwriting Standards” herein. The mortgage loans originated by
Countrywide are being serviced by Countrywide Home Loans Servicing LP
(“Countrywide Servicing”) and the mortgage loans originated by Paul Financial
are being serviced by it. See “The Servicers” herein.
S-22
The
mortgage loans originated by Countrywide were purchased by the seller from
Greenwich Capital Financial Products, Inc., an affiliate of the depositor and
of
one of the underwriters. Greenwich Capital Financial Products, Inc. initially
acquired these mortgage loans from Countrywide pursuant to a mortgage loan
purchase agreement (referred to herein as an “underlying purchase agreement”).
The mortgage loans originated by Paul Financial were purchased by the seller
directly from Paul Financial pursuant to a mortgage loan purchase agreement
(also referred to herein as an “underlying purchase agreement”). Under a
reconstituted servicing agreement among the seller, the sponsor, the depositor
and Paul Financial (and acknowledged by the master servicer and the trustee),
and a reconstituted servicing agreement among the depositor, seller, the
sponsor, Countrywide and the master servicer (and acknowledged by the trustee)
(each referred to herein as a “reconstitution agreement”), the servicers will
service the mortgage loans in the trust fund. Under a mortgage loan purchase
agreement (the “mortgage loan purchase agreement”), the seller will assign all
of its rights (other than rights to certain premium amounts in excess of the
Stated Principal Balance of repurchased or prepaid mortgage loans) with respect
to each underlying purchase agreement, including rights with respect to
representations and warranties made by each of the originators, to the trustee.
Subject to certain limitations set forth in the underlying purchase agreements,
the originators will be obligated to repurchase any mortgage loan as to which
there exists deficient documentation or an uncured breach of any such
representation or warranty, if such deficiency or breach of any such
representation or warranty materially and adversely affects the interests of
the
certificateholders or the certificate insurer in such mortgage loan. Under
the
mortgage loan purchase agreement, the sponsor will make certain representations
and warranties to the depositor with respect to the period during which the
seller held the mortgage loans, which will in turn assign its rights under
those
representations and warranties to the trustee under the pooling agreement.
Subject to certain limitations set forth in the pooling agreement, the sponsor
will be obligated to repurchase, or substitute a similar loan for, any mortgage
loan as to which there exists an uncured breach of any such representation
or
warranty, if the breach of such representation or warranty materially and
adversely affects the certificateholders’ or the certificate insurer’s interests
in such mortgage loan. In addition, if Paul Financial fails to cure a breach
or
defect, or repurchase or substitute for a mortgage loan as described above,
the
sponsor will be obligated to do so. See “The Pooling Agreement—Assignment of the
Mortgage Loans” in this prospectus supplement. The depositor will make no
representations or warranties with respect to the mortgage loans and neither
the
sponsor (except as to mortgage loans originated by Paul Financial) nor the
depositor will have any obligation to cure, repurchase or substitute mortgage
loans with deficient documentation or that are otherwise defective. The seller
is selling the mortgage loans without recourse and will have no obligation
with
respect to the certificates in its capacity as seller. The sponsor will have
certain cure, repurchase or substitution obligations described above and certain
limited indemnification obligations. Each originator will have no obligation
with respect to the certificates in its capacity as an originator other than
the
repurchase, indemnity or substitution obligations described in this prospectus
supplement.
The
Indices.
The
index applicable to the determination of the loan rates of approximately 99.67%
of the mortgage loans will be a per annum rate equal to the twelve-month average
yields on United States Treasury securities adjusted to a constant maturity
of
one year, as published by the Federal Reserve Board in Statistical Release
H.15(519) (the “MTA” index). The index applicable to the determination of the
loan rates of approximately 0.33% of the mortgage loans will be the weighted
average cost of funds of depository institutions, headquartered in Arizona,
California or Nevada and members of the Eleventh District of the Federal Home
Loan Bank System, as computed from statistics tabulated and published by the
FHLB of San Francisco (“COFI”).
The
indices will be calculated as of the date specified in the related mortgage
note. In the event that an index described above becomes unavailable or is
otherwise unpublished, the related servicer will select a comparable alternative
index over which it has no direct control and which is readily verifiable,
and
which is permissible under the terms of the related mortgage and mortgage
note.
Loan
Rate Adjustments.
The
loan rates for the mortgage loans are generally fixed for one, two or three
months following their origination and then adjust monthly. As of the cut-off
date, approximately 0.88% of all of the mortgage loans were still in their
initial one-, two- or three-month fixed rate period. These mortgage loans bear
a
weighted average fixed mortgage rate of approximately 1.995% per annum. The
loan
rate for each mortgage loan will be adjusted to equal the sum, generally rounded
to or rounded up to, as applicable, the nearest multiple of 0.010% of the index
and a fixed percentage amount known as the “gross margin” for that loan. The
mortgage loans adjust according to the applicable index as discussed under
“—The
Index” above.
S-23
No
mortgage loan will have a loan rate that exceeds the maximum loan rate specified
in the related mortgage note. Due to the application of the maximum loan rates,
the loan rate on each mortgage loan that has such a maximum loan rate, as
adjusted on any loan rate adjustment date, may be less than the sum of the
applicable index and gross margin, rounded as described above. See “—The Index”
above.
Monthly
Payment Adjustments.
Monthly
scheduled payments on the mortgage loans adjust annually on a date specified
in
the related mortgage note (each, a “Payment Adjustment Date”), subject to the
conditions (the “Payment Caps”) that (i) the amount of the monthly payment will
not increase or decrease by an amount that is more than 7.50% of the monthly
payment prior to the related Payment Adjustment Date, (ii) as of the fifth
Payment Adjustment Date and on the same day every fifth Payment Adjustment
Date
thereafter, the monthly payment will be recast without regard to the limitation
in clause (i) above and (iii) if the unpaid principal balance exceeds a
percentage (either, 110% or 115%, depending on the mortgage loan) of the
original principal balance due to deferred interest, the monthly payment will
be
recast without regard to the limitation in clause (i) to amortize fully the
then
unpaid principal balance of the mortgage loan over its remaining term to
maturity.
Because
the loan rates on the mortgage loans adjust at a different time than the monthly
payments thereon and the Payment Caps may limit the amount by which the monthly
payments may adjust, the amount of a monthly payment may be more or less than
the amount necessary to fully amortize the Stated Principal Balance of the
mortgage loans over its then remaining term at the applicable loan rate.
Accordingly, the mortgage loans may be subject to reduced amortization (if
the
monthly payment due on a due date is sufficient to pay interest accrued during
the related accrual period at the applicable loan rate but is not sufficient
to
reduce principal in accordance with a fully amortizing schedule); negative
amortization (if interest accrued during the related accrual period at the
applicable loan rate is greater than the entire monthly payment due on the
related due date (such excess accrued interest, “deferred interest”)); or
accelerated amortization (if the monthly payment due on a due date is greater
than the amount necessary to pay interest accrued during the related accrual
period at the applicable loan rate and to reduce principal in accordance with
a
fully amortizing schedule). In the event a mortgage loan negatively amortizes,
deferred interest, if any, is added to the Stated Principal Balance of such
mortgage loan and, if such deferred interest is not offset by subsequent
accelerated amortization, it may result in a final lump sum payment at maturity
greater than, and potentially substantially greater than, the monthly payment
due on the immediately preceding due date.
High
Loan-to-Value Mortgage Loans. As
of the
cut-off date, approximately 5.69% of all of the mortgage loans have original
loan-to-value ratios in excess of 80%. All of such mortgage loans are covered
by
a primary mortgage guaranty insurance policy (which policy insures, generally,
any portion of the unpaid principal balance of a mortgage loan in excess of
80%
of the value of the related mortgaged property). No such primary mortgage
guaranty insurance policy will be required to be maintained with respect to
any
such mortgage loan after the date on which the related loan-to-value ratio
is
80% or less.
For
each
mortgage loan and any date of determination, the loan-to-value ratiois
calculated as a fraction, expressed as a percentage, the numerator of which
is
the original principal balance of the mortgage loan and the denominator of
which
is the value of the mortgaged property as determined at the origination of
the
related loan on the basis of the lesser of the sale price or appraised value
with respect to a purchase mortgage loan or the appraised value with respect
to
a refinance mortgage loan.
Prepayment
Penalty Payments.
As of
the cut-off date, approximately 97.22% of the mortgage loans require the payment
of a prepayment penalty in connection with a voluntary prepayment of principal.
Generally, each such mortgage loan provides for payment of a prepayment penalty
in connection with certain voluntary, full or partial prepayments made within
the period of time specified in the related mortgage note, generally for one
to
three years from the date of origination of such mortgage loan. Certain mortgage
loans that require the payment of a prepayment penalty, however, may provide
for
brief periods during the applicable period for prepayments to be made without
incurring a prepayment penalty. The amount of the applicable prepayment penalty,
to the extent permitted under applicable law, is as provided in the related
mortgage note. Generally, such amount is equal to six months’ interest on any
amounts prepaid during any twelve-month period in excess of 20% of the original
principal balance of the related mortgage loan or a specified percentage of
the
amounts prepaid. Any prepayment penalty payments received by a servicer from
collections on the mortgage loans will be retained by the related servicer
as
additional compensation.
S-24
Aggregate
Mortgage Loan Statistics
The
following statistical information, unless otherwise specified, is based upon
the
aggregate principal balance of the mortgage loans as of the cut-off
date.
General
Characteristics. Approximately
98.37% and 1.63% of the mortgage loans have original terms to stated maturity
of
360 months and 480 months, respectively. The weighted average remaining
term to stated maturity of the mortgage loans was approximately 359 months
as of
the cut-off date. None of the mortgage loans had a first due date prior to
June
2005 or after March 2006 or had a remaining term to stated maturity of less
than
351 months or greater than 479 months as of the cut-off date. The latest stated
maturity date of any mortgage loan occurs in January 2046.
The
average principal balance of the mortgage loans at origination was approximately
$508,258. The average Stated Principal Balance of the mortgage loans as of
the
cut-off date was approximately $508,549. No mortgage loan had a Stated Principal
Balance of less than approximately $46,000 or greater than approximately
$2,003,840as
of the
cut-off date.
As
of the
cut-off date, none of the mortgage loans were 30 or more days delinquent in
payment.
No
mortgage loan has been 30 or more days delinquent from the date of its
origination.
The
mortgage loans had annual loan rates of not less than 1.000% and not more than
8.618% and the weighted average annual loan rate was approximately 6.719%.
As of
the cut-off date, the mortgage loans had gross margins ranging from 1.000%
to
5.000%, maximum loan rates ranging from 9.950% to 19.900% and minimum loan
rates
ranging from 1.000% to 5.000%. As of the cut-off date, the weighted average
gross margin was approximately 3.145%, the weighted average maximum loan rate
was approximately 10.292% and the weighted average minimum loan rate was
approximately 3.142% for all of the mortgage loans. The latest next loan rate
adjustment date following the cut-off date on any mortgage loan occurs in
approximately 1 month and the weighted average next loan rate adjustment date
following the cut-off date for all of the mortgage loans occurs in approximately
1 month. The latest next payment adjustment date following the cut-off date
on
any mortgage loan occurs in 60 months and the weighted average next payment
adjustment date following the cut-off date for all of the mortgage loans occurs
in approximately 10 months.
As
of
origination, approximately 97.22% of the mortgage loans provide for payment
by
the mortgagor of a prepayment penalty in connection with certain full or partial
prepayments of principal.
The
mortgage loans had the approximate characteristics shown in the following
tables. The sum in any column in the following tables may not equal the total
indicated due to rounding.
S-25
Stated
Principal Balances of the Mortgage Loans
Stated
Principal
Balance ($)
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
0.01
- 50,000.00
1
$
46,000.14
0.01
%
7.193
%
358
79.31
%
688
50,000.01
- 100,000.00
13
1,050,938.39
0.13
6.929
358
77.43
707
100,000.01
- 150,000.00
30
3,884,112.57
0.48
6.801
357
73.05
696
150,000.01
- 200,000.00
57
9,997,259.32
1.25
6.953
362
76.96
702
200,000.01
- 250,000.00
52
11,576,619.15
1.44
6.709
360
74.43
709
250,000.01
- 300,000.00
58
16,243,656.49
2.03
6.893
366
77.87
703
300,000.01
- 350,000.00
56
18,232,865.49
2.27
6.843
360
75.78
700
350,000.01
- 400,000.00
165
62,483,156.56
7.80
6.925
357
79.15
687
400,000.01
- 450,000.00
261
110,547,653.96
13.79
6.798
358
77.12
702
450,000.01
- 500,000.00
253
119,780,928.19
14.95
6.739
361
77.08
705
500,000.01
- 550,000.00
160
83,481,899.71
10.42
6.770
360
77.78
704
550,000.01
- 600,000.00
111
63,606,100.27
7.94
6.684
358
77.47
699
600,000.01
- 650,000.00
92
57,330,609.84
7.15
6.738
359
76.28
703
650,000.01
- 700,000.00
59
39,352,825.76
4.91
6.697
357
74.75
701
700,000.01
- 750,000.00
42
30,402,790.45
3.79
6.760
357
72.99
705
750,000.01
- 800,000.00
27
20,901,910.51
2.61
6.510
367
75.79
706
800,000.01
- 850,000.00
18
14,838,404.46
1.85
6.395
364
71.89
702
850,000.01
- 900,000.00
20
17,509,917.71
2.18
6.368
357
74.74
721
900,000.01
- 950,000.00
13
12,021,962.43
1.50
6.324
358
75.33
680
950,000.01
- 1,000,000.00
26
25,469,085.58
3.18
6.550
358
74.19
719
1,000,000.01
and above
62
82,715,145.36
10.32
6.589
359
70.87
711
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
The
average Stated Principal Balance of the mortgage loans was approximately
$508,549 as of the cut-off date.
Original
Terms to Stated Maturity of the Mortgage Loans
Original
Term (months)
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
360
1,549
$
788,416,755.16
98.37
%
6.714
%
357
76.01
%
703
480
27
13,057,087.18
1.63
7.068
479
76.35
723
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
The
weighted average original term to stated maturity of the mortgage loans was
approximately 362 months as of the cut-off date.
S-26
Remaining
Terms to Stated Maturity of the Mortgage Loans
Remaining
Term (months)
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
301
- 360
1,549
$
788,416,755.16
98.37
%
6.714
%
357
76.01
%
703
Greater
than 361
27
13,057,087.18
1.63
7.068
479
76.35
723
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
The
weighted average remaining term to stated maturity of the mortgage loans was
approximately 359 months as of the cut-off date.
Property
Types of the Mortgage Loans
Property
Type
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
Two-Four
Family
154
$
70,243,183.31
8.76
%
6.914
%
358
74.81
%
710
Condominium
148
69,821,234.73
8.71
6.697
357
76.83
706
Planned
Unit Development
327
175,050,436.33
21.84
6.646
360
76.32
708
Single
Family
947
486,358,987.97
60.68
6.721
359
75.95
700
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
Stated
Occupancy Status of the Mortgage Loans*
Stated
Occupancy Status
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
Investor
253
$
104,408,449.43
13.03
%
7.086
%
358
74.00
%
719
Primary
1,260
667,025,956.65
83.22
6.667
360
76.36
700
Second
Home
63
30,039,436.26
3.75
6.602
359
75.21
723
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
*In
the
preceding table, “stated occupancy status” refers to the intended use of the
mortgaged property as represented by the borrower when the related mortgage
loan
was originated.
S-27
Loan
Purposes of the Mortgage Loans
Purpose
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
Cash
Out Refinance
687
$
327,635,331.97
40.88
%
6.791
%
359
74.23
%
696
Purchase
636
350,008,168.93
43.67
6.681
359
78.05
710
Rate/Term
Refinance
253
123,830,341.44
15.45
6.639
361
74.96
701
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
Documentation
Programs of the Mortgage Loans
Documentation
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
Alternative
Documentation
40
$
20,218,525.65
2.52
%
6.577
%
357
78.79
%
675
Full
Documentation
141
65,002,889.55
8.11
6.742
358
78.31
692
Reduced
Documentation
1,067
568,415,173.04
70.92
6.710
357
75.92
701
Stated
Income/Stated Asset
124
54,267,059.84
6.77
6.705
357
72.45
716
Stated
Income/Verified Asset
204
93,570,194.26
11.67
6.799
375
76.44
724
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
Original
Loan-to-Value Ratios of the Mortgage Loans
Original
Loan-to-Value
Ratio
(%)
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
0.01
- 49.99
25
$
10,547,942.22
1.32
%
6.542
%
360
40.58
%
726
50.00
- 54.99
15
10,410,006.12
1.30
6.637
359
52.76
706
55.00
- 59.99
22
11,015,684.01
1.37
6.607
357
57.18
711
60.00
- 64.99
45
26,132,596.29
3.26
6.658
357
62.76
689
65.00
- 69.99
89
56,596,909.43
7.06
6.638
360
67.34
709
70.00
- 74.99
192
108,934,573.38
13.59
6.667
359
71.74
705
75.00
- 79.99
370
189,925,832.66
23.70
6.731
358
76.71
701
80.00
- 80.00
702
342,303,244.79
42.71
6.686
360
80.00
705
80.01
- 84.99
10
4,113,723.11
0.51
7.529
357
83.77
685
85.00
- 89.99
29
10,769,882.94
1.34
7.484
357
88.40
688
90.00
- 94.99
65
26,636,088.88
3.32
7.124
356
90.42
688
95.00
- 99.99
12
4,087,358.51
0.51
7.422
356
95.00
701
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
The
weighted average original loan-to-value ratio of the mortgage loans was
approximately 76.01% as of the cut-off date.
S-28
Geographic
Distribution of the Mortgage Loans
State
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
Arizona
50
$
19,044,932.60
2.38
%
6.737
%
360
76.25
%
711
Arkansas
1
469,577.94
0.06
7.393
355
95.00
683
California
1,077
582,704,599.23
72.70
6.752
360
76.02
704
Colorado
28
9,622,240.05
1.20
6.621
358
76.84
728
Connecticut
8
4,582,062.03
0.57
6.211
357
74.88
665
Delaware
2
589,943.04
0.07
6.887
358
46.49
740
District
of Columbia
2
1,124,718.46
0.14
6.693
358
80.00
692
Florida
121
56,353,552.45
7.03
6.727
357
75.62
708
Georgia
5
2,166,744.71
0.27
6.864
356
77.42
695
Hawaii
5
4,791,521.60
0.60
6.444
357
64.52
725
Idaho
6
923,892.94
0.12
6.644
357
73.52
715
Illinois
8
2,882,968.44
0.36
5.937
357
79.74
684
Indiana
2
111,193.04
0.01
7.193
358
79.71
672
Kentucky
1
143,753.98
0.02
7.193
358
77.01
769
Louisiana
1
513,256.61
0.06
6.568
352
90.00
727
Maryland
20
9,819,133.99
1.23
6.144
357
72.88
698
Massachusetts
9
4,586,893.38
0.57
6.753
358
76.32
680
Michigan
11
3,559,801.79
0.44
7.069
357
79.70
683
Minnesota
4
1,408,271.13
0.18
6.862
358
79.71
679
Missouri
2
411,724.45
0.05
6.867
358
76.41
711
Montana
1
373,606.60
0.05
7.068
356
80.00
745
Nevada
60
25,977,911.23
3.24
6.709
358
75.31
713
New
Hampshire
2
441,752.56
0.06
7.646
358
74.01
681
New
Jersey
11
6,739,436.80
0.84
7.004
358
73.24
654
New
York
17
8,920,461.73
1.11
6.049
358
77.10
699
North
Carolina
1
606,361.04
0.08
6.018
356
80.00
783
Ohio
5
1,496,137.98
0.19
6.484
358
79.04
684
Oklahoma
1
400,895.19
0.05
7.018
357
71.43
653
Oregon
7
3,361,036.88
0.42
6.852
357
79.05
683
Pennsylvania
9
2,577,919.16
0.32
6.662
358
79.15
701
Rhode
Island
3
1,423,232.31
0.18
6.834
358
78.07
713
South
Carolina
5
4,327,179.62
0.54
6.671
358
72.84
728
Texas
2
677,162.17
0.08
6.627
357
83.70
691
Utah
7
3,184,520.16
0.40
6.722
357
79.10
682
Virginia
44
21,469,218.82
2.68
6.492
357
78.23
683
Washington
35
13,153,483.92
1.64
6.688
358
76.87
689
Wisconsin
3
532,744.31
0.07
6.880
356
79.23
704
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
As
of the
cut-off date, the greatest five-digit ZIP Code geographic concentration of
mortgage loans by Stated Principal Balance was approximately 0.59% in the 92064
ZIP Code.
S-29
Loan
Rates of the Mortgage Loans
Loan
Rate (%)
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
1.000
- 1.499
1
$
328,800.00
0.04
%
1.000
%
360
68.50
%
800
1.500
- 1.999
6
3,963,955.50
0.49
1.696
358
75.14
701
2.000
- 2.499
3
1,372,094.05
0.17
2.239
358
77.03
735
2.500
- 2.999
3
1,097,751.16
0.14
2.683
358
80.47
650
3.000
- 3.499
1
211,302.11
0.03
3.250
358
80.00
686
4.000
- 4.499
1
67,812.29
0.01
4.250
358
80.00
629
4.500
- 4.999
2
1,485,788.87
0.19
4.724
357
72.32
662
5.000
- 5.499
1
143,683.03
0.02
5.268
358
80.00
713
5.500
- 5.999
37
24,069,145.79
3.00
5.807
360
75.46
714
6.000
- 6.499
273
155,852,512.20
19.45
6.319
357
74.62
715
6.500
- 6.999
692
355,890,919.36
44.40
6.709
358
75.71
706
7.000
- 7.499
479
223,810,095.78
27.92
7.102
363
76.64
690
7.500
- 7.999
47
21,461,325.38
2.68
7.683
362
79.09
717
8.000
- 8.499
25
9,870,057.45
1.23
8.197
357
87.06
696
8.500
- 8.999
5
1,848,599.37
0.23
8.570
357
89.31
654
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
The
weighted average loan rate of the mortgage loans was approximately 6.719% as
of
the cut-off date.
Maximum
Loan Rates of the Mortgage Loans
Maximum
Loan Rate (%)
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
9.500
- 9.999
1,340
$
695,581,718.70
86.79
%
6.697
%
357
75.86
%
701
10.500
- 10.999
3
1,190,164.89
0.15
7.182
355
81.14
699
11.000
- 11.499
8
2,947,731.79
0.37
8.230
357
88.64
672
12.000
- 12.499
1
529,999.48
0.07
8.368
356
85.69
628
12.500
- 12.999
221
99,885,948.39
12.46
6.818
375
76.67
722
19.500
- 19.999
3
1,338,279.09
0.17
6.543
359
68.85
716
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
The
weighted average maximum loan rate of the mortgage loans was approximately
10.292% as of the cut-off date.
S-30
Minimum
Loan Rates of the Mortgage Loans
Minimum
Loan Rate (%)
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
1.000
- 1.499
3
$
2,029,576.81
0.25
%
5.386
%
357
71.69
%
664
1.500
- 1.999
5
2,709,399.81
0.34
5.894
356
80.00
687
2.000
- 2.499
56
36,373,743.79
4.54
5.907
359
75.22
715
2.500
- 2.999
446
245,968,653.79
30.69
6.419
357
74.82
711
3.000
- 3.499
786
396,261,711.96
49.44
6.818
359
76.12
700
3.500
- 3.999
218
93,693,081.29
11.69
7.137
367
76.96
693
4.000
- 4.499
35
13,936,745.89
1.74
7.730
359
80.95
717
4.500
- 4.999
26
10,053,868.28
1.25
8.250
357
87.23
694
5.000
- 5.499
1
447,060.72
0.06
8.618
357
90.00
667
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
The
weighted average minimum loan rate of the mortgage loans was approximately
3.142% as of the cut-off date.
Gross
Margins of the Mortgage Loans
Gross
Margin (%)
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
1.000
- 1.499
2
$
1,485,788.87
0.19
%
4.724
%
357
72.32
%
662
1.500
- 1.999
4
2,028,679.80
0.25
5.500
356
80.00
703
2.000
- 2.499
56
36,373,743.79
4.54
5.907
359
75.22
715
2.500
- 2.999
446
245,968,653.79
30.69
6.419
357
74.82
711
3.000
- 3.499
787
396,942,431.97
49.53
6.818
359
76.12
700
3.500
- 3.999
219
94,236,869.23
11.76
7.138
367
76.92
693
4.000
- 4.499
35
13,936,745.89
1.74
7.730
359
80.95
717
4.500
- 4.999
26
10,053,868.28
1.25
8.250
357
87.23
694
5.000
- 5.499
1
447,060.72
0.06
8.618
357
90.00
667
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
The
weighted average gross margin of the mortgage loans was approximately 3.145%
as
of the cut-off date.
S-31
Rate
Adjustment Frequencies of the Mortgage Loans
Rate
Adjustment Frequency (Months)
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
1
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
Months
to Next Loan Rate Adjustment Date of the Mortgage Loans
Months
to Next Loan Rate Adjustment Date
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
1
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
Months
to Next Payment Adjustment Date of the Mortgage Loans
Months
to Next Payment Adjustment Date
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
4
1
$
340,141.30
0.04
%
6.943
%
351
80.00
%
720
5
2
910,699.70
0.11
6.110
352
85.64
743
6
4
2,566,975.19
0.32
6.674
353
71.53
691
7
13
6,563,756.11
0.82
6.524
354
79.64
709
8
27
13,637,655.06
1.70
6.896
355
79.75
700
9
138
66,448,103.14
8.29
6.885
357
77.66
701
10
804
419,204,466.22
52.30
6.743
357
75.95
702
11
397
205,991,027.74
25.70
6.580
359
75.01
698
12
181
81,738,219.82
10.20
6.894
374
76.74
722
13
2
1,180,800.00
0.15
1.361
360
76.80
745
23
1
439,058.10
0.05
6.500
358
80.00
718
24
2
475,907.25
0.06
6.589
359
77.08
769
60
4
1,977,032.71
0.25
6.489
359
68.61
720
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
S-32
Credit
Scores of the Mortgage Loans
Credit
Score
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
550
- 574
1
$
2,002,496.50
0.25
%
6.493
%
357
71.43
%
573
575
- 599
2
661,733.79
0.08
6.489
358
78.77
593
600
- 624
26
11,498,074.61
1.43
6.675
357
74.40
621
625
- 649
155
71,254,785.74
8.89
6.812
357
74.59
638
650
- 674
271
131,357,134.37
16.39
6.848
358
76.43
664
675
- 699
392
201,771,737.48
25.18
6.720
359
77.42
688
700
and above
729
382,927,879.85
47.78
6.661
360
75.46
740
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
The
weighted average credit score of the mortgage loans was approximately 703 as
of
the cut-off date.
Original
Prepayment Penalty Periods of the Mortgage Loans
Original
Prepayment Penalty Period (months)
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
N/A
46
$
22,316,213.93
2.78
%
6.765
%
364
76.02
%
725
12
704
386,832,390.94
48.27
6.647
359
75.87
706
24
25
11,414,456.90
1.42
6.883
384
73.82
715
36
801
380,910,780.57
47.53
6.786
359
76.22
699
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
Negative
Amortization Limits of the Mortgage Loans
Negative
Amortization Limit (%)
Number
of
Mortgage
Loans
Stated
Principal
Balance
as
of the
Cut-off
Date
%
of Aggregate Stated Principal Balance as of the
Cut-off
Date
Weighted
Average Gross Coupon
Weighted
Average Stated Remaining Term
Weighted
Average
Original
Loan-to-Value
Weighted
Average Credit Score
110
240
$
109,743,686.79
13.69
%
6.747
%
373
76.57
%
721
115
1,336
691,730,155.55
86.31
6.715
357
75.92
700
Total
1,576
$
801,473,842.34
100.00
%
6.719
%
359
76.01
%
703
S-33
Additional
Information
The
description in this prospectus supplement of the mortgage loans is based upon
the mortgage pool as constituted at the close of business on the cut-off date,
adjusted to reflect scheduled payments of principal due on those mortgage loans
on or prior to the cut-off date and any amounts of deferred interest added
to
the Stated Principal Balances of those mortgage loans due to negative
amortization. The depositor will file a current report on Form 8-K, together
with the pooling agreement and other material transaction documents, with the
Securities and Exchange Commission (the
“Commission”) after
the
initial issuance of the offered certificates.
The
issuing entity’s annual reports on Form 10-K (including reports of assessment of
compliance with the AB Servicing Criteria, attestation reports, and statements
of compliance, discussed in “Servicing and Administration of the Trust
Fund—Evidence as to Compliance” in this prospectus supplement), periodic
distribution reports on Form 10-D, current reports on Form 8-K and amendments
to
those reports prepared and filed by the securities administrator, together
with
such other reports to certificateholders or information about the certificates
as shall have been filed by the securities administrator with the Commission
will be posted on the securities administrator’s internet website as soon as
reasonably practicable after they have been electronically filed with, or
furnished to, the Commission. The address of the website is: https:/www.ctslink.com.
Static
Pool Information
Certain
static pool information may be found at www.rbsgcregab.com
in a pdf
file entitled “Luminent 2006-2 Static Pool Historical Deal Information.” Access
to this internet address is unrestricted and free of charge. Information
provided through this internet address will not be deemed to be a part of this
prospectus supplement or the registration statement for the certificates offered
hereby.
Various
factors may affect the prepayment, delinquency and loss performance of the
mortgage loans over time. The various mortgage loan groups for which performance
information is shown at the above internet address had initial characteristics
that differed, and may have differed in ways that were material to the
performance of those mortgage groups. These differing characteristics include,
among others, product type, credit quality, geographic concentration, originator
concentration, servicer concentration, average principal balance, weighted
average interest rate, weighted average loan-to-value ratio, weighted average
term to maturity, and the presence or absence of prepayment penalties. In
particular, prospective investors should note that certain of the mortgage
groups for which performance information is shown consist in whole or in part
of
loans that have negative amortization features, while other mortgage groups
do
not include negative amortization loans. We do not make any representation,
and
you should not assume, that the performance information shown at the above
internet address is in any way indicative of the performance of the mortgage
loans in the trust fund.
The
Depositor
Greenwich
Capital Acceptance, Inc. is a Delaware corporation organized on April 23, 1987,
for the limited purpose of acquiring, owning and transferring mortgage assets
and selling interests in those assets or bonds secured by those assets. The
depositor is a limited purpose finance subsidiary of Greenwich Capital Holdings,
Inc. and an affiliate of Greenwich Capital Markets, Inc. (“GCM”). GCM is a
registered broker-dealer engaged in the U.S. government securities market and
related capital markets business. The depositor maintains its principal office
at 600 Steamboat Road, Greenwich, Connecticut06830 and its telephone number
is
(203) 625-2700.
The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The
depositor has been engaged in the securitization of residential mortgage loans
since 1987. The depositor is generally engaged in the business of serving as
depositor of one or more trusts that may authorize, issue, sell and deliver
bonds or other evidences of indebtedness or certificates of interest that are
secured by a pledge or other assignment of, or represent an interest in,
residential mortgage loans. The depositor acquires residential mortgage loans
from affiliated and non-affiliated entities. If acquiring and engaging in the
securitization of mortgage loans by its affiliated entity, Greenwich Capital
Financial Products, Inc., mortgage loans are originated by third-party
originators according to their respective underwriting guidelines.
S-34
From
January 2000 through and including December 2005, the depositor has securitized
mortgage loans with an aggregate principal balance of approximately $55.3
billion. During the calendar years 2000, 2001, 2002, 2003, 2004 and 2005, the
depositor securitized mortgage loans with an aggregate principal balance of
approximately $1.2, $1.6, $1.3, $3.9, $15.7 and $31.6 billion, respectively.
Such issuances have included fixed and adjustable rate residential mortgage
loans of prime, alt-A and sub-prime residential mortgage loans originated by
various third parties.
The
depositor has filed with the Commission a registration statement under the
Securities Act of 1933, as amended, with respect to the offered certificates
(Registration No. 333-127352).
After
the
issuance of the certificates, the depositor will be required to perform certain
actions on a continual basis, including but not limited to:
·
giving
prompt written notice to the other parties to the pooling agreement
upon
the discovery by the depositor of a breach of any of the representations
and warranties made by a seller in the mortgage loan purchase agreement
in
respect of any mortgage loan that materially adversely affects such
mortgage loan or the interests of the related certificateholders
in such
mortgage loan;
·
appointing
a successor trustee in the event the trustee resigns, is removed
or
becomes ineligible to continue serving in such capacity under the
pooling
agreement; and
·
preparing
and filing any reports required under the Exchange
Act.
Generally,
however, it is expected that some of the above functions will be performed
by
the depositor’s agents, the securities administrator or the trustee in
accordance with the pooling agreement or mortgage loan purchase agreement,
as
applicable.
The
Sponsor and the Seller
Luminent
Mortgage Capital, Inc. will be the sponsor of the transaction (the “sponsor”)
and will sell the Mortgage Loans through Maia Mortgage Finance
Statutory Trust (the “seller”) indirectly to the issuing entity.
The sponsor is a Maryland corporation which was incorporated in April 2003
and commenced operations in June 2003. Its common stock is traded on the New
York Stock Exchange, or NYSE, under the trading symbol “LUM”. The
seller is a Maryland business trust and a wholly-owned indirect subsidiary
of
the sponsor.
The
sponsor has elected to be taxed as a Real Estate Investment Trust, or REIT,
under the Internal Revenue Code of 1986, as amended, and its business
objective is to invest primarily in mortgage-backed securities and other
mortgage-related assets, to finance its investments in the capital markets
and to use the related financing to generate an attractive return on its
stockholders’ equity. The sponsor manages all of its mortgage-related assets
other than its agency mortgage securities and its more highly-rated
mortgage-backed securities, which are managed by Seneca Capital Management
LLC,
or Seneca, pursuant to a management agreement between Seneca and the
sponsor.
The
purpose of the sponsor’s asset-backed securities transactions is to use
securitization as a means of permanently financing mortgage loan assets in
which
the sponsor invests. The sponsor has been engaged in the securitization of
assets since November 2005 and has securitized assets of the type included
in
the current transaction only as described in the table below. Consequently,
the sponsor has limited experience in securitizing assets.
Prior
Securitized Pools of the Sponsor for the Current Asset
Type
The
sponsor purchases mortgage loan assets in which it wishes to invest from
originators or others in the secondary market, directly or indirectly through
its affiliates, and finances those assets for an interim period
pending their securitization. The sponsor determines whether it wishes to invest
in particular mortgage loan assets by analyzing the pricing, terms and credit
quality of those assets, the cost and availability of
hedges and financing for those assets, the documentation, underwriting,
origination, servicing and performance of those assets (including delinquencies
and prepayments) and the other information available with
respect to those assets. The sponsor determines whether to securitize the
mortgage loan assets in which it invests on the basis of this analysis and
by
evaluating the structure, terms, pricing and other features of a
prospective asset-backed securities transaction. The sponsor does not
originate any of the mortgage loan assets that it securitizes.
In
its
asset-backed securities transactions, the sponsor participates in structuring
the transactions and pools the mortgage loan assets to be securitized. The
sponsor also makes certain representations and warranties as to those assets
for
the period during which they were held by the sponsor, and it agrees either
to
cure a breach of any such representation or warranty having a material adverse
effect or to repurchase the mortgage loan asset as to which such breach
occurred. The sponsor does not service the mortgage loan assets in its
asset-backed securities transactions, but under the terms of those transactions,
the sponsor, directly or indirectly through its affiliates, typically is
entitled to special foreclosure rights similar to those described under
“The Pooling Agreement¾Special
Foreclosure Rights” in this prospectus supplement. Additionally, the sponsor
typically receives and holds, directly or indirectly through its affiliates,
the
entire interest in one or more of the most subordinated classes of
securities issued in its asset-backed securities transactions.
The
sponsor is not aware of any prior securitization initiated by it which has
defaulted or experienced an early amortization triggering event.
Affiliations
and Relationships
The
depositor and Greenwich Capital Markets, Inc. are all affiliates of each other
and have the following ownership structure:
·
The
depositor, Greenwich Capital Acceptance, Inc., is a wholly owned,
direct
subsidiary of Greenwich Capital Holdings, Inc.
·
One
of the underwriters, Greenwich Capital Markets, Inc., is a wholly
owned,
direct subsidiary of Greenwich Capital Holdings,
Inc.
·
Greenwich
Capital Holdings, Inc. is a wholly owned subsidiary of The Royal
Bank of
Scotland Group plc.
·
The
seller, Maia Mortgage Finance Statutory Trust, is an indirect wholly
owned
subsidiary of the sponsor, Luminent Mortgage Capital, Inc.
·
One
of the originators, Countrywide Home Loans, Inc., is an affiliate
of one
of the servicers, Countrywide Home Loans Servicing
LP.
The
mortgage loans originated by Countrywide that will be included in the trust
fund
were initially acquired from Countrywide by Greenwich Capital Financial
Products, Inc., an affiliate of the depositor and of one of the underwriters
and
a wholly owned direct subsidiary of Greenwich Capital Holdings, Inc., and
subsequently sold to the seller in January 2006.
S-36
Mortgage
Loan Origination
The
Originators
Approximately
87.42% and 12.58% of the mortgage loans which were sold to the seller were
originated by Countrywide Home Loans, Inc. and Paul Financial, LLC,
respectively. The information set forth in this section contains a brief
description of the underwriting guidelines used for mortgage loans originated
by
Countrywide.
Countrywide
Home Loans, Inc.
Countrywide
Home Loans is a New York corporation and a direct wholly owned subsidiary of
Countrywide Financial Corporation, a Delaware corporation (“Countrywide
Financial”).
The
principal executive offices of Countrywide Home Loans are located at 4500 Park
Granada, Calabasas, California91302. Countrywide Home Loans is engaged
primarily in the mortgage banking business, and as part of that business,
originates, purchases, sells and services mortgage loans. Countrywide Home
Loans
originates mortgage loans through a retail branch system and through mortgage
loan brokers and correspondents nationwide. Mortgage loans originated by
Countrywide Home Loans are principally first-lien, fixed or adjustable rate
mortgage loans secured by single-family residences.
Except
as
otherwise indicated, reference in the remainder of this section to “Countrywide
Home Loans”
should
be read to include Countrywide Home Loans and its consolidated subsidiaries,
including Countrywide Servicing. Countrywide Home Loans services substantially
all of the mortgage loans it originates or acquires. In addition, Countrywide
Home Loans has purchased in bulk the rights to service mortgage loans originated
by other lenders. Countrywide Home Loans has in the past and may in the future
sell to mortgage bankers and other institutions a portion of its portfolio
of
loan servicing rights. As of December 31, 2002, December 31, 2003, December31,2004 and December 31, 2005, Countrywide Home Loans provided servicing for
mortgage loans with an aggregate principal balance of approximately $452.405
billion, $644.855 billion, $838.322 billion and $1,111.090 billion,
respectively, substantially all of which were being serviced for unaffiliated
persons.
Mortgage
Loan Production
The
following table sets forth, by number and dollar amount of mortgage loans,
Countrywide Home Loans’ residential mortgage loan production for the periods
indicated.
Percentage
of total loan production based on dollar
volume.
Underwriting
Standards
Note:
Loan-to-Value Ratio as used in this section “—Underwriting Standards” has the
following meaning:
The
“Loan-to-Value
Ratio”
of
a
mortgage loan at any given time is a fraction, expressed as a percentage, the
numerator of which is the principal balance of the related mortgage loan at
the
date of determination and the denominator of which is
·
in
the case of a purchase, the lesser of the selling price of the mortgaged
property or its appraised value at the time of sale
or
·
in
the case of a refinance, the appraised value of the mortgaged property
at
the time of the refinance, except in the case of a mortgage loan
underwritten pursuant to Countrywide Home Loans’ Streamlined Documentation
Program as described under “—Underwriting Standards—General” in this
prospectus supplement.
With
respect to mortgage loans originated pursuant to Countrywide Home Loans’
Streamlined Documentation Program,
·
if
the loan-to-value ratio at the time of the origination of the mortgage
loan being refinanced was 80% or less and the loan amount of the
new loan
being originated is $650,000 or less, then the “Loan-to-Value Ratio” will
be the ratio of the principal amount of the new mortgage loan being
originated divided by the appraised value of the related mortgaged
property at the time of the origination of the Mortgage Loan being
refinanced, as reconfirmed by Countrywide Home Loans using an automated
property valuation system; or
·
if
the loan-to-value ratio at the time of the origination of the mortgage
loan being refinanced was greater than 80% or the loan amount of
the new
loan being originated is greater than $650,000, then the “Loan-to-Value
Ratio” will be the ratio of the principal amount of the new mortgage loan
being originated divided by the appraised value of the related mortgaged
property as determined by an appraisal obtained by Countrywide Home
Loans
at the time of the origination of the new mortgage
loan.
S-38
No
assurance can be given that the value of any mortgaged property has remained
or
will remain at the level that existed on the appraisal or sales date. If
residential real estate values generally or in a particular geographic area
decline, the Loan-to-Value Ratios might not be a reliable indicator of the
rates
of delinquencies, foreclosures and losses that could occur with respect to
the
mortgage loans.
General
Countrywide
Home Loans, Inc., a New York corporation (“Countrywide
Home Loans”),
has
been originating mortgage loans since 1969. Countrywide Home Loans’ underwriting
standards are applied in accordance with applicable federal and state laws
and
regulations.
As
part
of its evaluation of potential borrowers, Countrywide Home Loans generally
requires a description of income. If required by its underwriting guidelines,
Countrywide Home Loans obtains employment verification providing current and
historical income information and/or a telephonic employment confirmation.
Such
employment verification may be obtained, either through analysis of the
prospective borrower’s recent pay stub and/or W-2 forms for the most recent two
years, relevant portions of the most recent two years’ tax returns, or from the
prospective borrower’s employer, wherein the employer reports the length of
employment and current salary with that organization. Self-employed prospective
borrowers generally are required to submit relevant portions of their federal
tax returns for the past two years.
In
assessing a prospective borrower’s creditworthiness, Countrywide Home Loans may
use FICO Credit Scores. “FICO
Credit Scores”
are
statistical credit scores designed to assess a borrower’s creditworthiness and
likelihood to default on a consumer obligation over a two-year period based
on a
borrower’s credit history. FICO Credit Scores were not developed to predict the
likelihood of default on mortgage loans and, accordingly, may not be indicative
of the ability of a borrower to repay its mortgage loan. FICO Credit Scores
range from approximately 250 to approximately 900, with higher scores indicating
an individual with a more favorable credit history compared to an individual
with a lower score. Under Countrywide Home Loans’ underwriting guidelines,
borrowers possessing higher FICO Credit Scores, which indicate a more favorable
credit history and who give Countrywide Home Loans the right to obtain the
tax
returns they filed for the preceding two years, may be eligible for Countrywide
Home Loans’ processing program (the “Preferred
Processing Program”).
Periodically
the data used by Countrywide Home Loans to complete the underwriting analysis
may be obtained by a third party, particularly for mortgage loans originated
through a loan correspondent or mortgage broker. In those instances, the initial
determination as to whether a mortgage loan complies with Countrywide Home
Loans’ underwriting guidelines may be made by an independent company hired to
perform underwriting services on behalf of Countrywide Home Loans, the loan
correspondent or mortgage broker. In addition, Countrywide Home Loans may
acquire mortgage loans from approved correspondent lenders under a program
pursuant to which Countrywide Home Loans delegates to the correspondent the
obligation to underwrite the mortgage loans to Countrywide Home Loans’
standards. Under these circumstances, the underwriting of a mortgage loan may
not have been reviewed by Countrywide Home Loans before acquisition of the
mortgage loan and the correspondent represents that Countrywide Home Loans’
underwriting standards have been met. After purchasing mortgage loans under
those circumstances, Countrywide Home Loans conducts a quality control review
of
a sample of the mortgage loans. The number of loans reviewed in the quality
control process varies based on a variety of factors, including Countrywide
Home
Loans’ prior experience with the correspondent lender and the results of the
quality control review process itself.
Countrywide
Home Loans’ underwriting standards are applied by or on behalf of Countrywide
Home Loans to evaluate the prospective borrower’s credit standing and repayment
ability and the value and adequacy of the mortgaged property as collateral.
Under those standards, a prospective borrower must generally demonstrate that
the ratio of the borrower’s monthly housing expenses (including principal and
interest on the proposed mortgage loan and, as applicable, the related monthly
portion of property taxes, hazard insurance and mortgage insurance) to the
borrower’s monthly gross income and the ratio of total monthly debt to the
monthly gross income (the “debt-to-income” ratios) are within acceptable limits.
If the prospective borrower has applied for an interest-only Six-Month LIBOR
Loan, the interest component of the monthly mortgage expense is calculated
based
upon the initial interest rate plus 2%. If the prospective borrower has applied
for a 3/1 Mortgage Loan or 3/27 Mortgage Loan and the Loan-to-Value Ratio is
less than or equal to 75%, the interest component of the monthly mortgage
expense is calculated based on the initial loan interest rate; if the
Loan-to-Value Ratio exceeds 75%, the interest component of the monthly mortgage
expense calculation is based on the initial loan interest rate plus 2%. If
the
prospective borrower has applied for a 5/1 Mortgage Loan, a 5/25 Mortgage Loan,
a 7/1 Mortgage Loan, a 7/23 Mortgage Loan, a 10/1 Mortgage Loan or a 10/20
Mortgage Loan, the interest component of the monthly mortgage expense is
calculated based on the initial loan interest rate. If the prospective borrower
has applied for a Negative Amortization Loan, the interest component of the
monthly housing expense calculation is based upon the greater of 4.25% and
the
fully indexed mortgage note rate at the time of loan application. The maximum
acceptable debt-to-income ratio, which is determined on a loan-by-loan basis
varies depending on a number of underwriting criteria, including the
Loan-to-Value Ratio, loan purpose, loan amount and credit history of the
borrower. In addition to meeting the debt-to-income ratio guidelines, each
prospective borrower is required to have sufficient cash resources to pay the
down payment and closing costs. Exceptions to Countrywide Home Loans’
underwriting guidelines may be made if compensating factors are demonstrated
by
a prospective borrower. Additionally, Countrywide Home Loans does permit its
adjustable rate mortgage loans, hybrid adjustable rate mortgage loans and
negative amortization mortgage loans to be assumed by a purchaser of the related
mortgaged property, so long as the mortgage loan is in its adjustable rate
period (except for a 3/1 Mortgage Loan, which may be assumed during the fixed
rate period) and the related purchaser meets Countrywide Home Loans’
underwriting standards that are then in effect.
S-39
Countrywide
Home Loans may provide secondary financing to a borrower contemporaneously
with
the origination of a mortgage loan, subject to the following limitations: the
Loan-to-Value Ratio of the senior (i.e., first) lien may not exceed 80% and
the
combined Loan-to-Value Ratio may not exceed 100%. Countrywide Home Loans’
underwriting guidelines do not prohibit or otherwise restrict a borrower from
obtaining secondary financing from lenders other than Countrywide Home Loans,
whether at origination of the mortgage loan or thereafter.
The
nature of the information that a borrower is required to disclose and whether
the information is verified depends, in part, on the documentation program
used
in the origination process. In general under the Full Documentation Loan Program
(the “Full
Documentation Program”),
each
prospective borrower is required to complete an application which includes
information with respect to the applicant’s assets, liabilities, income, credit
history, employment history and other personal information. Self-employed
individuals are generally required to submit their two most recent federal
income tax returns. Under the Full Documentation Program, the underwriter
verifies the information contained in the application relating to employment,
income, assets and mortgages.
A
prospective borrower may be eligible for a loan approval process that limits
or
eliminates Countrywide Home Loans’ standard disclosure or verification
requirements or both. Countrywide Home Loans offers the following documentation
programs as alternatives to its Full Documentation Program: an Alternative
Documentation Loan Program (the “Alternative
Documentation Program”),
a
Reduced Documentation Loan Program (the “Reduced
Documentation Program”),
a
CLUES Plus Documentation Loan Program (the “CLUES
Plus Documentation Program”),
a No
Income/No Asset Documentation Loan Program (the “No
Income/No Asset Documentation Program”),
a
Stated Income/Stated Asset Documentation Loan Program (the “Stated
Income/Stated Asset Documentation Program”)
and a
Streamlined Documentation Loan Program (the “Streamlined
Documentation Program”).
For
all
mortgage loans originated or acquired by Countrywide Home Loans, Countrywide
Home Loans obtains a credit report relating to the applicant from a credit
reporting company. The credit report typically contains information relating
to
such matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcy, dispossession,
suits or judgments. All adverse information in the credit report is required
to
be explained by the prospective borrower to the satisfaction of the lending
officer.
Except
with respect to the mortgage loans originated pursuant to its Streamlined
Documentation Program, whose values were confirmed with a Fannie Mae proprietary
automated valuation model, Countrywide Home Loans obtains appraisals from
independent appraisers or appraisal services for properties that are to secure
mortgage loans. The appraisers inspect and appraise the proposed mortgaged
property and verify that the property is in acceptable condition. Following
each
appraisal, the appraiser prepares a report which includes a market data analysis
based on recent sales of comparable homes in the area and, when deemed
appropriate, a replacement cost analysis based on the current cost of
constructing a similar home. All appraisals are required to conform to Fannie
Mae or Freddie Mac appraisal standards then in effect.
S-40
Countrywide
Home Loans requires title insurance on all of its mortgage loans secured by
first liens on real property. Countrywide Home Loans also requires that fire
and
extended coverage casualty insurance be maintained on the mortgaged property
in
an amount at least equal to the principal balance of the related single-family
mortgage loan or the replacement cost of the mortgaged property, whichever
is
less.
In
addition to Countrywide Home Loans’ standard underwriting guidelines (the
“Standard
Underwriting Guidelines”),
which
are consistent in many respects with the guidelines applied to mortgage loans
purchased by Fannie Mae and Freddie Mac, Countrywide Home Loans uses
underwriting guidelines featuring expanded criteria (the “Expanded
Underwriting Guidelines”).
The
Standard Underwriting Guidelines and the Expanded Underwriting Guidelines are
described further under the next two headings.
Standard
Underwriting Guidelines
Countrywide
Home Loans’ Standard Underwriting Guidelines for mortgage loans with
non-conforming original principal balances generally allow Loan-to-Value Ratios
at origination of up to 95% for purchase money or rate and term refinance
mortgage loans with original principal balances of up to $400,000, up to 90%
for
mortgage loans with original principal balances of up to $650,000, up to 75%
for
mortgage loans with original principal balances of up to $1,000,000, up to
65%
for mortgage loans with original principal balances of up to $1,500,000, and
up
to 60% for mortgage loans with original principal balances of up to
$2,000,000.
For
cash-out refinance mortgage loans, Countrywide Home Loans’ Standard Underwriting
Guidelines for mortgage loans with non-conforming original principal balances
generally allow Loan-to-Value Ratios at origination of up to 75% and original
principal balances ranging up to $650,000. The maximum “cash-out” amount
permitted is $200,000 and is based in part on the original Loan-to-Value Ratio
of the related mortgage loan. As used in this prospectus supplement, a refinance
mortgage loan is classified as a cash-out refinance mortgage loan by Countrywide
Home Loans if the borrower retains an amount greater than the lesser of 2%
of
the entire amount of the proceeds from the refinancing of the existing loan
or
$2,000.
Countrywide
Home Loans’ Standard Underwriting Guidelines for conforming balance mortgage
loans generally allow Loan-to-Value Ratios at origination on owner occupied
properties of up to 95% on 1 unit properties with principal balances up to
$417,000 ($625,500 in Alaska and Hawaii) and 2 unit properties with principal
balances up to $533,850 ($800,775 in Alaska and Hawaii) and up to 80% on 3
unit
properties with principal balances of up to $645,300 ($967,950 in Alaska and
Hawaii) and 4 unit properties with principal balances of up to $801,950
($1,202,925 in Alaska and Hawaii). On second homes, Countrywide Home Loans’
Standard Underwriting Guidelines for conforming balance mortgage loans generally
allow Loan-to-Value Ratios at origination of up to 95% on 1 unit properties
with
principal balances up to $417,000 ($625,500 in Alaska and Hawaii). Countrywide
Home Loans’ Standard Underwriting Guidelines for conforming balance mortgage
loans generally allow Loan-to-Value Ratios at origination on investment
properties of up to 90% on 1 unit properties with principal balances up to
$417,000 ($625,500 in Alaska and Hawaii) and 2 unit properties with principal
balances up to $533,850 ($800,775 in Alaska and Hawaii) and up to 75% on 3
unit
properties with principal balances of up to $645,300 ($967,950 in Alaska and
Hawaii) and 4 unit properties with principal balances of up to $801,950
($1,202,925 in Alaska and Hawaii).
Under
its
Standard Underwriting Guidelines, Countrywide Home Loans generally permits
a
debt-to-income ratio based on the borrower’s monthly housing expenses of up to
33% and a debt-to-income ratio based on the borrower’s total monthly debt of up
to 38%.
In
connection with the Standard Underwriting Guidelines, Countrywide Home Loans
originates or acquires mortgage loans under the Full Documentation Program,
the
Alternative Documentation Program, the Reduced Documentation Program, the CLUES
Plus Documentation Program or the Streamlined Documentation
Program.
S-41
The
Alternative Documentation Program permits a borrower to provide W-2 forms
instead of tax returns covering the most recent two years, permits bank
statements in lieu of verification of deposits and permits alternative methods
of employment verification.
Under
the
Reduced Documentation Program, some underwriting documentation concerning
income, employment and asset verification is waived. Countrywide Home Loans
obtains from a prospective borrower either a verification of deposit or bank
statements for the two-month period immediately before the date of the mortgage
loan application or verbal verification of employment. Because information
relating to a prospective borrower’s income and employment is not verified, the
borrower’s debt-to-income ratios are calculated based on the information
provided by the borrower in the mortgage loan application. The maximum
Loan-to-Value Ratio, including secondary financing, ranges up to
75%.
The
CLUES
Plus Documentation Program permits the verification of employment by alternative
means, if necessary, including verbal verification of employment or reviewing
paycheck stubs covering the pay period immediately prior to the date of the
mortgage loan application. To verify the borrower’s assets and the sufficiency
of the borrower’s funds for closing, Countrywide Home Loans obtains deposit or
bank account statements from each prospective borrower for the month immediately
prior to the date of the mortgage loan application. Under the CLUES Plus
Documentation Program, the maximum Loan-to-Value Ratio is 75% and property
values may be based on appraisals comprising only interior and exterior
inspections. Cash-out refinances and investor properties are not permitted
under
the CLUES Plus Documentation Program.
The
Streamlined Documentation Program is available for borrowers who are refinancing
an existing mortgage loan that was originated or acquired by Countrywide Home
Loans provided that, among other things, the mortgage loan has not been more
than 30 days delinquent in payment during the previous twelve-month period.
Under the Streamlined Documentation Program, appraisals are obtained only if
the
loan amount of the loan being refinanced had a Loan-to-Value Ratio at the time
of origination in excess of 80% or if the loan amount of the new loan being
originated is greater than $650,000. In addition, under the Streamlined
Documentation Program, a credit report is obtained but only a limited credit
review is conducted, no income or asset verification is required, and telephonic
verification of employment is permitted. The maximum Loan-to-Value Ratio under
the Streamlined Documentation Program ranges up to 95%.
Expanded
Underwriting Guidelines
Mortgage
loans which are underwritten pursuant to the Expanded Underwriting Guidelines
may have higher Loan-to-Value Ratios, higher loan amounts and different
documentation requirements than those associated with the Standard Underwriting
Guidelines. The Expanded Underwriting Guidelines also permit higher
debt-to-income ratios than mortgage loans underwritten pursuant to the Standard
Underwriting Guidelines.
Countrywide
Home Loans’ Expanded Underwriting Guidelines for mortgage loans with
non-conforming original principal balances generally allow Loan-to-Value Ratios
at origination of up to 95% for purchase money or rate and term refinance
mortgage loans with original principal balances of up to $400,000, up to 90%
for
mortgage loans with original principal balances of up to $650,000, up to 80%
for
mortgage loans with original principal balances of up to $1,000,000, up to
75%
for mortgage loans with original principal balances of up to $1,500,000 and
up
to 70% for mortgage loans with original principal balances of up to $3,000,000.
Under certain circumstances, however, Countrywide Home Loans’ Expanded
Underwriting Guidelines allow for Loan-to-Value Ratios of up to 100% for
purchase money mortgage loans with original principal balances of up to
$375,000.
For
cash-out refinance mortgage loans, Countrywide Home Loans’ Expanded Underwriting
Guidelines for mortgage loans with non-conforming original principal balances
generally allow Loan-to-Value Ratios at origination of up to 90% and original
principal balances ranging up to $1,500,000. The maximum “cash-out” amount
permitted is $400,000 and is based in part on the original Loan-to-Value Ratio
of the related mortgage loan.
Countrywide
Home Loans’ Expanded Underwriting Guidelines for conforming balance mortgage
loans generally allow Loan-to-Value Ratios at origination on owner occupied
properties of up to 100% on 1 unit properties with principal balances up to
$417,000 ($625,500 in Alaska and Hawaii) and 2 unit properties with principal
balances up to $533,850 ($800,775 in Alaska and Hawaii) and up to 85% on 3
unit
properties with principal balances of up to $645,300 ($967,950 in Alaska and
Hawaii) and 4 unit properties with principal balances of up to $801,950
($1,202,925 in Alaska and Hawaii). On second homes, Countrywide Home Loans’
Expanded Underwriting Guidelines for conforming balance mortgage loans generally
allow Loan-to-Value Ratios at origination of up to 95% on 1 unit properties
with
principal balances up to $417,000 ($625,500 in Alaska and Hawaii). Countrywide
Home Loans’ Expanded Underwriting Guidelines for conforming balance mortgage
loans generally allow Loan-to-Value Ratios at origination on investment
properties of up to 90% on 1 unit properties with principal balances up to
$417,000 ($625,500 in Alaska and Hawaii) and 2 unit properties with principal
balances up to $533,850 ($800,775 in Alaska and Hawaii) and up to 85% on 3
unit
properties with principal balances of up to $645,300 ($967,950 in Alaska and
Hawaii) and 4 unit properties with principal balances of up to $801,950
($1,202,925 in Alaska and Hawaii).
S-42
Under
its
Expanded Underwriting Guidelines, Countrywide Home Loans generally permits
a
debt-to-income ratio based on the borrower’s monthly housing expenses of up to
36% and a debt-to-income ratio based on the borrower’s total monthly debt of up
to 40%; provided, however, that if the Loan-to-Value Ratio exceeds 80%, the
maximum permitted debt-to-income ratios are 33% and 38%,
respectively.
In
connection with the Expanded Underwriting Guidelines, Countrywide Home Loans
originates or acquires mortgage loans under the Full Documentation Program,
the
Alternative Documentation Program, the Reduced Documentation Loan Program,
the
No Income/No Asset Documentation Program and the Stated Income/Stated Asset
Documentation Program. Neither the No Income/No Asset Documentation Program
nor
the Stated Income/Stated Asset Documentation Program is available under the
Standard Underwriting Guidelines.
The
same
documentation and verification requirements apply to mortgage loans documented
under the Alternative Documentation Program regardless of whether the loan
has
been underwritten under the Expanded Underwriting Guidelines or the Standard
Underwriting Guidelines. However, under the Alternative Documentation Program,
mortgage loans that have been underwritten pursuant to the Expanded Underwriting
Guidelines may have higher loan balances and Loan-to-Value Ratios than those
permitted under the Standard Underwriting Guidelines.
Similarly,
the same documentation and verification requirements apply to mortgage loans
documented under the Reduced Documentation Program regardless of whether the
loan has been underwritten under the Expanded Underwriting Guidelines or the
Standard Underwriting Guidelines. However, under the Reduced Documentation
Program, higher loan balances and Loan-to-Value Ratios are permitted for
mortgage loans underwritten pursuant to the Expanded Underwriting Guidelines
than those permitted under the Standard Underwriting Guidelines. The maximum
Loan-to-Value Ratio, including secondary financing, ranges up to 90%. The
borrower is not required to disclose any income information for some mortgage
loans originated under the Reduced Documentation Program, and accordingly
debt-to-income ratios are not calculated or included in the underwriting
analysis. The maximum Loan-to-Value Ratio, including secondary financing, for
those mortgage loans ranges up to 85%.
Under
the
No Income/No Asset Documentation Program, no documentation relating to a
prospective borrower’s income, employment or assets is required and therefore
debt-to-income ratios are not calculated or included in the underwriting
analysis, or if the documentation or calculations are included in a mortgage
loan file, they are not taken into account for purposes of the underwriting
analysis. This program is limited to borrowers with excellent credit histories.
Under the No Income/No Asset Documentation Program, the maximum Loan-to-Value
Ratio, including secondary financing, ranges up to 95%. Mortgage loans
originated under the No Income/No Asset Documentation Program are generally
eligible for sale to Fannie Mae or Freddie Mac.
Under
the
Stated Income/Stated Asset Documentation Program, the mortgage loan application
is reviewed to determine that the stated income is reasonable for the borrower’s
employment and that the stated assets are consistent with the borrower’s income.
The Stated Income/Stated Asset Documentation Program permits maximum
Loan-to-Value Ratios up to 90%. Mortgage loans originated under the Stated
Income/Stated Asset Documentation Program are generally eligible for sale to
Fannie Mae or Freddie Mac.
S-43
The
Master Servicer
Wells
Fargo Bank, N.A. (“Wells Fargo Bank”) will act as master servicer under the
pooling agreement. Wells Fargo Bank is a national banking association and a
wholly-owned subsidiary of Wells Fargo & Company. A diversified financial
services company with approximately $397 billion in assets, 24 million customers
and 143,000 employees, Wells Fargo & Company is a U.S. bank holding company,
providing banking, insurance, trust, mortgage and consumer finance services
throughout the United States and internationally. Wells Fargo Bank provides
retail and commercial banking services and corporate trust, custody, securities
lending, securities transfer, cash management, investment management and other
financial and fiduciary services. The depositor, the seller and the servicers
may maintain banking and other commercial relationships with Wells Fargo Bank
and its affiliates. Wells Fargo Bank’s principal corporate trust offices are
located at 9062 Old Annapolis Road, Columbia, Maryland21045-1951 and its office
for certificate transfer services is located at Sixth Street and Marquette
Avenue, Minneapolis, Minnesota55479.
The
master servicer is responsible for the aggregation of monthly servicer reports
and remittances and for the oversight of the performance of the servicers under
the terms of their respective servicing agreements. In particular, the master
servicer independently calculates monthly loan balances based on servicer data,
compares its results to servicer loan-level reports and reconciles any
discrepancies with the servicers. The master servicer also reviews the servicing
of defaulted loans for compliance with the terms of the pooling and servicing
agreement. In addition, upon the occurrence of certain servicer events of
default under the terms of any servicing agreement, the master servicer may
be
required to enforce certain remedies on behalf of the trust fund and at the
direction of the trustee against such defaulting servicer. Wells Fargo Bank
has
been engaged in the business of master servicing since June 30, 1995. As of
November 30, 2005, Wells Fargo Bank was acting as master servicer for
approximately 940 series of residential mortgage-backed securities with an
aggregate outstanding principal balance of approximately
$428,268,679,337.
The
Servicers
Approximately
87.42% and 12.58% of the mortgage loans included in the trust fund will be
serviced by Countrywide Home Loans Servicing LP (“Countrywide Servicing” or a
“servicer”) and Paul Financial, LLC (also a “servicer”), respectively. The
servicers will have primary responsibility for servicing the mortgage loans
including, but not limited to, all collection, advancing and loan-level
reporting obligations, maintenance of escrow accounts, maintenance of insurance
and enforcement of foreclosure and other proceedings with respect to the
mortgage loans and the related mortgaged properties in accordance with the
servicing provisions of the reconstitution agreement or underlying purchase
agreement, as the case may be (such servicing provisions referred to herein
as
the servicing agreements).
The
trustee on behalf of the trust fund and the master servicer will be parties
to
or third-party beneficiaries under the servicing agreements and can enforce
the
rights of the seller and sponsor thereunder. Under each servicing agreement,
the
master servicer has the right to terminate the servicer for certain events
of
default which indicate the servicer is not performing, or is unable to perform,
its duties and obligations under the related servicing agreement.
The
information set forth in the following paragraphs has been provided by
Countrywide Servicing, as a servicer providing primary servicing for a
substantial portion of the mortgage loans in the trust fund.
Countrywide
Home Loans Servicing LP
The
principal executive offices of Countrywide Home Loans Servicing LP (“Countrywide
Servicing”) are located at 7105 Corporate Drive, Plano, Texas75024. Countrywide
Servicing is a Texas limited partnership directly owned by Countrywide GP,
Inc.
and Countrywide LP, Inc., each a Nevada corporation and a direct wholly owned
subsidiary of Countrywide Home Loans. Countrywide GP, Inc. owns a 0.1% interest
in Countrywide Servicing and is the general partner. Countrywide LP, Inc. owns
a
99.9% interest in Countrywide Servicing and is a limited partner.
S-44
Countrywide
Home Loans established Countrywide Servicing in February 2000 to service
mortgage loans originated by Countrywide Home Loans that would otherwise have
been serviced by Countrywide Home Loans. In January and February, 2001,
Countrywide Home Loans transferred to Countrywide Servicing all of its rights
and obligations relating to mortgage loans serviced on behalf of Freddie Mac
and
Fannie Mae, respectively. In October 2001, Countrywide Home Loans transferred
to
Countrywide Servicing all of its rights and obligations relating to the bulk
of
its non-agency loan servicing portfolio (other than the servicing of home equity
lines of credit), including with respect to those mortgage loans (other than
home equity lines of credit) formerly serviced by Countrywide Home Loans and
securitized by certain of its affiliates. While Countrywide Home Loans expects
to continue to directly service a portion of its loan portfolio, it is expected
that the servicing rights for most newly originated Countrywide Home Loans
mortgage loans will be transferred to Countrywide Servicing upon sale or
securitization of the related mortgage loans. Countrywide Servicing is engaged
in the business of servicing mortgage loans and will not originate or acquire
loans, an activity that will continue to be performed by Countrywide Home Loans.
In addition to acquiring mortgage servicing rights from Countrywide Home Loans,
it is expected that Countrywide Servicing will service mortgage loans for
non-Countrywide Home Loans affiliated parties as well as subservice mortgage
loans on behalf of other master servicers.
In
connection with the establishment of Countrywide Servicing, certain employees
of
Countrywide Home Loans became employees of Countrywide Servicing. Countrywide
Servicing has engaged Countrywide Home Loans as a subservicer to perform certain
loan servicing activities on its behalf.
Countrywide
Servicing is an approved mortgage loan servicer for Fannie Mae, Freddie Mac,
Ginnie Mae, HUD and VA and is licensed to service mortgage loans in each state
where a license is required. Its loan servicing activities are guaranteed by
Countrywide Financial and/or Countrywide Home Loans when required by the owner
of the mortgage loans.
Loan
Servicing
Countrywide
Servicing has established standard policies for the servicing and collection
of
mortgages. Servicing includes, but is not limited to:
(a) collecting,
aggregating and remitting mortgage loan payments;
(b) accounting
for principal and interest;
(c) holding
escrow (impound) funds for payment of taxes and insurance;
(d) making
inspections as required of the mortgaged properties;
(e) preparation
of tax related information in connection with the mortgage loans;
(f) supervision
of delinquent mortgage loans;
(g) loss
mitigation efforts;
(h) foreclosure
proceedings and, if applicable, the disposition of mortgaged properties;
and
(i) generally
administering the mortgage loans, for which it receives servicing
fees.
Billing
statements with respect to mortgage loans are mailed monthly by Countrywide
Servicing. The statement details all debits and credits and specifies the
payment due. Notice of changes in the applicable loan rate are provided by
Countrywide Servicing to the mortgagor with these statements.
S-45
Collection
Procedures
When
a
mortgagor fails to make a payment on a mortgage loan, Countrywide Servicing
attempts to cause the deficiency to be cured by corresponding with the
mortgagor. In most cases, deficiencies are cured promptly. Pursuant to
Countrywide Servicing’s servicing procedures, Countrywide Servicing generally
mails to the mortgagor a notice of intent to foreclose after the loan becomes
61
days past due (three payments due but not received) and, generally within 59
days thereafter, if the loan remains delinquent, institutes appropriate legal
action to foreclose on the mortgaged property. Foreclosure proceedings may
be
terminated if the delinquency is cured. Mortgage loans to borrowers in
bankruptcy proceedings may be restructured in accordance with law and with
a
view to maximizing recovery of the loans, including any
deficiencies.
Once
foreclosure is initiated by Countrywide Servicing, a foreclosure tracking system
is used to monitor the progress of the proceedings. The system includes state
specific parameters to monitor whether proceedings are progressing within the
time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, Countrywide Servicing determines the amount
of the foreclosure bid and whether to liquidate the mortgage loan.
If
foreclosed, the mortgaged property is sold at a public or private sale and
may
be purchased by Countrywide Servicing. After foreclosure, Countrywide Servicing
may liquidate the mortgaged property and charge-off the loan balance which
was
not recovered through liquidation proceeds.
Servicing
and charge-off policies and collection practices with respect to mortgage loans
may change over time in accordance with, among other things, Countrywide
Servicing’s business judgment, changes in the servicing portfolio and applicable
laws and regulations.
Mortgage
Loan Servicing
Servicing
of the Mortgage Loans
The
servicers will have primary responsibility for servicing the mortgage loans
as
described under “Servicing and Administration of the Trust Fund—Servicing and
Administration Responsibilities” below. The servicers will directly service the
mortgage loans under the supervision of the master servicer. The master
servicer, however, will not be ultimately responsible for the servicing of
the
mortgage loans except to the extent described herein. The trustee and the master
servicer will be parties to or third party beneficiaries under each servicing
agreement and can enforce the rights of the seller and sponsor
thereunder.
Each
servicer will use its reasonable efforts to ensure that all payments required
under the terms and provisions of the mortgage loans are collected, and will
follow collection procedures comparable to the collection procedures of prudent
mortgage lenders servicing mortgage loans for their own account, to the extent
such procedures are consistent with the servicing agreement.
If
a
servicer fails to fulfill its obligations under a servicing agreement, the
master servicer has the right to terminate such servicer as described below
under “—Servicer Default.”
The
transfer of the servicing of the mortgage loans to one or more successor
servicers at any time will be subject to the conditions set forth in the pooling
agreement and the related servicing agreement, which include, among other
things, the requirements that: (1) any such successor servicer have a net worth
of not less than $15,000,000, (2) any such successor servicer be qualified
to
service mortgage loans for Freddie Mac or Fannie Mae and (3) that each rating
agency confirm in writing that the transfer of servicing will not result in
a
qualification, withdrawal or downgrade of the then-current ratings of any of
the
certificates (without regard to the Policy (as defined below)).
S-46
Servicing
Accounts
Each
servicing agreement entered into by a servicer will provide that it will
establish a servicing account in the name of the trustee on behalf of the trust
fund and its successors and assigns. On the 18th
day of
each month, or the business day immediately before the 18th
if such
day is not a business day (the “servicer remittance date”), each servicer will
remit the amounts on deposit in the related servicing account to the master
servicer for deposit into the distribution account, which is maintained by
the
securities administrator. Each servicer is entitled to reimburse itself from
the
related servicing account for any advances made and expenses incurred, as
described below under “—Servicing Compensation and Payment of Expenses” and
“—Advances.” Each servicing account and the distribution account will consist
solely of amounts relating to the mortgage loans, and amounts on deposit therein
will not be commingled with any other funds not related to the trust
fund.
Servicing
Compensation and Payment of Expenses
Each
servicer will be paid the monthly servicing fee with respect to each mortgage
loan serviced by it calculated at the related servicing fee rate. The servicing
fees and the servicing fee rates are each as set forth under “Fees and Expenses
of the Trust Fund.”
Each
servicing fee is subject to reduction as described below under “—Prepayment
Interest Shortfalls.” Each servicer will be entitled to reimbursement for
certain expenses prior to distribution of any amounts to
certificateholders.
Waiver
or Modification of Mortgage Loan Terms
The
servicers may waive, modify or vary any term of any mortgage loan or consent
to
the postponement of strict compliance with any term of any mortgage loan so
long
as that waiver, modification or postponement is not materially adverse to the
trust fund; provided,
however,
that
unless a servicer has received the prior written consent of the master servicer
on behalf of the trust fund, such servicer may not permit any modification
for
any mortgage loan that would change the mortgage rate, defer or forgive the
payment of principal or interest, reduce or increase the outstanding principal
balance (except for actual payments of principal) or change the final maturity
date on that mortgage loan. In the event of any such modification that permits
the deferral of interest or principal payments on any Mortgage Loan, the related
Servicer must make an advance. However, no servicer may make or permit any
modification, waiver or amendment of any term of any mortgage loan that would
cause any REMIC created under the pooling agreement to fail to qualify as a
REMIC or result in the imposition of any tax.
Prepayment
Interest Shortfalls
When
a
borrower prepays a mortgage loan in full or in part between due dates for
monthly payments, the borrower pays interest on the amount prepaid only from
the
last due date to the date of prepayment, with a resulting reduction in interest
payable for the month during which the prepayment is made causing a “prepayment
interest shortfall.” Any prepayment interest shortfall with respect to a
prepayment in full and/or in part, as applicable, of a mortgage loan is
generally required to be paid by the related servicer, generally limited to
the
extent that such amount does not exceed the total of its servicing fees on
the
related mortgage loans for the applicable distribution date.
The
financial guaranty insurance policy will not cover prepayment interest
shortfalls on the Class A1C Certificates.
Advances
Each
servicer will generally be obligated to make advances with respect to delinquent
payments of principal of and interest on the related mortgage loans (such
delinquent interest reduced by the servicing fee), to the extent that such
advances, in its reasonable judgment, are recoverable from future payments
and
collections, insurance payments or proceeds of liquidation of a mortgage loan.
The master servicer will be obligated to make any such advances if a servicer
is
required to and fails to do so, to the extent provided in the pooling agreement.
Any servicer or the master servicer, as applicable, will be entitled to recover
any advances made by it with respect to a mortgage loan out of late payments
thereon or out of related liquidation proceeds and insurance proceeds or, if
those amounts are insufficient, from collections on other mortgage loans. Such
reimbursements may result in Realized Losses.
S-47
The
purpose of making these advances is to maintain a regular cash flow to the
holders of certificates, rather than to guarantee or insure against losses.
No
party will be required to make any advances with respect to reductions in the
amount of the scheduled monthly payments on mortgage loans due to reductions
made by a bankruptcy court in the amount of a scheduled monthly payment owed
by
a borrower or a reduction of the applicable loan rate by application of the
Relief Act.
The
financial guaranty insurance policy will not cover any interest shortfalls
on
the Class A1C Certificates attributable to the application of the Relief
Act.
Hazard
Insurance
To
the
extent not maintained by the related borrower, the related servicer will
maintain and keep, with respect to each mortgage loan (other than a loan secured
by a cooperative or condominium unit), in full force and effect for each
mortgaged property, a hazard insurance policy equal to at least the lesser
of
(i) the outstanding principal balance of the mortgage loan or (ii) either the
maximum insurable value of the improvements securing such mortgage loan or,
in
some cases, the amount necessary to fully compensate for any damage or loss
to
improvements on a replacement cost basis, or equal to such other amount as
calculated pursuant to a similar formulation as provided in the related
servicing agreement, and containing a standard mortgagee clause. Because the
amount of hazard insurance to be maintained on the improvements securing the
mortgage loans may decline as the principal balances owing thereon decrease,
and
because residential properties have historically appreciated in value over
time,
in the event of partial loss, hazard insurance proceeds may be insufficient
to
restore fully the damaged property.
In
general, the standard form of fire and extended coverage policy covers physical
damage to or destruction of the improvements on the property by fire, lightning,
explosion, smoke, windstorm and hail, riot, strike and civil commotion, subject
to the conditions and exclusions particularized in each policy. Although the
policies relating to the mortgage loans will be underwritten by different
insurers and therefore will not contain identical terms and conditions, the
basic terms thereof are dictated by state law. Such policies typically do not
cover any physical damage resulting from the following: war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including earthquakes, landslides and mud flows), nuclear reactions, wet or
dry
rot, vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism and malicious mischief. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be
all-inclusive.
Where
the
property securing a mortgage loan is located at the time of origination in
a
federally designated flood area, the related servicer will cause with respect
to
such mortgage loan flood insurance to the extent available and in accordance
with industry practices, or in some cases federally mandated requirements,
to be
maintained. Such flood insurance will be in an amount equal to the lesser of
(i)
the outstanding principal balance of the related mortgage loan and (ii) the
minimum amount required under the terms of coverage to compensate for any damage
or loss on a replacement cost basis or, in some cases, the full insurable value,
or equal to such other amount as calculated pursuant to a similar formulation
as
provided in the servicing agreement, but not more than the maximum amount of
such insurance available for the related mortgaged property under either the
regular or emergency programs of the National Flood Insurance Program (assuming
that the area in which such mortgaged property is located is participating
in
such program).
The
servicers, on behalf of the trust fund, the certificate insurer and holders
of
certificates, will present claims to the insurer under any applicable hazard
insurance policy. As set forth above, all collections under such policies that
are not applied to the restoration or repair of the related mortgaged property
or released to the borrower in accordance with normal servicing procedures
are
to be deposited in a designated account. In most cases, the servicers are
required to deposit in a specified account the amount of any deductible under
a
blanket hazard insurance policy.
S-48
Realization
Upon Defaulted Mortgage Loans
The
servicers will take such action as they deem to be in the best interest of
the
trust fund with respect to defaulted mortgage loans and foreclose upon or
otherwise comparably convert the ownership of properties securing defaulted
mortgage loans as to which no satisfactory collection arrangements can be made.
To the extent set forth in the related servicing agreement, the servicer will
service the property acquired by the trust fund through foreclosure or
deed-in-lieu of foreclosure in accordance with procedures that the servicer
employs and exercises in servicing and administering mortgage loans for its
own
account and which are in accordance with accepted mortgage servicing practices
of prudent lending institutions and, in some cases, Fannie Mae
guidelines.
Because
insurance proceeds cannot exceed deficiency claims and certain expenses incurred
by a servicer, no insurance payments will result in a recovery to
certificateholders which exceeds the principal balance of the defaulted mortgage
loan together with accrued interest thereon less the related trust fund expense
fees.
In
addition, each servicer, on behalf of the trust fund, may also, in its
discretion, as an alternative to foreclosure, sell defaulted mortgage loans
at
fair market value to third-parties, if the related servicer reasonably believes
that such sale would maximize proceeds to the trust fund (on a present value
basis) with respect to those mortgage loans.
Collection
of Taxes, Assessments and Similar Items
Each
servicer will, to the extent required by the related loan documents and the
related servicing agreement, maintain one or more escrow accounts for the
collection of hazard insurance premiums and real estate taxes with respect
to
the mortgage loans, and will make advances with respect to delinquencies in
required escrow payments by the related borrowers.
Insurance
Coverage
The
servicers will be required to obtain and thereafter maintain in effect a bond,
corporate guaranty or similar form of insurance coverage (which may provide
blanket coverage), or any combination thereof, insuring against loss occasioned
by the errors and omissions of their respective officers and
employees.
Servicer
Default
If
a
servicer is in default in its obligations under the related servicing agreement
(and such default is not cured within any applicable grace period provided
for
in the servicing agreement), the master servicer may, at its option, terminate
the defaulting servicer and either appoint a successor servicer in accordance
with the servicing agreement or succeed to the responsibilities of the
terminated servicer, pursuant to the servicing agreement and the pooling
agreement.
Amendment
of the Servicing Agreements
Each
servicing agreement may be amended only by written agreement signed by the
related servicer, the seller, the sponsor, the trustee and the master servicer.
Such amendment shall not materially adversely affect the interest of the
Certificateholders or the certificate insurer in the Mortgage
Loans.
The
Certificate Insurer
The
information set forth in the following paragraphs has been provided by Financial
Security Assurance Inc. (the “certificate insurer”). The certificate insurer
makes no representation regarding the certificates or the advisability of
investing in the certificates.
S-49
General
The
certificate insurer, which is referred to in this prospectus supplement as
“FSA,” is a monoline insurance company incorporated in 1984 under the laws of
the State of New York. FSA is licensed to engage in the financial guaranty
insurance business in all 50 states, the District of Columbia, Puerto Rico,
the
U.S. Virgin Islands and Guam.
FSA
and
its subsidiaries are engaged in the business of writing financial guaranty
insurance, principally in respect of securities offered in domestic and foreign
markets and obligations under credit default swaps. Financial guaranty insurance
provides a guaranty of scheduled payments on an issuer's obligations - thereby
enhancing the credit rating of those obligations - in consideration for the
payment of a premium to the insurer. FSA and its subsidiaries principally insure
asset-backed, collateralized and municipal obligations. Asset-backed obligations
are typically supported by residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. Collateralized obligations include public utility first mortgage
bonds and sale/leaseback obligation bonds. Municipal obligations include general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. Obligations may be insured on a funded basis through
insurance of bonds or other securities or on an unfunded basis through insurance
of credit default swaps referencing one or more bonds or other obligations
(with
or without a deductible or other provision for loss reduction). FSA insures
both
newly issued securities sold in the primary market and outstanding securities
sold in the secondary market that satisfy FSA's underwriting criteria.
FSA
is a
wholly-owned subsidiary of Financial Security Assurance Holdings Ltd., which
is
referred to in this prospectus supplement as “Holdings.” Holdings is an indirect
subsidiary of Dexia S.A., a publicly held Belgian corporation. Dexia S.A.,
through its bank subsidiaries, is primarily engaged in the business of public
finance, banking and asset management in France, Belgium and other European
countries. No shareholder of Holdings or FSA is obligated to pay any debt of
FSA
or any claim under any insurance policy issued by FSA or to make any additional
contribution to the capital of FSA.
The
principal executive offices of FSA are located at 31 West 52nd Street, New
York,
New York, 10019, and its telephone number at that location is (212) 826-0100.
Reinsurance
Under
an
intercompany agreement, liabilities on financial guaranty insurance written
or
reinsured from third parties by FSA or its domestic or Bermuda operating
insurance company subsidiaries are generally reinsured among such companies
on
an agreed-upon percentage substantially proportional to their respective
capital, surplus and reserves, subject to applicable statutory risk limitations.
In addition, FSA reinsures a portion of its liabilities under certain of its
financial guaranty insurance policies with other reinsurers under various
treaties and on a transaction-by-transaction basis. This reinsurance is used
by
FSA as a risk management device and to comply with statutory and rating agency
requirements; it does not alter or limit FSA's obligations under any financial
guaranty insurance policy.
Ratings
FSA's
financial strength is rated “triple-A” by Fitch Ratings, Moody's Investors
Service, Inc., Standard & Poor's, and Rating and Investment Information,
Inc. These ratings reflect only the views of the respective rating agencies,
are
not recommendations to buy, sell or hold securities and are subject to revision
or withdrawal at any time by those rating agencies. See “Ratings” in this
prospectus supplement.
Capitalization
The
following table sets forth the capitalization of FSA and its subsidiaries as
of
September 30, 2005 (unaudited) on the basis of accounting principles generally
accepted in the United States of America:
Total
Deferred Premium Revenue (net), Surplus Notes Shareholder's Equity
........
$
4,425,037
For
further information concerning FSA, see the Consolidated Financial Statements
of
FSA and its subsidiaries, and the notes thereto, incorporated by reference
in
this prospectus supplement. FSA’s financial statements are included as exhibits
to reports filed with the Securities and Exchange Commission by Holdings
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of
1934, as amended (the “Exchange Act”) and may be reviewed at the EDGAR web site
maintained by the Securities and Exchange Commission. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by FSA are available upon request to the State of New York Insurance
Department.
Incorporation
of Certain Documents by Reference
The
consolidated financial statements of FSA included in, or as exhibits to, the
current report on Form 8-K filed on November 22, 2005 by Holdings with the
Securities and Exchange Commission are hereby incorporated by reference in
this
prospectus supplement.
All
financial statements of FSA included in, or as exhibits to, documents filed
by
Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after
the filing of this prospectus supplement and before the termination of the
offering of the certificates shall be deemed incorporated by reference into
this
prospectus supplement.
The
Depositor, on behalf of the trust fund, hereby undertakes that, for purposes
of
determining any liability under the Securities Act of 1933, each filing of
the
trust fund's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act and each filing of the financial statements of FSA included in
or
as an exhibit to the annual report of Holdings filed pursuant to Section 13(a)
or Section 15(d) of the Exchange Act that is incorporated by reference in this
prospectus supplement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide
offering
thereof.
Insurance
Regulation
FSA
is
licensed and subject to regulation as a financial guaranty insurance corporation
under the laws of the State of New York, its state of domicile. In addition,
FSA
and its insurance subsidiaries are subject to regulation by insurance laws
of
the various other jurisdictions in which they are licensed to do business.
As a
financial guaranty insurance corporation licensed to do business in the State
of
New York, FSA is subject to Article 69 of the New York Insurance Law which,
among other things, limits the business of a financial guaranty insurer to
writing financial guaranty insurance and related business lines, requires each
financial guaranty insurer to maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for
each
financial guaranty insurer, and limits the size of individual transactions
and
the volume of transactions that may be underwritten by each financial guaranty
insurer. Other provisions of the New York Insurance Law, applicable to non-life
insurance companies such as FSA, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability
for
borrowings.
S-51
Servicing
and Administration of the Trust Fund
Servicing
and Administrative Responsibilities
The
servicers, the master servicer, the securities administrator, the trustee and
the custodian (defined below) will have the following responsibilities with
respect to the trust fund:
Party:
Responsibilities:
Servicers
Performing
the servicing functions with respect to the mortgage loans and the
mortgaged properties in accordance with the provisions of the related
servicing agreement, including, but not limited
to:
·
collecting
monthly remittances of principal and interest on the mortgage loans
from
the borrowers, depositing such amounts into the related servicing
account
and delivering all amounts on deposit in the related servicing
account for
deposit into the distribution account on the related remittance
date;
·
collecting
amounts in respect of taxes and insurance from the borrowers,
depositing
such amounts in the account maintained for the escrow of such
payments and
paying such amounts to the related taxing authorities and insurance
providers, as applicable;
·
making
advances with respect to delinquent payments of principal of
and interest
on the mortgage loans (any such delinquent interest reduced
by the
servicing fee), except to the extent the servicer determines
such advance
is nonrecoverable;
·
paying,
as servicing advances, customary costs and expenses incurred
in the
performance by the servicer of its servicing obligations,
including, but
not limited to, the cost of (a) the preservation, restoration
and
protection of the mortgaged property, (b) any enforcement
of judicial
proceedings, including foreclosures, (c) compliance with
the obligations
under the servicing agreement or (d) fire and hazard insurance
coverage;
and
·
providing
monthly loan-level reports to the master
servicer.
See
“Servicing of Mortgage Loans—Servicing of the Mortgage Loans,”“—Advances,”
“—Hazard
Insurance” and “—Collection of Taxes, Assessments and Similar
Items.”
Master
Servicer
Performing
the master servicing functions in accordance with the provisions
of the
pooling agreement and the servicing agreements, including but not
limited
to:
·
monitoring
each servicer’s performance and enforcing each servicer’s obligations
under the related servicing
agreement;
·
gathering
the monthly loan-level reports delivered by each servicer and
providing a
comprehensive loan-level report to the securities administrator
with
respect to the mortgage
loans;
·
upon
the termination of a servicer, appointing a successor servicer,
and until
a successor servicer is appointed, acting as successor servicer;
and
·
upon
the failure of a servicer to make advances with respect
to a mortgage
loan, making those advances to the extent provided in
the pooling
agreement.
See
“The Master Servicer” and “Mortgage Loan Servicing”
above.
S-52
Party:
Responsibilities:
Securities
Administrator
Performing
the securities administration functions in accordance with the
provisions
of the pooling agreement, including but not limited
to:
·
distributing
all amounts on deposit in the distribution account to the
certificateholders in accordance with the priorities described
under
“Descriptions of the Certificates—Priority of Distributions on the
Certificates” on each distribution
date;
·
preparing
and distributing investor reports, including the monthly
distribution date
statement to certificateholders and the certificate insurer
based on
information received from the master
servicer;
·
receiving
monthly remittances from each servicer on the related servicer
remittance
date for deposit in the distribution
account;
·
upon
the failure of the master servicer to make any advance
required under the
pooling agreement, provide notice of such master servicer
event of default
to the trustee, the seller and the rating
agencies;
·
establishing
and receiving amounts from the certificate insurer for the
Policy Account,
and transferring appropriate amounts from that account to
the distribution
account for distribution to the insured
certificates;
·
establishing
and maintaining an account (the “Policy Account”) into which amounts
received under the Policy and payable to the Class A1C
Certificates will
be deposited;
·
preparing
and filing annual federal and (if required) state tax
returns on behalf of
the trust fund; and
·
preparing
and filing periodic reports with the Securities and
Exchange Commission on
behalf of the trust fund with respect to the
certificates.
Trustee
Performing
the trustee functions in accordance with the provisions of the
pooling
agreement, including but not limited to:
·
enforcing
the obligations of each of the master servicer and the securities
administrator under the pooling
agreement;
·
examining
certificates, statements and opinions required to be furnished
to it to
ensure they are in the form required under the pooling
agreement;
·
upon
the termination of the custodian, appointing a successor
custodian;
·
upon
the occurrence of a master servicer event of default
under the pooling
agreement, provide notice of such master servicer
event of default to the
master servicer, the depositor, the seller and the
rating
agencies;
·
upon
the occurrence of a master servicer event of default under
the pooling
agreement, at its discretion (or if so directed by the
certificateholders
having not less than 51% of the voting rights applicable
to the
certificates), terminating the master servicer;
and
·
upon
such termination of the master servicer under the pooling
agreement,
appointing a successor master servicer or succeeding
as master
servicer.
S-53
Party:
Responsibilities:
See
“The Pooling Agreement—The Trustee,”“Description of the
Certificates—Reports to Certificateholders” below.
Custodian
Performing
the custodial functions in accordance with the provisions of the
custodial
agreement, including but not limited
to:
·
holding
and maintaining the related mortgage files in a fire resistant
facility
intended for the safekeeping of mortgage loan files as agent
for the
Trustee.
See
“The Pooling Agreement—The Trustee”
below.
Trust
Accounts
All
amounts in respect of principal and interest received from the borrowers or
other recoveries in respect of the mortgage loans will, at all times before
distribution thereof to the holders of certificates, be invested in the trust
accounts, which are accounts established in the name of the trustee. Funds
on
deposit in the trust accounts may be invested in permitted investments by the
party responsible for such trust account. The trust accounts will be established
by the applicable parties listed below, and any investment income earned on
each
trust account will be retained or distributed as follows:
Trust
Account:
Responsible
Party:
Application
of any Investment Earnings:
Servicing
Accounts
Servicers
Any
investment earnings will be paid to the related servicer and will
not be
available for distribution to the holders of any
certificates.
Distribution
Account
Securities
Administrator
Any
investment earnings will be paid to the sponsor and will not be available
for distribution to the holders of any certificates.
Basis
Risk Reserve Fund
Securities
Administrator
Any
investment earnings will remain in the Basis Risk Reserve Fund and
shall
be for the benefit of, and be available for distribution to, the
holder(s)
of the Class X Certificates.
Policy
Account
Securities
Administrator
Amounts
on deposit in the Policy Account shall not be invested and shall
not be
held in an interest-bearing account; therefore, the Policy Account
will
not produce any investment income and no investment income will be
available for retention or
distribution.
If
funds
deposited in any trust accounts are invested by the responsible party identified
in the table above, the amount of any losses incurred in respect of any such
investments will be deposited in the related trust account by such responsible
party out of its own funds, without any right of reimbursement
therefor.
Any
one
or more of the following obligations or securities held in the name of the
trustee for the benefit of the certificateholders and the certificate insurer
acquired at a purchase price of not greater than par, regardless of whether
issued or managed by the depositor, the trustee, the master, the securities
administrator or any of their respective affiliates or for which an affiliate
serves as an advisor will be considered a permitted investment:
(i) direct
obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or instrumentality
thereof, provided such obligations are backed by the full faith and credit
of
the United States;
(ii) (A)
demand and time deposits in, certificates of deposit of, bankers’ acceptances
issued by or federal funds sold by any depository institution or trust company
(including the trustee, the securities administrator or the master servicer
or
their agents acting in their respective commercial capacities) incorporated
under the laws of the United States of America or any state thereof and subject
to supervision and examination by federal and/or state authorities, so long
as,
at the time of such investment or contractual commitment providing for such
investment, such depository institution or trust company or its ultimate parent
has a short-term uninsured debt rating in one of the two highest available
rating categories of each rating agency rating the certificates and (B) any
other demand or time deposit or deposit which is fully insured by the
FDIC;
S-54
(iii) repurchase
obligations with respect to any security described in clause (i) above and
entered into with a depository institution or trust company (acting as
principal) rated A or higher by the rating agencies rating the
certificates;
(iv) securities
bearing interest or sold at a discount that are issued by any corporation
incorporated under the laws of the United States of America, the District of
Columbia or any State thereof and that are rated by each rating agency rating
the certificates in its highest long-term unsecured rating categories at the
time of such investment or contractual commitment providing for such
investment;
(v) commercial
paper (including both non-interest-bearing discount obligations and
interest-bearing obligations) that is rated by each rating agency rating the
certificates in its highest short-term unsecured debt rating available at the
time of such investment;
(vi) units
of
money market funds (which may be 12b-1 funds, as contemplated by the Commission
under the Investment Company Act of 1940) registered under the Investment
Company Act of 1940 including funds managed or advised by the trustee, the
master servicer, the securities administrator or an affiliate thereof having
the
highest applicable rating from each rating agency rating the certificates;
and
(vii) if
previously confirmed in writing to the trustee, any other demand, money market
or time deposit, or any other obligation, security or investment, as may be
acceptable to each rating agency rating the certificates in writing as a
permitted investment of funds backing securities having ratings equivalent
to
its highest initial rating of the senior certificates;
In
addition, no instrument described above may evidence either the right to receive
(a) only interest with respect to the obligations underlying such instrument
or
(b) both principal and interest payments derived from obligations underlying
such instrument and the interest and principal payments with respect to such
instrument provide a yield to maturity at par greater than 120% of the yield
to
maturity at par of the underlying obligations.
Evidence
as to Compliance
The
servicing agreements and the custodial agreement will each provide that on
or
before March 15 of each year, beginning in March of 2007, the servicers and
the
custodian, respectively, will provide to the master servicer, the certificate
insurer and the depositor a report on an assessment of compliance with the
AB
Servicing Criteria. The pooling agreement will provide that on or before March
15 of each year, beginning in March of 2007, the master servicer and the
securities administrator will provide to the depositor and the certificate
insurer a report on an assessment of compliance with the AB Servicing Criteria.
In addition, any permitted subservicer or subcontractor of any of the parties
described above that is participating in the servicing function relating to
the
mortgage loans within the meaning of Regulation AB will also provide to the
trustee, the certificate insurer and the depositor a report on an assessment
of
compliance with the AB Servicing Criteria.
Each
party that is required to deliver a report on assessment of servicing compliance
must also deliver an attestation report from a firm of independent public
accountants on the related assessment of compliance. The AB Servicing Criteria
include specific criteria relating to the following areas: general servicing
considerations, cash collection and administration, investor remittances and
reporting and pool asset administration. Each report is required to indicate
that the AB Servicing Criteria applicable to such party were used to test
compliance of the relevant party on a platform level basis and will set out
any
material instances of noncompliance.
S-55
The
servicing agreements will also provide for delivery to the master servicer
and
the depositor on or before March 15 of each year, beginning in March of 2007,
a
separate annual statement of compliance from each servicer to the effect that,
to the best knowledge of the signing officer, the servicer has fulfilled in
all
material respects its obligations under the related servicing agreement
throughout the preceding year or, if there has been a material failure in the
fulfillment of any obligation, the statement will specify each failure and
the
nature and status of that failure.
Copies
of
the annual reports of assessment of compliance, attestation reports, and
statements of compliance will be posted on the securities administrator’s
website as described in “Additional Information” in this prospectus supplement
and may be obtained by certificateholders without charge upon written request
to
the master servicer at the address of the master servicer set forth above under
“Additional Information.” These items will also be filed with the issuing
entity’s annual report on Form 10-K, to the extent required under Regulation AB.
Fees
and Expenses of the Trust Fund
In
consideration of their duties on behalf of the trust fund, the trustee, the
servicers, the master servicer, the lender paid mortgage insurance providers
and
the certificate insurer will receive from the assets of the trust fund certain
fees as set forth in the following table:
S-56
Fee
Payable to:
Frequency
of
Payment:
Amount
of Fee:
How
and When Fee Is Payable:
Servicers
monthly
For
each mortgage loan, the “servicing fee” will be a monthly fee out of
collections received from such mortgage loan calculated as the product
of
(a) the outstanding principal balance of such mortgage loan and (b)
the
servicing fee rate.
The
“servicing fee rate” for loans serviced by Countrywide is 0.375%. The
“servicing fee rate” for loans serviced by Paul Financial is
0.3625%.
Withdrawn
from the servicing account in respect of each mortgage loan, before
payment of any amounts to certificateholders.
Lender
Paid Mortgage Insurance Providers
monthly
For
any mortgage loan covered by a lender paid mortgage insurance policy,
the
product of the outstanding scheduled principal balance of the related
mortgage loan and the related lender paid mortgage insurance fee
rate.
The
lender paid mortgage insurance fee rates with respect to the mortgage
loans with lender paid mortgage insurance range from 0.21% to 1.22%
and
the weighted average lender paid mortgage insurance fee rate as of
the
cut-off date is approximately 0.75% for all of such mortgage loans.
Payable
out of funds on deposit in the servicing account before payment of
any
amounts to certificateholders.
Master
Servicer
monthly
The
master servicer will receive as compensation for its services for
each
mortgage loan, a monthly fee (after payment to the trustee of any
of the
trustee’s fee remaining unpaid from the distribution account, as described
below) paid out of collections received from such mortgage loan calculated
as the product of (a) the outstanding principal balance of such mortgage
loan and (b) the “master servicing fee rate” equal to 0.0125% per
annum.
Withdrawn
by the master servicer from the distribution account before payment
of any
amounts to certificateholders.
Trustee
annually
A
fixed annual fee of $3,500.
Payable
out of funds on deposit in the distribution account before payment
of any
amounts to certificateholders.
Certificate
Insurer
monthly
The
certificate insurer will receive as compensation for its services
a
premium on each distribution date equal to 0.09% of the outstanding
aggregate principal balance of the Class A1C Certificates.
Withdrawn
from the distribution account in respect of each mortgage loan, before
payment of any amounts to
certificateholders.
S-57
The
servicing fees are subject to reduction as described above under “Mortgage Loan
Servicing—Prepayment Interest Shortfalls.” The master servicer will pay the fees
of the securities administrator and the custodian on behalf of the trust fund
out of the master servicer’s own funds. The servicers, the master servicer, the
securities administrator, the trustee and the custodian will each be entitled
to
reimbursement for certain expenses and indemnification by the trust fund prior
to distribution of any amounts to certificateholders.
None
of
the servicing fees set forth in the table above may be changed without amendment
of the servicing agreements, and none of the other fees set forth in the table
above may be changed without amendment of the pooling agreement.
The
Pooling Agreement
General
The
certificates will be issued pursuant to a pooling and servicing agreement dated
as of February 1, 2006, among the seller, the depositor, the sponsor, the master
servicer, the securities administrator and the trustee (the “pooling
agreement”).
The
Issuing Entity
On
the
closing date, and until the termination of the trust fund pursuant to the
pooling agreement, Luminent Mortgage Trust 2006-2 (the “issuing entity”) will be
a common law trust formed under the laws of the State of New York. The issuing
entity will be created under the pooling agreement by the depositor and its
assets will consist of:
·
all
of the depositor’s right, title and interest in the mortgage loans,
including the related mortgage notes, mortgages and other related
documents;
·
all
payments on or collections in respect of the mortgage loans due after
the
cut-off date, together with any proceeds
thereof;
·
any
mortgaged properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received
from the foreclosed properties;
·
the
rights of the trustee under all insurance policies required to be
maintained pursuant to the pooling
agreement;
·
the
rights to enforce the representations and warranties made by the
sponsor
with respect to the mortgage loans under the mortgage loan purchase
agreement;
·
the
rights to enforce the representations and warranties made by the
originators with respect to the mortgage loans under the underlying
purchase agreements and the reconstitution agreements, if
any;
·
the
rights of the depositor under the servicing agreements (which acquired
the
rights of the seller pursuant to the mortgage loan purchase
agreement);
·
the
irrevocable and unconditional financial guaranty insurance policy
(the
“Policy”) for the benefit of the holders of the Class A1C Certificates,
pursuant to which the certificate insurer will guarantee certain
payments
to holders of the Class A1C Certificates as described in this prospectus
supplement; and
·
certain
other assets of the trust fund, including rights to amounts in the
distribution account and the Basis Risk Reserve Fund, as described
herein.
On
the
closing date, the securities administrator will establish the basis risk reserve
fund, which will be an asset of the trust fund. The issuing entity will not
have
any liabilities as of the closing date. The fiscal year end of the issuing
entity will be December 31 of each year.
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The
issuing entity will not have any employees, officers or directors. The trustee,
the securities administrator, the master servicer, the servicers and the
custodian will act on behalf of the issuing entity, and may only perform those
actions on behalf of the issuing entity that are specified in the pooling
agreement, the mortgage loan purchase agreement and the servicing agreements.
See “The Servicers,”“Servicing of the Mortgage Loans,”“Administration of the
Trust Fund” and “The Pooling Agreement” in this prospectus
supplement.
The
trustee, on behalf of the issuing entity, is only permitted to take such actions
as are specifically provided in the pooling agreement. Under the pooling
agreement, the trustee on behalf of the issuing entity will not have the power
to issue additional certificates representing interests in the pooling
agreement, borrow money on behalf of the trust fund or make loans from the
assets of the trust fund to any person or entity, without the amendment of
the
pooling agreement by holders of certificates and the other parties thereto
as
described under “The Pooling Agreement—Amendment” in this prospectus
supplement.
If
the
assets of the trust fund are insufficient to pay the holders of certificates
all
principal and interest owed, holders of some or all classes of holders of
certificates will not receive all of their expected payments of interest and
principal and will suffer a loss. The risk of loss to holders of subordinate
certificates is greater than to holders of senior certificates. See “Risk
Factors—If credit enhancement is insufficient, you could experience losses on
your certificates” in this prospectus supplement. The issuing entity, as a
common law trust, is not eligible to be a debtor in a bankruptcy proceeding.
In
the event of a bankruptcy of the sponsor, the seller, the depositor or an
originator, it is not anticipated that the trust fund would become part of
the
bankruptcy estate or subject to the bankruptcy control of a third
party.
Assignment
of the Mortgage Loans
On
the
closing date, the depositor will transfer to the trust fund all of its right,
title and interest in and to each of the mortgage loans, together with the
related mortgage notes, mortgages and other related documents, including all
scheduled payments with respect to each mortgage loan due after the cut-off
date. Concurrently with the transfer, upon order of the depositor, the trustee
will deliver the certificates to the depositor. Each mortgage loan transferred
to the trust fund will be identified on the mortgage loan schedule prepared
by
the depositor and delivered to the trustee pursuant to the pooling agreement.
The mortgage loan schedule will include the Stated Principal Balance of each
mortgage loan as of the cut-off date, its loan rate and certain additional
information.
Sale
of the Mortgage Loans.
Each
transfer of the mortgage loans from the seller to the depositor and from the
depositor to the trustee will be intended to be a sale of the mortgage loans
and
will be reflected as such in the mortgage loan purchase agreement and the
pooling agreement, respectively. However, in the event of insolvency of either
the seller or the depositor, a trustee in bankruptcy or a receiver or creditor
of the insolvent party could attempt to recharacterize the sale of the mortgage
loans by the insolvent party as a financing secured by a pledge of the mortgage
loans. In the event that a court were to recharacterize the sale of the mortgage
loans by either the seller or the depositor as a financing, each of the
depositor, as transferee of the mortgage loans from the seller, and the trustee
will have a security interest in the mortgage loans transferred to it. The
trustee’s security interest in the mortgage loans will be perfected by delivery
of the mortgage notes to the custodian, which will hold the mortgage notes
on
behalf of the trustee.
Delivery
of Mortgage Loan Files.
The
pooling agreement will require that, upon certain conditions and within the
time
period specified in the pooling agreement the depositor will deliver to the
trustee (or the custodian, as the trustee’s agent for that purpose) the mortgage
notes evidencing the mortgage loans endorsed in blank or to the trustee on
behalf of the certificateholders, together with the other related documents
received by the seller from the originator pursuant to the terms of the
underlying purchase agreement. In lieu of delivery of an original mortgage,
if
an original is not available or is lost, the depositor may deliver a true and
complete copy of the original together with a lost note affidavit of the
originator.
Within
90
days after the closing date the custodian on behalf of the trustee will review
the mortgage loans and the related documents pursuant to the pooling agreement.
Pursuant to the terms of the related underlying purchase agreement, if any
mortgage loan or related document is found to be defective in any material
respect and the defect is not cured within 90 days following notification to
the
originator by the trustee (or the custodian, as the trustee’s agent for that
purpose), the related originator will be obligated to substitute a mortgage
loan
for the defective loan and pay any related substitution adjustment amount (as
described below) or repurchase the defective loan at a purchase price equal
to
its outstanding principal balance as of the date of purchase, plus all accrued
and unpaid interest computed at the loan rate through the end of the calendar
month in which the repurchase is made plus, in the event that the affected
loan
is repurchased by the related originator due to a breach of any representation
and warranty relating to predatory and abusive lending laws, any costs and
damages incurred by the trust fund in connection with a violation of a predatory
or abusive lending law with respect to such loan.
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The
substitution adjustment amount or the purchase price will be deposited in the
distribution account on or prior to the next determination date after the
related originator’s obligation to substitute for or purchase the defective loan
arises. The obligation of an originator to cure, repurchase or substitute for
(or, with respect to any costs and damages incurred by the trust fund in
connection with any violation of any anti-predatory or anti-abusive lending
laws, indemnify for) a defective mortgage loan is the sole remedy available
to
the trustee or the certificateholders regarding any defect in that mortgage
loan
and the related documents.
Upon
discovery of a breach of any representation or warranty of the sponsor or an
originator that materially and adversely affects the interests of the
certificateholders or the certificate insurer in a mortgage loan and the related
documents, the sponsor or the related originator, as applicable, will have
a
period of 90 days after discovery or notice of the breach to effect a cure.
With
respect to an originator, if its breach is not cured within the 90-day period,
the originator will be obligated to substitute for or repurchase such mortgage
loan under the same terms and conditions as set forth above for the purchase
of
defective loans as a result of deficient documentation. With respect to the
sponsor, if its breach (or in the case of a mortgage loan that was originated
by
Paul Financial, Paul Financial’s breach or defect) is not cured within the
90-day period, the sponsor will be obligated to either:
·
substitute
for the defective loan an eligible substitute mortgage loan (provided
that
substitution is permitted only within two years of the closing date
and
may not be made unless an opinion of counsel is provided to the effect
that the substitution will not disqualify any REMIC created under
the
pooling agreement or result in a prohibited transaction tax under
the
Internal Revenue Code) and pay any related substitution adjustment
amount,
or
·
repurchase
the defective loan at a purchase price equal to its outstanding principal
balance as of the date of purchase, plus all accrued and unpaid interest
computed at the loan rate through the end of the calendar month in
which
the repurchase is made;
plus,
in
any case, in the event that the affected loan is repurchased by the sponsor
due
to a breach of any representation and warranty relating to predatory and abusive
lending laws, any costs and damages incurred by the trust fund in connection
with a violation of a predatory or abusive lending law with respect to such
loan.
The
substitution adjustment amount or the purchase price will be deposited in the
distribution account on or prior to the next determination date after the
sponsor’s obligation to substitute for or purchase the related mortgage loan
arises. The obligation of the sponsor to cure a breach or defect, or repurchase
or substitute for a mortgage loan is the sole remedy available to the trustee
or
the certificateholders regarding any breach of the sponsor’s representations and
warranties with respect to that mortgage loan. The sponsor will not be obligated
to cure a breach or defect, or repurchase or substitute for a mortgage loan
as
to which an originator is so obligated, even if the originator fails to do
so,
except in the case of a mortgage loan originated by Paul Financial.
For
a
mortgage loan to be eligible to be substituted for a mortgage loan (the
“affected loan”), the substituted loan must meet the following criteria on the
date of the substitution:
·
the
substituted loan has an outstanding principal balance (or in the
case of a
substitution of more than one mortgage loan for a single affected
loan, an
aggregate principal balance), not in excess of, and not more than
5% less
than, the principal balance of the affected loan;
·
the
substituted loan has a maximum loan rate and a gross margin not less
than
those of the affected loan and uses the same index as the affected
loan;
·
the
substituted loan has a remaining term to maturity not more than one
year
earlier and not later than the remaining term to maturity of the
affected
loan;
·
the
substituted loan complies with each representation and warranty as
to the
mortgage loans set forth in the pooling agreement (which are deemed
to be
made with respect to the substituted loan as of the date of substitution);
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·
the
substituted loan has been underwritten or re-underwritten in accordance
with the same underwriting criteria and guidelines as the affected
loan;
·
the
substituted loan is of the same or better credit quality as the affected
loan; and
·
the
substituted loan satisfies certain other conditions specified in
the
pooling agreement.
In
connection with the substitution of an eligible substitute mortgage loan, the
sponsor or the related originator, as applicable, will be required to deposit
in
the distribution account, on or prior to the next determination date after
its
obligation to purchase or substitute for the affected loan arises, a
substitution adjustment amount equal to the excess of the principal balance
of
the affected loan over the principal balance of the eligible substitute mortgage
loan.
We
can
make no assurance that the sponsor or either originator will be able to fulfill
any obligation it may have to cure a breach or defect, or repurchase or
substitute for any of the mortgage loans if and when such obligation
arises.
Representations
and Warranties
Pursuant
to each underlying purchase agreement and each reconstitution agreement, each
originator has made certain representations and warranties with respect to
the
mortgage loans as of the date such mortgage loans were sold by it to the seller
(an “Original Sale Date”). These representations and warranties include, among
other things, that:
(a) The
information contained in the mortgage loan schedule is complete, true and
correct;
(b) All
payments required to be made up to, and excluding, the related cut-off date
for
such mortgage loan under the terms of the mortgage note have been made; the
originator has not advanced funds, or induced, solicited or knowingly received
any advance of funds from a party other than the owner of the mortgaged property
subject to the mortgage,
directly or indirectly, for the payment of any amount required by the mortgage
loan;
(c) There
are
no delinquent taxes, ground rents, water charges, sewer rents,
assessments, insurance premiums, leasehold payments, including assessments
payable in future installments or other outstanding charges affecting the
related mortgaged property;
(d) 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,
if necessary to protect the interests of the trustee, and which have been
delivered to the depositor or the custodian. No mortgagor has been released,
in
whole or in part, except in connection with an assumption agreement approved
by
the primary mortgage insurer, if any, and title insurer, to the
extent required by the policy, and which assumption agreement is part of the
mortgage file and
the
terms of which are reflected in the mortgage loan schedule;
(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 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) All
buildings upon the mortgaged property are insured by an insurer
acceptable to either Fannie Mae or Freddie Mac against loss by fire, hazards
of
extended coverage and
such
other hazards as are customary in the area where the mortgaged property is
located. If the mortgaged property is in an area identified in the Federal
Register by the Federal Emergency Management Agency as having special flood
hazards (and such flood insurance has been made available), a flood insurance
policy meeting the requirements
of the current guidelines of the Federal Insurance Administration is in effect
which policy
conforms to the requirements of either Fannie Mae or Freddie Mac;
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(g) Any
and
all requirements of any federal, state or local law including, without
limitation, all applicable predatory and abusive lending, 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;
(h) The
mortgage has not been satisfied, canceled, subordinated, or rescinded, in whole
or in part, and the mortgaged property has not been released from the lien
of
the mortgage, in whole or in part, nor has any instrument been executed that
would effect any such release, cancellation, subordination or
rescission;
(i) The
mortgage (including any negative amortization which may arise thereunder, with
respect to a negative amortization loan) is a valid, existing and enforceable
first lien on the mortgaged property, including all improvements on the
mortgaged property subject only to (a) the lien of current real property taxes
and assessments not yet due and payable, (b) covenants, conditions and
restrictions, rights of way,
easements and other matters of the public record as of the date of recording
being acceptable
to mortgage lending institutions generally and specifically referred to in
the
lender’s
title insurance policy delivered to the originator of the mortgage loan and
which do
not
adversely affect the appraised value of the mortgaged property and (c) 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 use, enjoyment, value or marketability of the related mortgaged
property. Any security agreement, chattel mortgage or equivalent document
related to and delivered in connection with the mortgage loan establishes and
creates a valid, existing and enforceable first lien and first priority security
interest on the property described therein. The mortgaged property was not,
as
of the date of origination of the mortgage loan, subject to a mortgage, deed
of
trust, deed to secure debt or other security instrument creating a lien
subordinate to the lien of the mortgage;
(j) The
mortgage note and the related mortgage are genuine and each is the legal, valid
and binding obligation of the maker thereof, enforceable in accordance
with
its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, or reorganization;
(k) The
originator has good and marketable title to the mortgage loan and has full
right
to transfer and sell the mortgage loan to the depositor free and clear of any
encumbrance, equity, lien, pledge, charge, claim or security interest and has
full right and authority subject to no interest or participation of, or
agreement with, any other party, to sell and assign each mortgage
loan;
(l) The
mortgage loan is covered by an American Land Title Association (“ALTA”) lender’s
title insurance policy acceptable to Fannie Mae or Freddie Mac, issued by a
title insurer acceptable to Fannie Mae or Freddie
Mac and qualified to do business in the jurisdiction where the mortgaged
property is located;
(m) There
is
no default, breach, violation or event of acceleration existing under the
mortgage or the 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 of acceleration, and the originator has not waived any default, breach,
violation or event of acceleration;
(n) To
the
best of the originator’s knowledge after reasonable inquiry and investigation,
there are no mechanics’ or similar liens or claims which have been filed for
work, labor or material (and no rights are outstanding that under law could
give
rise to such lien) affecting the related mortgaged property which are or may
be
liens prior to, or equal or coordinate with, the lien of the related
mortgage;
(o) The
mortgage loan was originated by a savings and loan association, a savings bank,
a commercial bank or similar banking institution which is supervised and
examined by a federal or state authority, or by a mortgagee approved as such
by
the Secretary of HUD pursuant to Sections 203 and 211 of the National Housing
Act. With respect to each negative amortization mortgage loan, the related
mortgage note requires a monthly payment which is sufficient during the period
following each payment adjustment date, to fully amortize the outstanding
principal balance as of the first day of such period (including any negative
amortization) over the then remaining term of such mortgage note and to pay
interest at the related mortgage interest rate; provided,
that
the monthly payment shall not increase to an amount that exceeds 107.5% of
the
amount of the monthly payment that was due immediately prior to the payment
adjustment date; provided,
further,
that the
payment adjustment cap shall not be applicable with respect to the adjustment
made to the monthly payment that occurs in a year in which the mortgage loan
has
been outstanding for a multiple of five years and in any such year the monthly
payment shall be adjusted to fully amortize the mortgage loan over the remaining
term;
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(p) The
origination and collection practices used by the originator with respect to
each
mortgage note and mortgage have been in all respects legal, proper, prudent
and
customary in the mortgage origination and servicing business;
(q) To
the
best of the originator’s knowledge, after reasonable inquiry and investigation,
the mortgaged property is free of damage and waste and there is no proceeding
pending for the total or partial condemnation thereof;
(r) The
mortgage contains customary and enforceable provisions such as to render the
rights and remedies of the holder thereof adequate for the realization against
the mortgaged property of the benefits of the security provided thereby and
there is no homestead or other exemption available to the mortgagor which would
interfere with the right to sell the mortgaged property at a trustee’s sale or
the right to foreclose the mortgage;
(s) The
mortgage loan was underwritten generally in accordance with the originator’s
underwriting standards in effect at the time the mortgage loan was originated
or
acquired;
(t) The
mortgage note is not and has not been secured by any collateral
except the lien of the corresponding mortgage and the security interest of
any
applicable security agreement or chattel mortgage referred to in (i)
above;
(u) No
mortgage loan contains provisions pursuant to which monthly payments are (a)
paid or partially paid with funds deposited in any separate account established
by the originator, the mortgagor, or anyone on behalf of the mortgagor, (b)
paid
by any source other than the mortgagor or (c)
contains
any other similar provisions which may constitute
a “buydown” provision. The mortgage loan is not a graduated payment mortgage
loan and
the
mortgage loan does not have a shared appreciation or other contingent interest
feature;
(v) With
respect to an adjustable rate mortgage loan, the mortgagor has received all
disclosure materials required by applicable law with respect to the making
of
an adjustable rate mortgage loan and rescission materials with respect to
refinanced mortgage
loans on primary residences (or by applicable law);
(w) No
fraud
was committed by the originator in connection with the origination
or servicing of the mortgage loan and to the best of originator’s knowledge, no
fraud was committed with respect to the mortgage loan on the part of the
mortgagor or any other person involved in the origination of the mortgage
loan;
(x) No
mortgage loan is (a) subject to the provisions of the Homeownership and Equity
Protection Act of 1994 as amended (“HOEPA”), (b) a “high cost” mortgage loan,
“covered” mortgage loan or “predatory” mortgage loan under any federal, state or
local law or (c) subject to any comparable federal, state or local statutes
or
regulations, including, without limitation, the provisions of the Georgia Fair
Lending Act, the City of Oakland, California Anti-Predatory Lending Ordinance
No. 12361 or any other statute or regulation providing assignee liability to
holders of such mortgage loans;
(y) None
of
the proceeds of the mortgage loan were used to finance the purchase of single
premium credit life or disability insurance policies or any comparable
insurance;
(z) No
mortgage loan has a balloon payment feature; and
(aa) No
mortgage loan is a convertible mortgage loan.
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Other
than with respect to mortgage loans originated by Paul Financial, the sponsor’s
representations and warranties with respect to the mortgage loans relate only
to
circumstances arising during the periods between the related Original Sale
Dates
and the closing date other than as a result of action or inaction required
of an
originator or servicer, and
they
do not
require the sponsor to assume the risk of any delinquency on a mortgage loan.
In
addition, the sponsor will represent and warrant as of the closing date that
with respect to each
representation and warranty made by an originator with respect to any mortgage
loan in the related underlying purchase agreement that is made as of the
Original Sale Date, no event has occurred since the Original Sale Date that
would render any such representation and warranty to be untrue in any material
respect as of the closing date, however, this representation and warranty will
not require
the sponsor to assume the risk of any delinquency on a mortgage
loan.
Payments
on Mortgage Loans; Deposits to Distribution Account
Distribution
Account.
The
securities administrator will establish and maintain a separate distribution
account for the benefit of the trustee, the certificate insurer and the holders
of the certificates. The distribution account must be a segregated account
that
is:
·
an
account or accounts maintained with a federal or state chartered
depository institution or trust company the short-term unsecured
debt
obligations of which (or, in the case of a depository institution
or trust
company that is the principal subsidiary of a holding company, the
short-term unsecured debt obligations of that holding company) are
rated
in the highest short term rating category by each rating agency named
in
this prospectus supplement at the time any amounts are held on deposit
in
the account; or
·
an
account or accounts the deposits in which are fully insured by the
FDIC
(to the limits established by the FDIC), or the uninsured deposits
in
which account are otherwise secured such that, as evidenced by an
opinion
of counsel delivered to the securities administrator and to each
rating
agency named in this prospectus supplement, the certificateholders
will
have a claim with respect to the funds in such account or a perfected
first priority security interest against the collateral securing
those
funds that is superior to claims of any other depositors or creditors
of
the depository institution with which the certificate account is
maintained; or
·
a
trust account or accounts maintained with the trust department of
a
federal or state chartered depository institution, national banking
association or trust company acting in its fiduciary capacity; or
·
otherwise
acceptable to each rating agency named in this prospectus supplement
without causing the qualification, reduction or withdrawal of its
then
current ratings of the certificates as evidenced by a letter from
each
rating agency to the trustee (without regard to the
Policy).
Upon
receipt by the servicers of amounts in respect of the mortgage loans (excluding
amounts representing the servicing fees, reimbursement for advances and
servicing-related advances, and insurance proceeds to be applied to the
restoration or repair of a mortgaged property, or similar items), the servicers
will deposit these amounts in the collection or custodial account established
by
each servicer in accordance with the related servicing agreement. Amounts
deposited in the collection or custodial account may accrue interest with the
depository institution with which it is held, or may be invested in certain
eligible investments specified in the pooling agreement maturing no later than
one business day prior to (or,
in
respect of an eligible investment which is an obligation of the related
servicer, on) the
related distribution date.
Servicing
Fees and Other Compensation
Trust
fund expense fees are payable out of the interest payments on each mortgage
loan
or as otherwise provided in the pooling agreement and the servicing agreements.
Trust fund expense fees accrue at an annual expense fee rate, referred to as
the
“trust expense fee rate,” calculated on the principal balance of each mortgage
loan. With respect to each mortgage loan, the “trust expense fee rate” will be
equal to sum of the master servicing fee rate, the custodial fee rate, the
servicing fee rates and the rate at which the premiums with respect to any
lender paid mortgage insurance policies are calculated.
The
Trustee
HSBC
Bank
USA, National Association, a national banking association organized and existing
under the laws of the United States of America, will be named trustee under
the
pooling agreement. The trustee will perform administrative functions on behalf
of the trust fund and for the benefit of the certificateholders pursuant to
the
terms of the pooling agreement. The trustee’s offices for notices under the
pooling agreement are located at 452 Fifth Avenue, New York, New York10018,
and
its telephone number is (212) 525-1362.
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In
the
event the master servicer defaults in the performance of its obligations
pursuant to the terms of the pooling agreement prior to the appointment of
a
successor, the trustee is obligated to perform such obligations until a
successor master servicer is appointed. If the trustee resigns or is removed
under the terms of the pooling agreement, a successor trustee will be appointed
within 30 days by the depositor. If no such successor trustee is appointed
within the 30-day period, then a court of competent jurisdiction may be
petitioned to appoint a successor trustee.
The
compensation of the trustee is described under “Fee and Expenses of the Trust
Fund” herein.
The
trustee and any director, officer, employee or agent of the trustee will be
indemnified and held harmless by the trust fund against any loss, liability
or
expense set forth in the pooling agreement. In addition, the trustee will be
indemnified by the trust fund for any losses, liabilities or expenses resulting
from the servicer’s breach of its obligations as provided in the pooling
agreement. The trustee’s duties are limited solely to its express obligations
under the pooling agreement. See “The Pooling Agreement” in this prospectus
supplement.
As
of
January 24, 2006, HSBC Bank USA, National Association is acting as trustee
for
approximately 400 asset-backed securities transactions involving similar pool
assets to those found in this transaction.
The
Securities Administrator
Under
the
terms of the pooling agreement, Wells Fargo Bank also is responsible for
securities administration, which includes pool performance calculations,
distribution calculations and the preparation of monthly distribution reports.
As securities administrator, Wells Fargo Bank is responsible for the preparation
and filing of all REMIC tax returns on behalf of the trust fund and the
preparation of monthly reports on Form 10-D in regards to distribution and
pool
performance information and annual reports on Form 10-K that are required to
be
filed with the Securities and Exchange Commission on behalf of the issuing
entity. Wells Fargo Bank has been engaged in the business of securities
administration since June 30, 1995. As of November 30, 2005, Wells Fargo Bank
was acting as securities administrator with respect to more than
$700,000,000,000 of outstanding residential mortgage-backed
securities.
Matters
relating to the Trustee and the Securities Administrator
The
trustee and the securities administrator will be entitled to reimbursement
of
all reasonable expenses incurred or made by the trustee and the securities
administrator, respectively, in accordance with the pooling agreement, except
for expenses incurred by the trustee or securities administrator, as the case
may be, in the routine administration of its duties under the pooling agreement
and except for any expenses arising from its negligence, bad faith or willful
misconduct. Each of the trustee and the securities administrator will also
be
entitled to indemnification from the trust fund for any loss, liability or
expense incurred, arising out of, or in connection with, the acceptance or
administration of the trusts created under the pooling agreement or in
connection with the performance of its duties under the pooling agreement,
the
mortgage loan purchase agreement and any servicing agreement, including the
costs and expenses of defending itself against any claim in connection with
the
exercise or performance of its duties or powers under the pooling agreement.
Each of the trustee and the securities administrator will not have any liability
arising out of or in connection with the pooling agreement, except that each
of
the trustee and the securities administrator may be held liable for its own
negligent action or failure to act, or for its own willful misconduct;
provided,
however,
that
neither the trustee nor the securities administrator will be personally liable
with respect to any action taken, suffered or omitted to be taken by it in
good
faith in accordance with the direction of the certificateholders, and the
trustee will not be deemed to have notice of any event of default unless a
responsible officer of the trustee has actual knowledge of the event of default
or written notice of an event of default is received by the trustee at its
corporate trust office. Neither the trustee nor the securities administrator
is
required to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties under the pooling agreement,
or in the exercise of any of its rights or powers, if it has reasonable grounds
for believing that repayment of those funds or adequate indemnity against risk
or liability is not reasonably assured to it.
On
each
distribution date, the securities administrator will remit to the trustee any
reimbursable expenses from the distribution account prior to the calculation
of
Available Funds and distributions to certificateholders. The fees of the trustee
will be paid by the master servicer on behalf of the trust fund.
The
trustee and the securities administrator may resign at any time, in which event
the sponsor will be obligated to appoint a successor trustee or securities
administrator, as applicable. The sponsor may also remove the trustee and the
trustee may remove the securities administrator if the trustee or securities
administrator, as applicable, ceases to be eligible to continue as such under
the pooling agreement, if the trustee or securities administrator becomes
incapable of acting, bankrupt, insolvent or if a receiver takes charge of the
trustee, the securities administrator or its respective property, or if the
credit rating of the trustee falls below certain levels. Upon such resignation
or removal of the trustee or the securities administrator and the seller will
be
entitled to appoint a successor trustee or successor securities administrator,
respectively. The trustee and the securities administrator may also be removed
at any time by the holders of certificates evidencing ownership of not less
than
51% of the certificates having voting rights. Any resignation or removal of
the
trustee or securities administrator and appointment of a successor trustee
or
successor securities administrator will not become effective until acceptance
of
the appointment by the successor trustee or the successor securities
administrator, as applicable. Upon resignation or removal of the trustee or
the
securities administrator, the trustee or the securities administrator, as
applicable, shall be reimbursed any outstanding and unpaid fees and expenses,
and if removed by the holders of the certificates as described above, the
securities administrator shall also be reimbursed any outstanding and unpaid
costs and expenses.
S-65
Custody
of the Mortgage Files; Custodian
The
servicers will generally not have responsibility for custody of the mortgage
loan documents described under “—Assignment of Mortgage Loans” above. These
documents are generally required to be delivered to the custodian. The custodian
will hold the mortgage loan documents on behalf of the trustee pursuant to
a
custodial agreement between the custodian and the trustee. The mortgage loan
documents related to a mortgage loan will be held together in an individual
file
separate from other mortgage loan files held by the custodian. The custodian
will maintain the mortgage loan documents in a fireproof facility intended
for
the safekeeping of mortgage loan files.
Wells
Fargo Bank is acting as custodian of the mortgage loan files pursuant to the
custodial agreement. In that capacity, Wells Fargo Bank is responsible to hold
and safeguard the mortgage notes and other contents of the mortgage files on
behalf of the trustee and the certificateholders. Wells Fargo Bank maintains
each mortgage loan file in a separate file folder marked with a unique bar
code
to assure loan-level file integrity and to assist in inventory management.
Files
are segregated by transaction or investor. Wells Fargo Bank has been engaged
in
the mortgage document custody business for more than 25 years. Wells Fargo
Bank
maintains document custody facilities in its Minneapolis, Minnesota headquarters
and in three regional offices located in Richfield, Minnesota, Irvine,
California and Salt Lake City, Utah. Wells Fargo Bank maintains mortgage custody
vaults in each of those locations with an aggregate capacity of over eleven
million files.
As
of
November 30, 2005, Wells Fargo Bank was acting as custodian on more than nine
million files.
Wells
Fargo Bank serves or has served within the past two years as loan file custodian
for various mortgage loans owned by the depositor or the sponsor or an affiliate
of the depositor or the sponsor and anticipates that one or more of those
mortgage loans may be included in the trust fund. The terms of the custodial
agreement under which those services are provided by Wells Fargo Bank are
customary for the mortgage-backed securitization industry and provide for the
delivery, receipt, review and safekeeping of mortgage loan files. The custodian
will be entitled to its compensation as set forth under “Fees and Expenses of
the Trust Fund.”
Voting
Rights
With
respect to any date of determination, 98% of the voting rights will be allocated
to each class of certificates (other than the Class X and Class A-R
Certificates), pro
rata,
based
on a fraction, expressed as a percentage, the numerator of which is the class
principal balance of that class and the denominator of which is the aggregate
of
the class principal balances of all classes then outstanding. The Class X and
Class A-R Certificates will each have 1%of
the
voting rights; provided,
however,
when
none of the regular certificates is outstanding, all of the voting rights of
the
regular certificates will be allocated to the holder of the Class A-R
Certificate.
The
voting rights allocated to a class of certificates will be allocated among
all
holders of that class, pro
rata,
based
on a fraction the numerator of which is the certificate principal balance of
each certificate of that class and the denominator of which is the class
principal balance of that class. However, any certificate registered in the
name
of the master servicer, the securities administrator, the trustee or any of
their respective affiliates will not be included in the calculation of voting
rights as long as other certificates registered in the names of other entities
remain outstanding.
For
so
long as there does not exist a failure by the certificate insurer to make a
required payment under the Policy (such event, a “certificate insurer default”),
the certificate insurer will have the right to exercise all rights, including
voting rights, of the holders of the Class A1C Certificates under the pooling
agreement without any consent of such holders, and such holders may exercise
such rights only with the prior written consent of the certificate insurer
except as provided in the pooling agreement. In addition, to the extent of
unreimbursed payments under the Policy, the certificate insurer will be
subrogated to the rights of the holders of the Class A1C Certificates to which
such insured amounts were paid. In connection with each insured amount paid
on a
Class A1C Certificate, the trustee as attorney-in-fact for the holder thereof
will be required to assign to the certificate insurer the rights of such holder
with respect to the Class A1C Certificates, as applicable, to the extent of
such
insured amount.
S-66
Amendment
The
pooling agreement may be amended by the depositor, the seller, the sponsor,
the
master servicer, the securities administrator and the trustee without the
consent of the holders of the certificates, for any of the purposes set forth
under “Operative Agreements—Amendment” in the prospectus. In addition, the
pooling agreement may be amended by the depositor, the seller, the sponsor,
the
master servicer, the securities administrator and the trustee, with the consent
of the holders of a majority in interest of each class of affected certificates,
for the purpose of adding any provisions to, or changing in any manner or
eliminating any of the provisions of the pooling agreement or of modifying
in
any manner the rights of the holders of any class of certificates. However,
in
no event, may any amendment:
·
reduce
in any manner the amount of, or delay the timing of, distributions
required to be made on any class of offered certificates without
the
consent of the holders of all the affected certificates;
or
·
affect
adversely in any material respect the interests of the holders of
any
class of offered certificates in a manner other than as described
in the
clause above, without the consent of the holders of that class evidencing
percentage interests aggregating at least 66⅔%;
or
·
reduce
the aforesaid percentages of the aggregate outstanding principal
amounts
of the offered certificates, the holders of which are required to
consent
to any such amendment, without the consent of the holders of all
those
certificates.
Notwithstanding
the foregoing, the certificate insurer’s written consent shall be required for
any amendment that adversely affects in any respect the rights and interest
of
the certificate insurer or of holders of the Class A1C Certificates (without
regard to the Policy).
Optional
Termination of the Trust Fund.
On
any
distribution date following the date on which the aggregate Stated Principal
Balance of the mortgage loans is equal to or less than 10% of the aggregate
Stated Principal Balance of the mortgage loans as of the cut-off date, the
sponsor will have the right to repurchase all of the mortgage loans and REO
properties remaining in the trust fund. We refer to the date on which this
option may be exercised as the “optional termination date” of the trust fund. In
the event that the option is exercised, the repurchase will be made at a price
equal to the sum of (a) 100% of the Stated Principal Balance of the mortgage
loans (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced and unscheduled
collections of principal received during the related Prepayment Period) and
(b)
the fair market value of each REO property, plus, in each case, interest accrued
and not paid or advanced at the related loan rate (net of servicing fees) up
to
and including the first day of the month in which the termination price is
distributed. All proceeds from the termination will be included in Available
Funds and will be distributed to the holders of the certificates in accordance
with the pooling agreement. Any delinquency advances and servicing advances
remaining unreimbursed, and any servicing fee unpaid, upon the optional
termination of the trust fund, will be paid in accordance with the related
underlying purchase agreement. Any unpaid Basis Risk Shortfalls will not be
paid
to certificateholders in connection with the optional termination of the trust
fund. No such purchase by the sponsor will be permitted without the consent
of
the certificate insurer if a draw on the Policy will be made or could in the
future be made, or if any amounts due to the certificate insurer would remain
unreimbursed on the final distribution date. Subject to the rights of the
certificate insurer set forth in the preceding sentence, if the sponsor does
not
exercise such option to repurchase the mortgage loans and REO properties, Wells
Fargo Bank, N.A., in its capacity as master servicer, may repurchase from the
trust fund all mortgage loans and REO properties remaining in the trust fund
at
the purchase price set forth above when the Stated Principal Balance of the
mortgage loans is less than 5% of their aggregate Stated Principal Balance
as of
the cut-off date.
S-67
Any
repurchase of the mortgage loans and REO properties in accordance with the
preceding paragraph will result in the early retirement of any outstanding
certificates.
Special
Foreclosure Rights
A
servicer will not commence foreclosure proceedings with respect to a mortgage
loan unless (i) no later than five business days prior to such commencement,
it
notifies the master servicer and the majority holder of the most junior class
of
subordinate certificates of its intention to do so, and (ii) such holder does
not, within such period, affirmatively object to such action. If the majority
holder of the most junior class of subordinate certificates timely and
affirmatively objects to such action, then it will instruct the master servicer
to hire three appraisal firms to compute the fair value of the mortgaged
property relating to the mortgage loan utilizing the Fannie Mae Form 2055
Exterior-Only Inspection Residential Appraisal Report (each such appraisal
firm
computation, a “Fair Value Price”), in each case no later than 30 days from the
date of such holder’s objection. Subject to certain provisions in the pooling
agreement and in the related servicing agreement, the majority holder of the
most junior class of subordinate certificates will, no later than 5 days after
the expiration of such 30-day period, purchase such mortgage loan and the
related mortgaged property at an amount equal to the highest of the three Fair
Value Prices determined by such appraisal firms plus accrued and unpaid interest
thereon; provided, that if such appraisals cannot be obtained, then such holder
shall purchase such mortgage loan at a purchase price established in accordance
with the provisions of the related servicing agreement and the pooling and
servicing agreement.
In
the
event that a servicer determines not to proceed with foreclosure proceedings
with respect to a mortgage loan that is 60 days’ or more delinquent, prior to
taking any action with respect to such mortgage loan the related servicer must
promptly provide the master servicer and the majority holder of the most junior
class of subordinate certificates with notice of such determination and a
description of such other action as it intends to take with respect to such
mortgage loan. The related servicer is not permitted to proceed with any such
action unless such holder, does not, within five business days following such
notice, affirmatively objects to such servicer taking such action. If the
majority holder of the most junior class of subordinate certificates timely
and
affirmatively objects to the servicer’s action, then it will instruct the master
servicer to hire the three appraisal firms to compute the Fair Value Price,
in
each case no later than 30 days from the date of such holder’s objection. The
majority holder of the most junior class of subordinate certificates will,
no
later than 5 days after the expiration of such 30-day period, purchase such
mortgage loan and the related mortgaged property at an amount equal to the
highest of the three Fair Value Prices determined by such appraisal firms plus
accrued and unpaid interest thereon; provided, that if such appraisals cannot
be
obtained, then such holder shall purchase such mortgage loan at a purchase
price
established in accordance with the provisions of the related servicing agreement
and the pooling and servicing agreement.
Notwithstanding
anything in this prospectus supplement to the contrary, the majority holder
of
the most junior class of subordinate certificates will not be entitled to any
of
its rights described in this prospectus supplement with respect to a mortgage
loan following its failure to purchase such mortgage loan and the related
mortgaged property (at the highest of the three Fair Value Prices respectively
determined by such appraisal firms as set forth above) during the time frame
set
forth in the pooling agreement following its objection to the servicer’s
action.
Events
of Default
An
event
of default with respect to the master servicer will consist, among other things,
of:
·
any
failure by the master servicer to make an advance or any other failure
by
the master servicer to deposit in the distribution account any deposit
required to be made under the terms of the pooling agreement and
the
continuance of such failure for two business days following the date
upon
which written notice of such failure shall have been given to the
master
servicer; or
·
any
failure by the master servicer duly to observe or perform in any
material
respect any other of its covenants or agreements in the servicing
agreement, which continues unremedied for 60 days after the date
on which
written notice of the failure is given to the master servicer;
or
·
insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, and certain actions by or on behalf of the master servicer
indicating its insolvency or inability to pay its
obligations.
Rights
Upon Event of Default
So
long
as an event of default under the pooling agreement remains unremedied, the
trustee may (and, pursuant to the pooling agreement, if so directed by holders
of certificates evidencing not less than 51% of the voting rights, shall)
terminate all of the rights and obligations of the master servicer in its
capacity as master servicer of the mortgage loans, as provided in the servicing
agreements and the pooling agreement. If this occurs, the trustee will succeed
to, or appoint a successor to succeed to, all of the responsibilities and duties
of the master servicer under the pooling agreement, including the obligation
to
make advances.
S-68
No
assurance can be given that termination of the rights and obligations of the
master servicer under the servicing agreement would not adversely affect the
servicing of the mortgage loans, including the loss and delinquency experience
of the mortgage loans.
No
certificateholder, solely by virtue of its status as a holder of a certificate,
will have any right under the pooling agreement to institute any proceeding
with
respect to the termination of the master servicer, unless the holder previously
has given to the trustee written notice of the master servicer’s default and
certificateholders having not less than 51% of the voting rights agree to the
termination and have offered an indemnity reasonably acceptable to the
trustee.
Description
of the Certificates
General
The
certificates will be issued pursuant to the pooling agreement. Set forth below
is a description of the material terms and provisions pursuant to which the
offered certificates will be issued. The following description is subject to,
and is qualified in its entirety by reference to, the actual provisions of
the
pooling agreement. When particular provisions or terms used in the pooling
agreement are referred to, the provisions or terms are as specified in the
pooling agreement.
Luminent
Mortgage Trust 2006-2 will issue the following classes of senior
certificates:
· the
Class
A1A Certificates,
· the
Class
A1B Certificates,
· the
Class
A1C Certificates,
· the
Class X Certificates,
· the
Class
PO Certificates, and
· the
Class
A-R Certificate,
in
addition to the following classes of subordinate certificates:
· the
Class
B-1 Certificates,
· the
Class
B-2 Certificates,
· the
Class
B-3 Certificates,
· the
Class
B-4 Certificates,
· the
Class
B-5 Certificates, and
· the
Class
B-6 Certificates.
Only
the
senior certificates and the Class B-1, Class B-2 and Class B-3 Certificates
are
offered by this prospectus supplement and the accompanying
prospectus.
The
classes of offered certificates will have the respective initial class principal
balances or class notional amount set forth on the cover page. The
initial class principal balances or class notional balance of the certificates
may vary in the aggregate by plus or minus 10%. On
any
date subsequent to the closing date, the class principal balance of a class
of
certificates (other than the Class X Certificates) will be equal to its initial
class principal balance, as increased by any amounts of net deferred interest
allocated to such class as described under “—Interest” below, reduced by all
amounts actually distributed as principal of that class, all Realized Losses
applied in reduction of principal of that class or component on all prior
distribution dates and any amounts allocated to any class of subordinate
certificates in reduction of its class principal balance if the aggregate class
principal balances of all classes of certificates following all distributions
and the allocations of Realized Losses on that distribution date exceeds the
Pool Balance as of the first day of the month of that Distribution Date, as
described below under “—Allocation of Losses;”provided,
however,
that on
any distribution date, the class principal balance to which Realized Losses
have
been allocated (including any such class of certificates for which the class
principal balance has been reduced to zero) will be increased, up to the amount
of Recoveries for such distribution date, as follows: (a) first, the class
principal balance of each class of senior certificates (other than the Class
X
Certificates) with respect to which each Recovery was collected will be
increased, pro
rata,
based
on Realized Losses borne by such class, up to the lesser of (i)(x) the excess
of
net Realized Losses previously borne by that class over (y) the amount of
payments received under the financial guaranty insurance policy (that remain
unreimbursed) with respect to such Realized Loss and (ii) Recoveries for such
Distribution Date and (b) second, the class principal balance of each class
of
subordinate certificates will be increased, in order of seniority, up to the
amount of Realized Losses previously allocated to reduce the class principal
balance of each such class of certificates and not previously
reimbursed.
S-69
The
classes of offered certificates will have the respective pass-through rates
described under “—Interest—Pass-Through Rates” below.
The
Class
PO Certificates are principal-only certificates and are not entitled to any
distributions in respect of interest.
The
Class
PO Certificates will have a class principal balance (initially equal to $100)
that will increase in an amount equal to net deferred interest allocated to
the
Class X Certificates as described under “—Interest” below, as reduced by all
amounts actually distributed as principal of such class and all Realized Losses
applied in reduction of principal of such class on all prior distribution dates.
The
Class
X Certificates are interest-only certificates and are not entitled to any
distributions in respect of principal. The Class X Certificates will have the
pass-through rate described under “—Interest—Pass-Through Rates”
below.
The
Class
X Certificates are interest-only certificates that will not have a class
principal balance but will accrue interest on their class notional amount which
shall, for any distribution date, equal the aggregate class principal balance
of
the certificates immediately before such distribution date (initially, equal
to
approximately $801,473,842).
The
initial class principal balances of the Class B-4, Class B-5 and Class B-6
Certificates will be approximately $10,419,000, $8,015,000 and $6,411,642,
respectively, subject to the ten percent variance described above. The Class
B-4, Class B-5 and Class B-6 Certificates will have the respective pass-through
rates described under “—Interest—Pass-Through Rates” below.
The
offered certificates other than the Class A-R Certificate will be issued in
book-entry form as described under “—Book-Entry Registration and Definitive
Certificates” below. The offered certificates, other than the interest-only
certificates and principal-only certificates and the Class A-R Certificates
will
be issued in minimum dollar denominations of $25,000 and integral multiples
of
$1 in excess thereof, provided,
that,
such
certificates must be purchased in minimum total investments of at least
$100,000. The Class X Certificates will be issued in minimum notional amounts
of
$100,000 and integral multiples of $1 in excess thereof. The Class PO
Certificates will be issued in minimum percentage interests of 0.01%,
provided,
that,
such
certificates must be purchased initially in minimum total investments of at
least $100,000. The Class A-R Certificate will be issued as a single certificate
in physical form.
Distributions
on the offered certificates will be made by the securities administrator on
each
distribution date, beginning in March 2006, to the persons or entities in whose
names the offered certificates are registered at the close of business on the
related record date. The record date for any distribution date with respect
to
the Class X, Class PO and Class A-R Certificates, is the last business day
of
the month immediately preceding the month in which that distribution date occurs
(or the closing date, in the case of the first distribution date). The record
date for any distribution date with respect to the LIBOR Certificates is the
last business day immediately preceding that distribution date, unless such
certificates are no longer book-entry certificates, in which case the record
date is the last business day of the month immediately preceding the month
in
which that distribution date occurs.
Book-Entry
Registration and Definitive Certificates
The
offered certificates (other than the Class A-R Certificate) initially will
be
book-entry certificates. Persons and entities that acquire beneficial ownership
interests in the book-entry certificates will be deemed “certificate owners” and
will hold their certificates through The Depository Trust Company (“DTC”) in the
United States, or, upon request, through Clearstream Banking Luxembourg, or
Euroclear in Europe, if they are participants of those systems, or indirectly
through organizations which are participants in those systems. Each class of
book-entry certificates will be issued in the form of one or more global
certificates which equal the class principal balance or class notional amount,
as applicable, of that class and will initially be registered in the name of
Cede & Co., the nominee of DTC. Clearstream and Euroclear will hold omnibus
positions on behalf of their participants through customers’ securities accounts
in Clearstream’s and Euroclear’s names on the books of their respective
depositaries which in turn will hold such positions in customers’ securities
accounts in the depositaries’ names on the books of DTC. Citibank, N.A. will act
as depositary for Clearstream and JPMorgan Chase Bank will act as depositary
for
Euroclear. Except as described below, no beneficial owner of a book-entry
certificate will be entitled to receive a definitive (i.e.,
physical) certificate. Unless and until definitive certificates are issued,
it
is anticipated that the only “certificateholder” of the offered certificates
will be Cede & Co., as nominee of DTC. Beneficial owners of book-entry
certificates will not be “Certificateholders” as that term is used in the
pooling agreement. Beneficial owners of book-entry certificates are only
permitted to exercise their rights indirectly through DTC
participants.
S-70
A
certificate owner’s ownership of a book-entry certificate will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary that maintains the owner’s account for such purpose. In turn, the
financial intermediary’s ownership of the book-entry certificate will be
recorded on the records of DTC (or of a participant that acts as agent for
the
financial intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner’s financial intermediary is not a participant,
and on the records of Clearstream or Euroclear, as appropriate).
Certificate
owners will receive all distributions of principal of and interest on the
book-entry certificates from the securities administrator, through DTC and
DTC
participants. So long as the book-entry certificates are outstanding (except
under the circumstances described below), DTC’s rules (consisting of all the
rules, regulations and procedures creating and affecting DTC and its
operations), require that DTC:
·
make
book-entry transfers among participants on whose behalf it acts with
respect to the book-entry certificates, and
·
receive
and transmit distributions of principal of, and interest on, the
book-entry certificates.
Participants
and indirect participants with which certificate owners have accounts with
respect to book-entry certificates are similarly required to make book-entry
transfers and receive and transmit distributions on behalf of their respective
certificate owners. Accordingly, although certificate owners will not possess
certificates representing their respective interests in the book-entry
certificates, DTC’s rules provide a mechanism by which certificate owners will
receive distributions and will be able to transfer their interests.
Certificate
owners will not receive or be entitled to receive certificates representing
their respective interests in the offered certificates, except under the limited
circumstances described below. Unless and until definitive certificates are
issued, certificate owners who are not DTC participants may transfer ownership
of book-entry certificates only through participants and indirect participants
by instructing such participants and indirect participants to transfer the
book-entry certificates, by book-entry transfer, through DTC for the account
of
the purchasers of the book-entry certificates, which account is maintained
with
their respective participants. Under DTC’s rules and in accordance with DTC’s
normal procedures, transfers of ownership of book-entry certificates will be
executed through DTC and the accounts of the respective participants at DTC
will
be debited and credited. Similarly, the participants and indirect participants
will make debits or credits, as the case may be, on their records on behalf
of
the selling and purchasing certificate owners.
Because
of time zone differences, credits of securities received in Clearstream or
Euroclear as a result of a transaction with a DTC participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. These credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream participants on the business day following the DTC
settlement date. Cash received in Clearstream or Euroclear as a result of sales
of securities by or through a Clearstream participant or Euroclear participant
to a DTC participant will be received with value on the DTC settlement date
but
will be available in the relevant Clearstream or Euroclear cash account only
as
of the business day following settlement in DTC. For information with respect
to
tax documentation procedures relating to the certificates, see “Material Federal
Income Tax Consequences—REMIC Certificates—C. Regular Certificates—Non-U.S.
Persons,”“—Information Reporting and Backup Withholding” and “—New Withholding
Regulations” in the prospectus.
Transfers
between participants will occur in accordance with DTC’s rules. Transfers
between Clearstream participants and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
Cross-market
transfers between persons or entities holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through Clearstream
participants or Euroclear participants, on the other, will be effected in DTC
in
accordance with DTC’s rules on behalf of the relevant European international
clearing system by the relevant European depositary. However, these cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
relevant European depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. Clearstream participants and Euroclear Participants may
not
deliver instructions directly to the European depositaries.
S-71
DTC
is a
New York-chartered limited purpose trust company, and performs services for
its
participants, some of which (and/or their representatives) own DTC. In
accordance with its normal procedures, DTC is expected to record the positions
held by each DTC participant in the book-entry certificates, whether held for
its own account or as a nominee for another person. In general, beneficial
ownership of book-entry certificates will be subject to the DTC’s rules as in
effect from time to time.
Clearstream
Banking Luxembourg, 42 Avenue J.F. Kennedy, L-2967 Luxembourg, is a limited
liability company incorporated under the laws of the Grand Duchy of Luxembourg.
Clearstream is a subsidiary of Clearstream International, société
anonyme
(“Clearstream International”), which was formed in January 2000 through the
merger of Cedel International and Deutsche Boerse Clearing, a subsidiary of
Deutsche Boerse AG. In July 2002, Deutsche Boerse AG acquired Cedel
International and its 50 percent interest in Clearstream
International.
Clearstream
is registered as a bank in Luxembourg, and as such is subject to regulation
by
the Banque Central du Luxembourg (Luxembourg Central Bank) and the Commission
de
Surveillance du Secteur Financier (Luxembourg Commission for the Supervision
of
the Financial Sector), which supervise Luxembourg banks.
Clearstream
holds securities for its participating organizations. Clearstream facilitates
the clearance and settlement of securities transactions between Clearstream
participants through electronic book-entry changes in accounts of Clearstream
participants, eliminating the need for physical movement of certificates.
Clearstream provides to Clearstream participants, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Clearstream interfaces
with domestic markets in several countries. Clearstream participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to Clearstream is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Clearstream
participant, either directly or indirectly.
Euroclear
was created in 1968 to hold securities for its participants and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, eliminating the need for
physical movement of certificates and eliminating any risk from lack of
simultaneous transfers of securities and cash. Euroclear provides various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries. Euroclear is operated by Euroclear Bank
S.A./NV (the “Euroclear Operator”), under contract with Euroclear Clearance
System plc, a United Kingdom corporation (the “Cooperative”). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear participants. Euroclear participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries and may include underwriters. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear participant, either directly or
indirectly.
The
Euroclear Operator has advised us that it is licensed by the Belgian Banking
and
Finance Commission to carry out banking activities on a global basis. As a
Belgian bank, it is regulated and examined by the Belgian Banking
Commission.
Securities
clearance accounts and cash accounts with the Euroclear operator are governed
by
the terms and conditions governing use of Euroclear. The related operating
procedures of the Euroclear System and applicable Belgian law govern transfers
of securities and cash within Euroclear, withdrawals of securities and cash
from
Euroclear, and receipts of payments with respect to securities in Euroclear.
All
securities in Euroclear are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
operator acts only on behalf of Euroclear participants and has no record of
or
relationship with persons holding through Euroclear participants.
S-72
Distributions
on the book-entry certificates will be made on each distribution date by the
securities administrator to DTC. DTC will be responsible for crediting the
respective amounts to the accounts of the applicable DTC participants in
accordance with DTC’s normal procedures. Each DTC participant will be
responsible for disbursing the payments to the beneficial owners of the
book-entry certificates that it represents and to each financial intermediary
for which it acts as agent. In turn, each financial intermediary will be
responsible for disbursing funds to the beneficial owners of the book-entry
certificates that it represents.
Under
a
book-entry format, beneficial owners of the book-entry certificates may
experience some delay in their receipt of payments, because such payments will
be forwarded by the securities administrator to Cede & Co. Distributions
with respect to certificates held through Clearstream or Euroclear will be
credited to the cash accounts of Clearstream participants or Euroclear
participants in accordance with the relevant system’s rules and procedures, to
the extent received by the relevant European depositary. Distributions will
be
subject to tax reporting in accordance with relevant United States tax laws
and
regulations. See “Material Federal Income Tax Consequences—REMIC Certificates—C.
Regular Certificates— Non-U.S.
Persons”
and
“—Information
Reporting and Backup Withholding”
in
the
prospectus. Because DTC can only act on behalf of financial intermediaries,
the
ability of a beneficial owner to pledge book-entry certificates to persons
or
entities that do not participate in DTC, or otherwise take actions in respect
of
the book-entry certificates, may be limited due to the lack of physical
certificates. In addition, issuance of certificates in book-entry form may
reduce the liquidity of the certificates in the secondary market because certain
potential investors may be unwilling to purchase certificates for which they
cannot obtain physical certificates.
Monthly
and annual reports on the trust fund will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with DTC’s rules, and to the financial
intermediaries to whose DTC accounts the book-entry certificates of such
beneficial owners are credited.
DTC
has
advised the securities administrator, that, unless and until definitive
certificates are issued, DTC will take any action permitted to be taken by
the
holders of the book-entry certificates under the pooling agreement only at
the
direction of one or more financial intermediaries to whose DTC accounts the
book-entry certificates are credited, to the extent that such actions are taken
on behalf of financial intermediaries whose holdings include book-entry
certificates. Clearstream or the Euroclear operator, as the case may be, will
take any other action permitted to be taken by a certificateholder under the
pooling agreement on behalf of a Clearstream participant or Euroclear
participant only in accordance with its relevant rules and procedures and
subject to the ability of the relevant European depositary to effect such
actions on its behalf through DTC. DTC may take actions, at the direction of
the
related participants, with respect to some book-entry certificates which
conflict with actions taken with respect to other book-entry
certificates.
Definitive
certificates will be issued to beneficial owners of book-entry certificates,
or
their nominees, rather than to DTC, only if:
·
DTC
or the depositor advises the securities administrator in writing
that DTC
is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the book-entry
certificates and the depositor or the securities administrator is
unable
to locate a qualified successor; or
·
the
depositor, with the consent of the applicable DTC participants, elects,
in
writing, to terminate the book entry system through DTC;
or
·
after
the occurrence of an event of default under the pooling agreement,
beneficial owners having percentage ownership interests aggregating
not
less than 51% of the book-entry certificates advise the securities
administrator and DTC, through the financial intermediaries and the
DTC
participants in writing, that the continuation of the book-entry
system
through DTC (or a successor thereto) is no longer in the best interests
of
beneficial owners.
Upon
the
occurrence of any of the events described in the immediately preceding
paragraph, the securities administrator will use all reasonable efforts to
notify the beneficial owners of the occurrence of the event and the availability
through DTC of definitive certificates. Upon surrender by DTC of the global
certificate or certificates representing the book-entry certificates and
instructions for re-registration, the securities administrator will issue
definitive certificates, and thereafter the securities administrator and the
trustee will recognize the holders of the definitive certificates as
“Certificateholders” under the pooling agreement. The definitive certificates
will be transferable and exchangeable at the offices of the securities
administrator, as certificate registrar, from time to time for these purposes.
The securities administrator has initially designated its offices located at
Sixth Street and Marquette Avenue, Minneapolis, Minnesota55479 for such
purposes.
S-73
Although
DTC, Clearstream and Euroclear have agreed to the foregoing procedures in order
to facilitate transfers of book-entry certificates among participants of DTC,
Clearstream and Euroclear, they are under no obligation to perform or continue
to perform these procedures, which may be discontinued at any time.
None
of
the depositor, the master servicer, the underwriters, the seller, the sponsor,
the certificate insurer, the securities administrator or the trustee will have
any responsibility for any aspect of the records relating to, or payments made
on account of, beneficial ownership interests of the book-entry certificates
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests or transfer
thereof.
According
to DTC, the foregoing information with respect to DTC has been provided for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
Priority
of Distributions on the Certificates
As
more
fully described in this prospectus supplement, on each distribution date the
distribution of Available Funds will be made in the following order of
priority:
(a)
with
respect to the Available Funds from the mortgage
loans:
first,
current
interest on the Class A1A, Class A1B, Class A1C, Class A-R and Class
X
Certificates, on a pro
rata
basis with respect to each class of certificates; provided,
however,
that on each distribution date, to the extent of the Required Reserve
Fund
Deposit for such distribution date, the amount of current interest
that
would otherwise be distributable to the Class X Certificates (after
giving
effect to any reduction in respect of net deferred interest allocated
to
the Class X Certificates on such distribution date) will be deposited
in
the Basis Risk Reserve Fund and will not be distributed to such class;
and
second,
principal
on the senior certificates (other than the Class X Certificates)
in the
order and priority described under “—Principal—Senior Principal
Distribution Amount” below;
(b)
from
the
Basis Risk Reserve Fund, for distribution to the Class A1A, Class A1B and
Class
A1C Certificates, pro
rata,
based
on amounts due, any Basis Risk Shortfall remaining unpaid for each such class
and such date as described under “—Interest—Basis Risk Reserve Fund” below;
(c)
with
respect to all remaining Available
Funds:
first,
reimbursement
amounts due to the certificate insurer under the pooling agreement;
and
second,
current
and unpaid interest on, and then principal of, each class of subordinate
certificates, in the order of their numerical class designations
beginning
with the Class B-1 Certificates, subject to certain limitations described
under “—Principal” below;
(d) any
remaining amounts from the Basis Risk Reserve Fund, for distribution to the
subordinate certificates, sequentially in the order of their numerical class
designations beginning with the Class B-1 Certificates, any Basis Risk Shortfall
remaining unpaid for each such class and such date, as described under
“—Interest—Basis Risk Reserve Fund” below; and
(e) with
respect to all remaining Available Funds, to the Class A-R
Certificate.
S-74
Interest
Calculation
of Interest.
On each
distribution date, each class of certificates (other than the principal-only
certificates) will be entitled to receive, to the extent of funds available
and
subject to reduction for net interest shortfalls on the related mortgage loans
as described under “ —Net Interest Shortfall” below, an amount allocable to
interest (“current interest”) for the related interest accrual period equal
to
·
interest
at the applicable pass-through rate on the class principal balance,
or
class notional amount, as applicable, immediately prior to such
distribution date, of that class
plus
·
unpaid
interest amounts consisting of the excess
of
all amounts calculated in accordance with the preceding bullet on
all
prior distribution dates over
the
amount actually distributed as interest on the prior distribution
dates;
provided,
however,
that
for any distribution date, a portion of the current interest on any class of
certificates will be reduced if the pass-through rate applicable to such class
for the related accrual period exceeds the adjusted cap rate applicable to
such
class.
The
“adjusted cap rate” for the certificates (other than the Class X and Class PO
Certificates) for any distribution date will equal the related net WAC cap
for
that distribution date, computed by first reducing the net WAC by a per annum
rate equal to the quotient of (i) the product of (a) the net deferred interest,
if any, on the mortgage loans for that distribution date and (b) 12, divided
by
(ii) the aggregate principal balance of the mortgage loans as
of the
first day of the related Due Period.
The
“adjusted cap rate” for the Class X Certificates for any distribution date will
equal the pass-through rate for such class, computed for this purpose by (i)
reducing the amount of interest accrued on the mortgage loans for the related
Due Period by the amount of any net deferred interest for such distribution
date, and (ii) calculating the interest accrued on the certificates (other
than
the Class X Certificates) by substituting the related “adjusted cap rate” for
the related “net WAC cap” in the definition of pass-through rate for each class
of certificates (other than the Class X and Class PO Certificates).
With
respect to each mortgage loan and each related due date, “deferred interest”
will be the excess, if any, of the amount of interest accrued on such mortgage
loan from the preceding due date to such due date over the portion of the
monthly payment allocated to interest for such due date. Such excess may occur
because the mortgage rates of the mortgage loans adjust monthly, while the
monthly payment adjusts generally no more frequently than annually, or as a
result of the application of the Payment Caps, in either case, resulting in
negative amortization. See “Description of the Mortgage Loans—General—Monthly
Payment Adjustments” herein.
With
respect to the mortgage loans and each related due date, “net deferred interest”
will be the greater of (i) the excess, if any, of the aggregate of deferred
interest for that due date over the aggregate amount of any principal
prepayments in part or in full received during the related Prepayment Period
with respect to the mortgage loans and (ii) zero.
For
any
distribution date, the net deferred interest on the mortgage loans will be
allocated among the related classes of certificates in an aggregate amount
equal
to the excess, if any, for each such class of (i) the current interest
accrued at the pass-through rate for such class over (ii) the amount that
would have been calculated as current interest had the pass-through rate for
such class equaled the adjusted cap rate for such class and for such
distribution date.
On
each
distribution date, any amount of net deferred interest allocable to a class
of
certificates (other than the interest-only certificates) on such distribution
date will be added as principal to the outstanding class principal balance
of
such class of certificates. With respect to the Class X Certificates and each
distribution date, any amount of net deferred interest with respect to the
mortgage loans that is allocated to the Class X Certificates on such
distribution date will be added as principal to the class principal balance
of
the Class PO Certificates. As a result of the allocation of net deferred
interest, a portion of the interest accrued on such certificates may be
distributed to such certificates later than otherwise anticipated and in the
case of the Class X Certificates, will be distributable as principal to the
Class PO Certificates.
S-75
The
interest accrual period for the Class A-R and Class X Certificates will be
the
calendar month preceding the month of that distribution date. The interest
accrual period for each distribution date and the Class A1A, Class A1B and
Class
A1C Certificates and the subordinate certificates will be the period beginning
with the prior distribution date (or the closing date, in the case of the first
distribution date) and ending on the day immediately preceding such distribution
date. Interest will accrue during the interest accrual period for each
distribution date and the Class A-R and Class X Certificates on the basis of
an
assumed 360-day year consisting of twelve 30-day months. Interest will accrue
during the interest accrual period for each distribution date and the Class
A1A,
Class A1B and Class A1C Certificates and the subordinate certificates on the
basis of an assumed 360-day year and the actual number of days elapsed in the
related interest accrual period. The Class PO Certificates are principal-only
certificates and will not accrue interest.
The
interest entitlement described above for each class of certificates for any
distribution date will be reduced by the amount of net interest shortfall
experienced by the related mortgage loans. See “—Net Interest Shortfall”
below.
Pass-Through
Rates.
The
pass-through rates of the certificates (other than the principal-only
certificates) for any distribution date will be calculated as described below.
The net loan rate for each mortgage loan will be equal to the loan rate on
such
mortgage loan less
the
related trust expense fee rate.
The
“net
WAC” for any distribution date equals the weighted average of the net loan rates
of the mortgage loans as of the first day of the related Due Period, weighted
on
the basis of their Stated Principal Balances as of the first day of the related
Due Period.
The
“net
WAC cap” for each class of the Class A1A and Class A1B Certificates and the
subordinate certificates for any distribution date equals the product of (i)
the
net WAC multiplied by (ii) the quotient of 30 divided by the actual number
of
days in the accrual period.
The
“net
WAC cap” for the Class A1C Certificates for any distribution date equals (a) the
product of (i) the net WAC multiplied by (ii) the quotient of 30 divided by
the
actual number of days in the accrual period less
(b) the
insurance premium rate for such distribution date.
For
the
Class A1C Certificates and the related net WAC cap and pass-through rate, the
per annum “insurance premium rate” for any distribution date is the product of
(i)(a) the insurance premium for the Class A1C Certificates for such
distribution date, divided by (b) the class principal balance of such class
immediately prior to such distribution date, multiplied by (ii) the quotient
obtained by dividing 360 by the actual number of days in the related interest
accrual period for such class.
The
“net
maximum rate cap” for each class of certificates (other than the Class X and
Class PO Certificates) on any distribution date is equal to the related net
WAC
cap computed by assuming that each mortgage loan accrued interest at its net
maximum rate.
The
“net
maximum rate” with respect to each mortgage loan is equal to the maximum
mortgage rate less
the
trust expense fee rate.
The
“pass-through rate” of the Class A1A Certificates on any distribution date will
equal the least of (i) One-Month LIBOR plus 0.200% per annum (the “Class A1A
Certificate Margin”), (ii) the related net WAC cap for that distribution
date and (iii) the net maximum rate cap. As described under “The Pooling
Agreement—Optional Termination of the Trust Fund,” if the option to repurchase
the mortgage loans is not exercised by the sponsor on the first possible
optional termination date, then on all succeeding distribution dates, the Class
A1A Certificate Margin will be increased to 0.400% per annum.
The
“pass-through rate” of the Class A1B Certificates on any distribution date will
equal the least of (i) One-Month LIBOR plus 0.280% per annum (the “Class A1B
Certificate Margin”), (ii) the related net WAC cap for that distribution
date and (iii) the net maximum rate cap. As described under “The Pooling
Agreement—Optional Termination of the Trust Fund,” if the option to repurchase
the mortgage loans is not exercised by the sponsor on the first possible
optional termination date, then on all succeeding distribution dates, the Class
A1B Certificate Margin will be increased to 0.560% per annum.
The
“pass-through rate” of the Class A1C Certificates on any distribution date will
equal the least of (i) One-Month LIBOR plus 0.210% per annum (the “Class A1C
Certificate Margin”), (ii) the related net WAC cap for that distribution
date and (iii) the net maximum rate cap. As described under “The Pooling
Agreement—Optional Termination of the Trust Fund,” if the option to repurchase
the mortgage loans is not exercised by the sponsor on the first possible
optional termination date, then on all succeeding distribution dates, the Class
A1C Certificate Margin will be increased to 0.420% per annum.
S-76
The
“pass-through rate” of the Class A-R Certificate on any distribution date will
equal the net WAC for that distribution date.
The
“pass-through rate” of the Class X Certificates for any distribution date
will be calculated at an annual rate equal to the quotient of (a) the product
of
(1) the excess, if any, of (i) the interest accrued on the mortgage loans at
the
net mortgage rate for the related due period over (ii) the sum of (x) the
interest accrued for the related accrual period on the certificates (other
than
the Class X Certificates) and (y) the insurance premiums due for such
distribution date, multiplied by (2) 12, divided by (b) the class notional
amount of the Class X Certificates for such distribution date.
Notwithstanding
the foregoing, on each distribution date the amount of interest that would
otherwise be distributable to the Class X Certificates (after giving effect
to
any reduction in respect of net deferred interest allocated to the Class X
Certificates on such distribution date) may be reduced by the amount, if any,
that is necessary to fund payment of any Basis Risk Shortfalls to the holders
of
the Class A1A, Class A1B and Class A1C Certificates, and the subordinate
certificates. See “—Basis Risk Reserve Fund” below.
The
“pass-through rate” of the Class B-1 Certificates on any distribution date will
equal the least of (i) One-Month LIBOR plus 0.480% per annum (the “Class B-1
Certificate Margin”), (ii) the related net WAC cap for that distribution date
and (iii) the net maximum rate cap for that distribution date. As described
under “The Pooling Agreement—Optional Termination of the Trust Fund,” if the
option to repurchase the mortgage loans is not exercised by the sponsor on
the
first possible optional termination date, then on all succeeding distribution
dates, the Class B-1 Certificate Margin will be increased to 0.720% per
annum.
The
“pass-through rate” of the Class B-2 Certificates on any distribution date will
equal the least of (i) One-Month LIBOR plus 0.900% per annum (the “Class B-2
Certificate Margin”), (ii) the related net WAC cap for that distribution date
and (iii) the net maximum rate cap for that distribution date. As described
under “The Pooling Agreement—Optional Termination of the Trust Fund,” if the
option to repurchase the mortgage loans is not exercised by the sponsor on
the
first possible optional termination date, then on all succeeding distribution
dates, the Class B-2 Certificate Margin will be increased to 1.350% per
annum.
The
“pass-through rate” of the Class B-3 Certificates on any distribution date will
equal the least of (i) One-Month LIBOR plus 1.750% per annum (the “Class B-3
Certificate Margin”), (ii) the related net WAC cap for that distribution date
and (iii) the net maximum rate cap for that distribution date. As described
under “The Pooling Agreement—Optional Termination of the Trust Fund,” if the
option to repurchase the mortgage loans is not exercised by the sponsor on
the
first possible optional termination date, then on all succeeding distribution
dates, the Class B-3 Certificate Margin will be increased to 2.625% per
annum.
The
“pass-through rate” of the Class B-4 Certificates on any distribution date will
equal the least of (i) One-Month LIBOR plus 1.750% per annum (the “Class B-4
Certificate Margin”), (ii) the related net WAC cap for that distribution date
and (iii) the net maximum rate cap for that distribution date. As described
under “The Pooling Agreement—Optional Termination of the Trust Fund,” if the
option to repurchase the mortgage loans is not exercised by the sponsor on
the
first possible optional termination date, then on all succeeding distribution
dates, the Class B-4 Certificate Margin will be increased to 2.625% per
annum.
The
“pass-through rate” of the Class B-5 Certificates on any distribution date will
equal the least of (i) One-Month LIBOR plus 1.750% per annum (the “Class B-5
Certificate Margin”), (ii) the related net WAC cap for that distribution date
and (iii) the net maximum rate cap for that distribution date. As described
under “The Pooling Agreement—Optional Termination of the Trust Fund,” if the
option to repurchase the mortgage loans is not exercised by the sponsor on
the
first possible optional termination date, then on all succeeding distribution
dates, the Class B-5 Certificate Margin will be increased to 2.625% per
annum.
The
“pass-through rate” of the Class B-6 Certificates on any distribution date will
equal the least of (i) One-Month LIBOR plus 1.750% per annum (the “Class B-6
Certificate Margin”), (ii) the related net WAC cap for that distribution date
and (iii) the net maximum rate cap for that distribution date. As described
under “The Pooling Agreement—Optional Termination of the Trust Fund,” if the
option to repurchase the mortgage loans is not exercised by the sponsor on
the
first possible optional termination date, then on all succeeding distribution
dates, the Class B-6 Certificate Margin will be increased to 2.625% per
annum.
S-77
Net
Interest Shortfall.
The
interest entitlement of each class of certificates (other than the Class PO
Certificates) on each distribution date as described under “—Calculation of
Interest” above will be reduced by its share, as described below, of the amount
of net interest shortfall experienced by the mortgage loans. For each
distribution date, the “net interest shortfall” will be equal to the
sum
of
·
the
amount, if any, by which the aggregate prepayment interest shortfall
experienced by the mortgage loans during the preceding calendar month
exceeds the compensating interest paid out of the servicing fees
for the
related distribution date as described under “Servicing of Mortgage
Loans—Prepayment Interest Shortfalls,”plus
·
the
amount by which the interest that would otherwise have been received
on
any related mortgage loan was reduced due to application of the
Servicemembers Civil Relief Act, as amended and similar state and
local
laws (the “Relief Act”).
See
“Material Legal Aspects of the Loans—Servicemembers Civil Relief Act” in the
prospectus and “Description of the Certificates—Allocation of Losses” in this
prospectus supplement.
The
net
interest shortfall for the mortgage loans on any distribution date will be
allocated among all classes of the senior certificates (other than the Class
PO
Certificates) and all classes of the subordinate certificates based on the
amount of interest which the respective classes of certificates would otherwise
be entitled to receive with respect to the mortgage loans on that distribution
date, in each case before taking into account any reduction in those amounts
on
such date due to (i) the net interest shortfall, (ii) any net deferred interest
allocable to such class and (iii) with respect to the Class X Certificates,
the
Required Reserve Fund Deposit.
If
on any
distribution date Available Funds in the distribution account applied in the
order described under “—Priority of Distributions on the Certificates” above are
not sufficient to make a full distribution of the interest entitlement on the
certificates, interest will be distributed on each class of certificates of
equal priority pro
rata
based on
the amount of interest it would otherwise have been entitled to receive in
the
absence of the shortfall. Any unpaid interest amount will be carried forward
and
added to the amount that class of certificates will be entitled to receive
on
the next distribution date. A shortfall could occur, for example, if
delinquencies or losses realized on the mortgage loans were exceptionally high
or were concentrated in a particular month. Any unpaid interest amount so
carried forward will not bear interest.
Basis
Risk Shortfalls.
For
the
Class A1A, Class A1B and Class A1C Certificates and the subordinate certificates
and any distribution date, the “Basis Risk Shortfalls” for such class will equal
the sum of:
(i)
the
excess, if any, of the amount of interest that such class would have
been
entitled to receive if the pass-through rate for such class were
calculated without regard to clause (ii) in the definition thereof,
over
the actual amount of interest such class is entitled to receive for
such
distribution date;
(ii)
any
excess described in clause (i) above remaining unpaid from prior
distribution dates; and
(iii)
interest
for the applicable interest accrual period on the amount described
in
clause (ii) above based on the applicable pass-through rate determined
without regard to clause (ii) in the definition
thereof.
The
financial guaranty insurance policy does not cover Basis Risk Shortfalls or
shortfalls in interest collections on the mortgage loans that are attributable
to prepayment interest shortfalls, net deferred interest or the application
of
the Relief Act.
Basis
Risk Reserve Fund.
Pursuant to the terms of the pooling agreement, the securities administrator
will establish an account on behalf of the Class X Certificates (the “Basis Risk
Reserve Fund”). The Basis Risk Reserve Fund will be held in trust by the
securities administrator on behalf of the Class A1A, Class A1B, Class A1C,
Class
B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates.
The
Basis Risk Reserve Fund will not be an asset of any REMIC. Amounts on deposit
in
the Basis Risk Reserve Fund will be the sole source of payments to the holders
of the LIBOR Certificates with respect to any Basis Risk Shortfalls on such
certificates.
S-78
On
each
distribution date,interest
that would otherwise be distributable with respect to the Class X Certificates
will be deposited instead in the Basis Risk Reserve Fund, to the extent of
the
Required Reserve Fund Deposit in the manner described below.
With
respect to the Class X Certificates and any distribution date, the “Required
Reserve Fund Deposit” will be an amount equal to the lesser of (i) the aggregate
current interest for the Class X Certificates for such distribution date (after
giving effect to each such certificate’s share of any net deferred interest and
after any reduction in current interest due to net interest shortfalls on such
distribution date) and (ii) the amount required to bring the balance on deposit
in the Basis Risk Reserve Fund up to an amount equal to the aggregate unpaid
Basis Risk Shortfalls for such distribution date with respect to the Class
A1A,
Class A1B, Class A1C, Class B-1, Class B-2, Class B-3, Class B-4, Class B-5
and
Class B-6 Certificates.
On
any
distribution date for which a Basis Risk Shortfall exists with respect to any
of
the Class A1A, Class A1B and Class A1C Certificates, the securities
administrator shall withdraw from the Basis Risk Reserve Fund, the amount of
such Basis Risk Shortfall for distribution on such distribution date as
described above under “—Priority of Distributions on the Certificates.”
On
any
distribution date for which a Basis Risk Shortfall exists with respect to any
of
the subordinate certificates, the securities administrator shall withdraw from
the Basis Risk Reserve Fund the amount of such Basis Risk Shortfall for
distribution on such distribution date as described above under “—Priority of
Distributions on the Certificates.”
On
each
distribution date, the securities administrator will distribute the amount
on
deposit in the Basis Risk Reserve Fund first, to the Class A1A, Class A1B and
Class A1C Certificates on a pro
rata
basis,
based on amounts due, and second, from the Basis Risk Reserve Fund,
sequentially, to the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5
and
Class B-6 Certificates, in that order.
To
the
extent that Required Reserve Fund Deposit exceeds the amount of Basis Risk
Shortfalls to be funded by such deposits as described above, such excess shall
be remitted to the Class X Certificates.
Determination
of One-Month LIBOR.
On the
second LIBOR Business Day (as defined below) preceding the commencement of
each
interest accrual period (each such date, a “LIBOR Determination Date”), the
securities administrator will determine LIBOR based on the “Interest Settlement
Rate” for U.S. dollar deposits of one-month maturity set by the British Bankers’
Association (the “BBA”) as of 11:00 a.m. (London time) on the LIBOR
Determination Date (“LIBOR” or “One-Month LIBOR”).
The
BBA’s
Interest Settlement Rates are currently displayed on the Dow Jones Telerate
Service page 3750 (such page, or such other page as may replace page 3750 on
that service or such other service as may be nominated by the BBA as the
information vendor for the purpose of displaying the BBA’s Interest Settlement
Rates for deposits in U.S. dollars, the “Designated Telerate Page”). Such
Interest Settlement Rates are also currently available on Reuters Monitor Money
Rates Service page “LIBOR01” and Bloomberg L.P. page “BBAM.” The BBA’s Interest
Settlement Rates currently are rounded to five decimal places.
A
“LIBOR
Business Day” is any day on which banks in London and New York are open for
conducting transactions in foreign currency and exchange.
With
respect to any LIBOR Determination Date, if the BBA’s Interest Settlement Rate
does not appear on the Designated Telerate Page as of 11:00 a.m. (London time)
on such date, or if the Designated Telerate Page is not available on such date,
the securities administrator will obtain such rate from the Reuters or Bloomberg
page. If such rate is not published for such LIBOR Determination Date, LIBOR
for
such date will be the most recently published Interest Settlement Rate. In
the
event that the BBA no longer sets an Interest Settlement Rate, the rate for
such
date will be determined on the basis of the rates at which one-month U.S. dollar
deposits are offered by the Reference Banks (as defined below) at approximately
11:00 a.m. (London time) on such date to prime banks in London interbank market.
In such event, the securities administrator will request the principal London
office of each of the Reference Banks to provide a quotation of its rate. If
at
least two such quotations are provided, the rate for that date will be the
arithmetic mean of the quotations (rounded upwards if necessary to the nearest
whole multiple of 1/16%). If fewer than two quotations are provided as
requested, the rate for that date will be the arithmetic mean of the rates
quoted by major banks in New York City, selected by the securities administrator
(after consultation with the Depositor), at approximately 11:00 a.m. (New York
City time) on such date for one-month U.S. dollar loans to leading European
banks. For this purpose, a ‘‘Reference Bank’’ shall be a leading bank engaged in
transactions in Eurodollar deposits in the international Eurocurrency market
which does not control, nor is controlled by, or under common control with,
the
securities administrator and which has an established place of business in
London. Until all of the LIBOR Certificates are paid in full, the securities
administrator will at all times retain at least four Reference Banks for the
purpose of determining LIBOR with respect to each LIBOR Determination Date.
The
securities administrator initially will designate the Reference Banks (after
consultation with the Depositor). If any such Reference Bank should be unwilling
or unable to act as such or if the securities administrator should terminate
its
appointment as Reference Bank, the securities administrator will promptly
appoint or cause to be appointed another Reference Bank (after consultation
with
the Depositor). The securities administrator will have no liability or
responsibility to any person for (i) the selection of any Reference Bank for
purposes of determining LIBOR or (ii) any inability to retain at least four
Reference Banks which is caused by circumstances beyond its reasonable
control.
S-79
The
establishment of LIBOR on each LIBOR Determination Date by the securities
administrator and the securities administrator’s calculation of the pass-through
rate applicable to the LIBOR certificates for the related interest accrual
period will (in the absence of manifest error) be final and
binding.
LIBOR
for
the first distribution date will be determined two business days prior to the
closing date.
Principal
General.
All
payments and other amounts received in respect of principal of the mortgage
loans will be allocated between the senior certificates (other than the
interest-only certificates) and the subordinate certificates.
Principal
Distribution Amount.
On each
distribution date, the Principal Distribution Amount, to the extent of Available
Funds remaining after distributions in respect of interest, will be applied
as
principal to the senior certificates (other than the Class X Certificates)
and
to the subordinate certificates as provided below.
Senior
Principal Distribution Amount. On
each
distribution date, the Principal Distribution Amount, up to the Senior Principal
Distribution Amount, will be distributed as principal to the senior certificates
(other than the Class X Certificates), in the following priority:
first,
from
the Senior Principal Distribution Amount, sequentially, first, to the Class
A-R
Certificate, second, concurrently, to the Class A1A, Class A1B and Class A1C
Certificates, pro
rata
based on
their class principal balance immediately prior to such distribution date and
third, the Class PO Certificates, in each case until their class principal
balance is reduced to zero; and
second,
reimbursement amounts due to the certificate insurer under the pooling
agreement.
If
on any
distribution date the allocation to the class or classes of senior certificates
(other than the interest-only certificates) then entitled to distributions
of
scheduled principal and full and partial principal prepayments (net of deferred
interest) and other amounts in the percentages required above would reduce
the
outstanding class principal balance of the class(es) below zero, the
distribution to such class(es) of the related Senior Prepayment Percentage
and
related Senior Percentage of those amounts for that distribution date will
be
limited to the amounts necessary to reduce the related class principal
balance(s) to zero.
Subordinate
Principal Distribution Amount.
Except
as provided in the next paragraph, each class of subordinate certificates will
be entitled to receive on each distribution date its pro
rata
share of
the Subordinate Principal Distribution Amount (based on its respective class
principal balance) for all mortgage loans, in each case to the extent of the
amount available from Available Funds for distribution of principal on that
class, as described under “—Priority of Distributions on the Certificates”
above. Distributions of principal of the subordinate certificates will be made
on each distribution date to the classes of subordinate certificates in the
order of their numerical class designations, beginning with the Class B-1
Certificates, until each such class has received its respective pro
rata
share
for that distribution date.
Under
the
definition of Subordinate Principal Distribution Amount, the subordinate
certificates will only be entitled to receive the Subordinate Percentage or
the
Subordinate Prepayment Percentage of any Principal Distribution Amount for
the
related distribution date. Before the distribution date in March 2016, the
Subordinate Prepayment Percentage will generally equal zero unless the related
senior certificates (other than the interest-only certificates) are paid down
to
zero or the credit enhancement provided by the subordinate certificates has
doubled since the closing date and certain performance tests have been
satisfied.
S-80
With
respect to each class of subordinate certificates (other than the Class B-1
Certificates), if on any distribution date the Applicable Credit Support
Percentage is less than the Original Applicable Credit Support Percentage,
no
distribution of principal prepayments (net of deferred interest) will be made
to
any such classes and the amount otherwise distributable to those classes in
respect of principal prepayments (net of deferred interest) will be allocated
among the remaining classes of subordinate certificates, pro
rata,
based
upon their respective class principal balances.
The
approximate Original Applicable Credit Support Percentages for the subordinate
certificates on the date of issuance of the certificates are expected to be
as
follows:
Class B-1
10.50%
Class B-2
6.80%
Class B-3
4.50%
Class B-4
3.10%
Class B-5
1.80%
Class B-6
0.80%
Allocation
of Losses
On
each
distribution date, the principal portion of all Realized Losses with respect
to
the mortgage loans will be allocated first to the classes of subordinate
certificates, in the reverse order of their numerical class designations
(beginning with the class of subordinate certificates then outstanding with
the
highest numerical class designation), in each case until the class principal
balances of the respective classes of subordinate certificates have been reduced
to zero, and then to the class or classes of senior certificates (other than
the
interest-only certificates) on a pro
rata
basis,
until their respective class principal balances have been reduced to zero;
provided,
however that
all
realized losses allocable to the Class A1A, Class A1B and Class A1C Certificates
will instead be allocated sequentially, first
to the
Class A1C Certificates, second
to the
Class A1B Certificates and third
to the
Class A1A Certificates, in that order, for so long as such certificates are
outstanding.
If
on any
distribution date the aggregate of the class principal balances of all classes
of certificates following all distributions and allocations of net deferred
interest and the allocation of Realized Losses on that distribution date exceeds
the Pool Balance as of the first day of the month of that distribution date,
the
class principal balance of the class of subordinate certificates then
outstanding with the highest numerical class designation will be reduced by
the
amount of the excess.
On
each
distribution date, the interest portion of Realized Losses will reduce the
amount available for distribution on the related distribution date to the class
of subordinate certificates with the highest numerical class designation which
is outstanding on that date and, when the subordinate certificates are reduced
to zero, to the related classes of senior certificates, pro
rata.
Subordination
of the Subordinate Certificates
The
rights of the holders of the subordinate certificates to receive distributions
with respect to the mortgage loans will be subordinated to the rights of the
holders of the senior certificates and the rights of the holders of each class
of subordinate certificates (other than the Class B-1 Certificates) to receive
the distributions will be further subordinated to the rights of the class or
classes of subordinate certificates with lower numerical class designations,
in
each case only to the extent described in this prospectus supplement. The
subordination of the subordinate certificates to the senior certificates and
the
further subordination among the subordinate certificates is intended to provide
the certificateholders having higher relative payment priority with protection
against Realized Losses. Realized Losses will be allocated to the class of
subordinate certificates then outstanding with the highest numerical class
designation.
The
Policy
The
following summary of the terms of the financial guaranty insurance policy (the
“Policy“) does not purport to be complete and is qualified in its entirety by
reference to the Policy.
Simultaneously
with the issuance of the Class A1C Certificates (the “Insured Certificates”),
FSA will deliver the Policy to the trustee for the benefit of the holders of
each class of Insured Certificates. Under the Policy, FSA unconditionally and
irrevocably guarantees to the trustee for the benefit of any holder of an
Insured Certificate the full and complete payment of (1) Insured Amounts on
each
class of the Insured Certificates and (2) the amount of any Insured Amount
which
subsequently is avoided in whole or in part as a preference payment under
applicable law.
S-81
“Insured
Amount” means, (i) with respect to any distribution date, the amount, if any, by
which the amount available to be paid as interest to each class of Insured
Certificates, pursuant to the priority of payment set forth in the pooling
agreement, is less than the related Monthly Interest Distributable Amount
(provided,
however
that the
Policy will not cover interest accrued at a rate higher than the adjusted cap
rate), (ii) the amount of any Realized Losses allocated to the Insured
Certificates and (iii) to the extent unpaid on the Final Scheduled Distribution
Date, after payment of all other amounts due to the Insured Certificates, any
remaining certificate principal balance of such certificates, in each case
in
accordance with the original terms of the certificates when issued and without
regard to any amendments or modifications of the certificates or the pooling
agreement except to amendments or modifications to which FSA has given its
prior
written consent. The Policy will not cover interest shortfalls due to any
prepayment interest shortfalls, any Relief Act shortfalls, any basis risk
shortfalls, deferred interest, net deferred interest, net interest shortfalls
or
any taxes or withholding or other charges imposed by a government authority.
Insured Amount shall not include (x) any portion of an Insured Amount due to
holders of the Insured Certificates because a notice and certificate in proper
form as required by Policy was not timely received by FSA and (y) any portion
of
an Insured Amount due to holders of the Insured Certificates representing
interest on any unpaid interest accrued from and including the date of payment
by FSA of the amount of such unpaid interest. The Policy will not cover any
reduction in the amount of the Monthly Interest Distributable Amount payable
to
the holders of Insured Certificates on any distribution date due to the
pass-through rate for such Insured Certificates exceeding the adjusted cap
rate
for such Insured Certificates on such distribution date.
Payment
of claims on the Policy made in respect of Insured Amounts will be made by
FSA
following receipt by FSA of the appropriate notice for payment on the later
to
occur of (1) 12:00 noon New York City time, on the second business day following
receipt of such notice for payment and (2) 12:00 noon New York City time, on
the
date on which such payment was due on any class of Insured Certificates, as
applicable.
If
payment of any amount avoided as a preference under applicable bankruptcy,
insolvency, receivership or similar law is required to be made under the Policy,
FSA shall cause that payment to be made on the later of (a) the date when due
to
be paid pursuant to the order described below or (b) the first to occur of
(1)
the fourth business day following receipt by FSA from the securities
administrator of (A) a certified copy of the order (the “Order”) of the court or
other governmental body which exercised jurisdiction to the effect that the
holder of such Insured Certificate is required to return principal or interest
paid on such certificate during the Term of the Policy because those
distributions were avoidable as preference payments under applicable bankruptcy
law, (B) a certificate of the holder of such Insured Certificate that the Order
has been entered and is not subject to any stay, and (C) an assignment duly
executed and delivered by the holder of such Insured Certificate, in the form
as
is reasonably required by FSA and provided to the holder of such Insured
Certificate, by FSA, irrevocably assigning to FSA all rights and claims of
the
holder of such Insured Certificate, relating to or arising under such Insured
Certificate, against the trust fund or otherwise with respect to the preference
payment, or (2) the date of receipt by FSA from the securities administrator
of
the items referred to in clauses (A), (B) and (C) above if, at least four
business days prior to the date of receipt, FSA shall have received written
notice from the securities administrator that the items referred to in clauses
(A), (B) and (C) above were to be delivered on that date and that date was
specified in the notice. Payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the securities administrator or any holder of an Insured Certificate,
directly, unless a holder of an Insured Certificate has previously paid that
amount to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the Order in which case the payment shall be disbursed
to
the securities administrator for distribution to the holder of such Insured
Certificate upon proof of payment reasonably satisfactory to FSA. In connection
with the foregoing, FSA shall have the rights provided pursuant to the pooling
agreement to the holders of each class of Insured Certificates including,
without limitation, the right to direct all matters relating to any preference
claim and subrogation to the rights of the trustee and each holder of an Insured
Certificate in the conduct of any proceeding with respect to a preference
claim.
The
terms
“receipt” and “received,” with respect to the Policy, shall mean actual delivery
to FSA and to its fiscal agent, if any, prior to 12:00 noon, New York City
time,
on a business day; delivery either on a day that is not a business day or after
12:00 noon, New York City time, shall be deemed to be receipt on the next
succeeding business day. If any notice or certificate given under the Policy
by
the securities administrator is not in proper form or is not properly completed,
executed or delivered, or contains a misstatement, it shall be deemed not to
have been received, and FSA or the fiscal agent shall promptly so advise the
securities administrator and the securities administrator may submit an amended
notice.
S-82
“Term
of
the Policy” means the period from and including the closing date to and
including the date on which (i) the unpaid principal balances of all of the
Insured Certificates is zero (after giving effect to all payments), (ii) any
period during which any payment on the Insured Certificates could have been
avoided in whole or in part as a preference payment under applicable bankruptcy,
insolvency, receivership or similar law has expired, and (iii) if any
proceedings requisite to avoidance as a preference payment have been commenced
prior to the occurrence of (i) and (ii), a final and nonappealable order in
resolution of each such proceeding has been entered.
Under
the
Policy, “business day” means any day other than (i) a Saturday or Sunday, or
(ii) a day on which banking institutions in New York, Minnesota or California
are authorized or obligated by law, executive order or governmental decree
to be
closed.
FSA’s
obligations under the Policy in respect of Insured Amounts will be discharged
to
the extent funds are transferred to the securities administrator as provided
in
the Policy whether or not those funds are properly applied by the securities
administrator.
FSA
shall
be subrogated to the rights of the holder of an Insured Certificate to receive
payments of principal and interest to the extent of any payment by FSA under
the
Policy.
Claims
under the Policy constitute direct, unsecured and unsubordinated obligations
of
FSA ranking not less than pari
passu
with
other unsecured and unsubordinated indebtedness of FSA for borrowed money.
Claims against FSA under the Policy and claims against FSA under each other
financial guaranty insurance policy issued thereby constitute pari
passu
claims
against the general assets of FSA. The terms of the Policy cannot be modified
or
altered by any other agreement or instrument, or by the merger, consolidation
or
dissolution of the trust fund. The Policy may not be canceled or revoked prior
to payment in full of all Insured Amounts with respect to the Insured
Certificates.
The
Policy is not covered by the property/casualty insurance security fund specified
in Article 76 of the New York Insurance Law. The Policy is governed by the
laws
of the State of New York.
Reports
to Certificateholders
On
each
distribution date, the securities administrator will make available to each
holder of a certificate, the certificate insurer, the sponsor and each rating
agency a statement (based on information received from each servicer) generally
setting forth, among other things:
·
the
amount of the distributions, separately identified, with respect
to each
class of certificates;
·
the
amount of the distributions set forth in the first clause above allocable
to principal, separately identifying the aggregate amount of any
principal
prepayments, net principal prepayments or other unscheduled recoveries
of
principal included in that amount;
·
the
amount of the distributions set forth in the first clause above allocable
to interest and how it was
calculated;
·
the
amount of any unpaid interest shortfall amount or Basis Risk Shortfalls
(if applicable) with respect to each class of certificates;
·
the
amount of deferred interest and net deferred interest for the mortgage
loans;
·
the
class principal balance or class notional amount, as applicable,
of each
class of certificates after giving effect to the distribution of
principal
on that distribution date;
·
the
Pool Balance and the net WAC cap;
·
the
Senior Percentage for the senior certificates, and Subordinate Percentage
for the following distribution
date;
·
the
Senior Prepayment Percentage for the senior certificates, and Subordinate
Prepayment Percentage for the following distribution
date;
S-83
·
the
total amount of master servicing fees paid to the master servicer;
·
the
amount of the servicing fees paid to or retained by the
servicers;
·
the
amount of advances for the related Due
Period;
·
the
number and aggregate principal balance of mortgage loans, in the
aggregate, that were (A) delinquent (1) 30 to 59 days,
(2) 60 to 89 days and (3) 90 or more days, (B) in
foreclosure and (C) in bankruptcy as of the close of business on the
last day of the calendar month preceding that distribution date,
in each
case determined using the MBA
method;
·
the
total number and principal balance of any REO properties as of the
close
of business on the last day of the preceding Due
Period;
·
the
aggregate amount of Realized Losses incurred during the preceding
calendar
month;
·
the
cumulative amount of Realized
Losses;
·
the
Realized Losses, if any, allocated to each class of certificates
(other
than the Class X Certificates) or, with respect to the Class PO
Certificates, the related principal-only components, on that distribution
date;
·
the
pass-through rate for each class of certificates for that distribution
date; and
·
the
number of mortgage loans and the aggregate balance of mortgage loans
that
have negative amortization.
The
securities administrator will make that statement available each month, to
any
interested party, via the securities administrator’s website. The securities
administrator’s internet website will initially be located at “https:/www.ctslink.com.”
Assistance in using the website can be obtained by calling the securities
administrator’s customer service desk at (301) 815-6600. Parties that are unable
to use the above distribution options are entitled to have a paper copy mailed
to them via first class mail by calling the customer service desk and indicating
such. The securities administrator will have the right to change the way such
reports are distributed in order to make such distribution more convenient
and/or more accessible to the above parties, and the securities administrator
will provide timely and adequate notification to all above parties regarding
any
such changes.
In
addition, upon written request within a reasonable period of time after the
end
of each calendar year, the securities administrator, pursuant to the pooling
agreement, will prepare and deliver to each holder of a certificate of record
during the previous calendar year a statement containing aggregate payment
information necessary to enable holders of the certificates to prepare their
tax
returns. These statements will not have been examined and reported upon by
an
independent public accountant.
Yield,
Prepayment and Maturity Considerations
General
The
effective yields to the holders of the Class X and Class A-R Certificates will
be lower than the yields otherwise produced by the applicable rate at which
interest is passed through to those holders and the purchase price of the
certificates because monthly distributions will not be payable to those holders
until generally the 25th
day of
the month following the month in which interest accrues on the mortgage loans,
without any additional distribution of interest or earnings on the distributions
in respect of the delay.
Delinquent
payments on the mortgage loans that are not advanced by a servicer, or the
master servicer as successor servicer, as the case may be, because amounts,
if
advanced, would be nonrecoverable, will adversely affect the yields on the
senior certificates and the subordinate certificates. Because of the priority
of
distributions, shortfalls resulting from delinquencies not so advanced will
be
borne first by the subordinate certificates in the reverse order of their
numerical class designations, and then by the related senior certificates to
the
extent and in the manner described under “Descriptions of the
Certificates—Allocation of Losses” in the prospectus supplement. If, as a result
of these shortfalls, the aggregate of the certificate principal balances of
all
classes of certificates following all distributions and the allocation of
Realized Losses on a distribution date exceeds the Pool Balance as of the first
day of the month of that distribution date, the class principal balance of
the
class of subordinate certificates then outstanding with the highest numerical
class designation will be reduced by the amount of the excess.
S-84
Net
interest shortfalls will adversely affect the yields on the related senior
certificates and the subordinate certificates. All Realized Losses initially
will be borne by the subordinate certificates, in the reverse order of their
numerical class designations. As a result, the yields on the offered
certificates will depend on the rate and timing of Realized Losses on the
mortgage loans.
Prepayment
Considerations and Risks
The
rate
of principal payments on the offered certificates (other than the Class X
Certificates), the aggregate amount of distributions on the offered certificates
and the yields to maturity of the offered certificates will be related to the
rate and timing of payments of principal on the mortgage loans. The rate of
principal payments on the mortgage loans will in turn be affected by the
amortization schedules of the mortgage loans, including for this purpose
prepayments resulting from refinancing, liquidations of the mortgage loans
due
to defaults, casualties, condemnations and repurchases due to breaches of
certain representations and warranties and purchases by an originator or the
sponsor, as applicable.
Borrowers
may prepay their mortgage loans in whole or in part at any time; however, as
of
the cut-off date, approximately 97.22% of the mortgage loans require the payment
of a prepayment penalty in connection with any voluntary prepayment occurring
during a period of one to three years after origination. These penalties may
discourage borrowers from prepaying their mortgage loans during the penalty
period. Any prepayment penalty payments received by a servicer from collections
on the mortgage loans will be retained by the related servicer as additional
servicing compensation. We cannot predict the rate at which borrowers will
repay
their mortgage loans. A prepayment of a mortgage loan generally will result
in a
payment of principal on the offered certificates.
The
negative amortization of the mortgage loans may affect the yield on the
certificates. As a result of the negative amortization of the mortgage loans,
the outstanding principal balance of a mortgage loan will increase by the amount
of interest that is deferred as described in this prospectus supplement under
“The Mortgage Loans—General.” During periods in which the outstanding principal
balance of a mortgage loan is increasing due to the addition of deferred
interest thereto, such increasing principal balance of that mortgage loan may
approach or exceed the value of the related mortgaged property, thus increasing
the likelihood of defaults as well as the amount of any loss experienced with
respect to any such mortgage loan that is required to be liquidated.
Furthermore, each mortgage loan provides for the payment of any remaining
unamortized principal balance of such mortgage loan (due to the addition of
deferred interest, if any, to the principal balance of such mortgage loan)
in a
single payment at the maturity of the mortgage loan. Because the mortgagors
may
be required to make a larger single payment upon maturity, it is possible that
the default risk associated with the mortgage loans is greater than that
associated with fully amortizing mortgage loans.
In
addition, because the loan rates on the mortgage loans adjust, after their
initial fixed rate periods, at a different time than the monthly payments
thereon and the Payment Caps may limit the amount by which the monthly payments
may adjust, the amount of a monthly payment may be more or less than the amount
necessary to fully amortize the principal balance of the mortgage loans over
its
then remaining term at the applicable loan rate. Accordingly, the mortgage
loans
may be subject to reduced amortization (if the monthly payment due on a due
date
is sufficient to pay interest accrued during the related accrual period at
the
applicable loan rate but is not sufficient to reduce principal in accordance
with a fully amortizing schedule); or accelerated amortization (if the monthly
payment due on a due date is greater than the amount necessary to pay interest
accrued during the related accrual period at the applicable loan rate and to
reduce principal in accordance with a fully amortizing schedule). In the event
the loan rate on a mortgage loan is increased, deferred interest is added to
the
principal balance of such mortgage loan and, if such deferred interest is not
offset by subsequent accelerated amortization, it may result in a final lump
sum
payment at maturity greater than, and potentially substantially greater than,
the monthly payment due on the immediately preceding due date.
Net
Principal Prepayments, liquidations and purchases of the mortgage loans,
including any purchase of a defaulted mortgage loan and any optional repurchase
of the remaining mortgage loans in connection with the termination of the trust
fund, in each case as described in this prospectus supplement, will result
in
distributions on the offered certificates (other than the interest-only
certificates) of principal amounts which would otherwise be distributed over
the
remaining terms of the mortgage loans. Because the rate of payment of principal
on the mortgage loans will depend on future events and a variety of other
factors, no assurance can be given as to that rate or the rate of principal
prepayments. The extent to which the yield to maturity of a class of offered
certificates may vary from the anticipated yield will depend upon the degree
to
which that offered certificate is purchased at a discount or premium, and the
degree to which the timing of payments thereon is sensitive to prepayments,
liquidations and purchases of the mortgage loans. Further, an investor should
consider the risk that, in the case of any offered certificates purchased at
a
discount, a slower than anticipated rate of principal payments, including
prepayments, on the mortgage loans could result in an actual yield to that
investor that is lower than the anticipated yield and, in the case of the Class
X Certificates and any offered certificates purchased at a premium, a faster
than anticipated rate of principal payments on the related mortgage loans could
result in an actual yield to that investor that is lower than the anticipated
yield. The application of principal prepayments to payments of deferred interest
will have the effect of slowing the rate at which principal prepayments are
distributed to the related certificates and will further reduce the yield in
the
case of certificates purchased at a discount and will correspondingly reduce
the
reduction in yield in the case of certificates purchased at a
premium.
S-85
The
rate
of principal payments, including prepayments, on pools of mortgage loans may
vary significantly over time and may be influenced by a variety of economic,
geographic, social and other factors. These factors include changes in
mortgagors’ housing needs, job transfers, unemployment, mortgagors’ net equity
in the mortgaged properties and servicing decisions, as well as the
characteristics of the mortgage loans as described under “The Mortgage Loans” in
this prospectus supplement. If prevailing interest rates were to fall
significantly below the loan rates on the mortgage loans, the mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
were to remain at or above the loan rates on the mortgage loans because the
mortgagors may seek to “lock in” a lower interest rate. Conversely, if
prevailing interest rates were to rise significantly, the rate of prepayments
on
the mortgage loans would generally be expected to decrease. The existence of
maximum rate limitations on the mortgage loans also may affect the likelihood
of
prepayments in either a rising or falling interest rate environment. No
assurances can be given as to the rate of prepayments on the mortgage loans
in
stable or changing interest rate environments.
The
rate
of prepayment may affect the pass-through rates on the offered certificates.
Prepayments of mortgage loans with net loan rates in excess of the then-current
net WAC of the mortgage loans may reduce the pass-through rate on the related
certificates. Mortgage loans with higher loan rates may prepay at faster rates
than mortgage loans with relatively lower loan rates in response to a given
change in market interest rates. Any such disproportionate rate of prepayments
may adversely affect the pass-through rate on the related certificates. In
addition, differences in the rates of prepayments or of Realized Losses may
adversely affect the pass-through rate on the subordinate certificates by
reducing the weighting factor used to determine that pass-through rate. Due
to
the different types of mortgage loans, such different experience is likely
to
occur.
As
described under “Description of the Certificates—Principal” in this prospectus
supplement, the applicable Senior Prepayment Percentage of all Net Principal
Prepayments on the mortgage loans will be distributed to the class or classes
of
senior certificates (other than the interest-only certificates) then entitled
to
receive principal distributions. This may result in all or a disproportionate
percentage of Net Principal Prepayments being distributed to holders of senior
certificates and none or less than their pro
rata
share of
Net Principal Prepayments being distributed to holders of the subordinate
certificates during the periods of time described in the definition of the
“Senior Prepayment Percentage” in this prospectus supplement.
The
timing of changes in the rate of prepayments on the mortgage loans may
significantly affect an investor’s actual yield to maturity, even if the average
rate of principal payments is consistent with an investor’s expectation. In
general, the earlier a prepayment of principal on the mortgage loans occurs
(that is distributed as principal on the related class or classes of
certificates), the greater the effect on an investor’s yield to maturity. The
effect on an investor’s yield as a result of principal payments (that are
distributed as principal on the related class or classes of certificates)
occurring at a rate higher or lower than the rate anticipated by the investor
during the period immediately following the issuance of the offered certificates
may not be offset by a subsequent like decrease or increase in the rate of
principal payments. In addition, generally, the amount of prepayments will
be
distributed to the classes of certificates in the order of priority described
herein. Such order will have the likely effect of reducing the class principal
balance of classes with lower certificate rates relative to other classes.
This
will have the effect of raising the weighted average certificate rate and
lowering the rate at which interest accrues on the Class X Certificates.
The
Subordinate Certificates
The
weighted average lives of, and the yields to maturity on, the subordinate
certificates, in increasing order of their numerical class designations, will
be
progressively more sensitive to the rate and timing of borrower defaults and
the
severity of ensuing losses on the mortgage loans. If the actual rate and
severity of losses on the mortgage loans are higher than those assumed by a
holder of a subordinate certificate, the actual yield to maturity of that
certificate may be lower than the yield expected by the holder based on that
assumption. The timing of losses on the mortgage loans will also affect an
investor’s actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage pool are consistent with an investor’s
expectations. In general, the earlier a loss occurs, the greater the effect
on
an investor’s yield to maturity. Realized Losses on the mortgage loans will
reduce the class principal balances of the applicable class of subordinate
certificates to the extent of any losses allocated to them (as described under
“Description of the Certificates—Allocation of Losses”), without the receipt of
cash attributable to that reduction. In addition, shortfalls in cash available
for distributions on the subordinate certificates will result in a reduction
in
the class principal balance of the class of subordinate certificates then
outstanding with the highest numerical class designation if and to the extent
that the aggregate of the class principal balances of all classes of
certificates, following all distributions and the allocation of Realized Losses
on a distribution date, exceeds the Pool Balance as of the first day of the
month of that distribution date. As a result of these reductions, less interest
will accrue on that class of subordinate certificates than otherwise would
be
the case. The yields to maturity of the subordinate certificates will also
be
affected by the disproportionate allocation of Net Principal Prepayments to
the
senior certificates (other than the Class X Certificates), net interest
shortfalls and other cash shortfalls in Available Funds.
S-86
If
on any
distribution date the Applicable Credit Support Percentage for any class of
subordinate certificates (other than the Class B-1 Certificates) is less than
its Original Applicable Credit Support Percentage, all Net Principal Prepayments
available for distribution on the subordinate certificates will be allocated
solely to all other classes of subordinate certificates with lower numerical
class designations, thereby accelerating the amortization of those classes
relative to the classes of subordinate certificates not receiving distributions
of Net Principal Prepayments on that distribution date, and reducing the
weighted average lives of the classes of subordinate certificates receiving
distributions. Accelerating the amortization of the classes of subordinate
certificates with lower numerical designations relative to the other classes
of
subordinate certificates is intended to preserve the availability of the
subordination provided by those other classes.
Weighted
Average Lives
The
projected weighted average life of each class of offered certificates is the
average amount of time that will elapse from the closing date, until each dollar
of principal is scheduled to be repaid to the investors in that class. Because
it is expected that there will be prepayments and defaults on the mortgage
loans, the actual weighted average lives of the classes of offered certificates
are expected to vary substantially from the weighted average remaining terms
to
stated maturity of the mortgage loans as set forth under “The Mortgage Loans” in
this prospectus supplement.
In
general, the weighted average lives of the offered certificates will be
shortened if the level of prepayments of principal of the mortgage loans
increases which is not offset by amounts of deferred interest, including any
optional repurchase of remaining mortgage loans in connection with the
termination of the trust fund. However, the weighted average lives of the
offered certificates will depend upon a variety of other factors, including
the
timing of changes in the rate of principal payments, the timing and amount
of
deferred interest experienced by the mortgage loans in the related group and
the
priority sequence of distributions of principal of the classes of
certificates.
The
interaction of the foregoing factors may have different effects on various
classes of offered certificates and the effects on any class may vary at
different times during the life of that class. Accordingly, no assurance can
be
given as to the weighted average life of any class of offered certificates.
Further, to the extent that the prices of the offered certificates represent
discounts or premiums to their respective original class principal balances
or
class notional amounts, variability in the weighted average lives of the classes
of offered certificates will result in variability in the related yields to
maturity.
The
final
scheduled distribution date for each class of offered certificates is as set
forth on page S-2 of this prospectus supplement. The final scheduled
distribution date for each class of offered certificates (other than the Class
A1C Certificates) is the distribution date in the first month following the
month of the latest maturity date of any mortgage loan. The final scheduled
distribution date for the Class A1C Certificates is the distribution date in
the
thirteenth month following the month of the latest maturity date of any mortgage
loan. The weighted average life of each class of offered certificates is likely
to be shorter than would be the case if payments actually made on the mortgage
loans conformed to the foregoing assumptions, and the final distribution date
with respect to the offered certificates could occur significantly earlier
than
the related final scheduled distribution date because prepayments are likely
to
occur and because there may be a termination of the trust fund as provided
in
this prospectus supplement.
S-87
Structuring
Assumptions
Prepayments
of mortgage loans are commonly measured relative to a prepayment standard or
model. The model used with respect to the mortgage loans assumes a constant
prepayment rate or “CPR.” This is not a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool
of
mortgage loans, including the mortgage loans.
The
tables on pages S-92 through S-93 were prepared on the basis of the assumptions
in the following paragraph and the tables set forth below. There are certain
differences between the loan characteristics included in those assumptions
and
the characteristics of the actual mortgage loans. Any such discrepancy may
have
an effect upon the percentages of original class principal balances outstanding
and weighted average lives of the offered certificates set forth in the tables
on pages S-92 through S-93. In addition, because the actual mortgage loans
in
the trust fund will have characteristics that differ from those assumed in
preparing the tables set forth below, the distributions of principal of the
classes of offered certificates may be made earlier or later than indicated
in
the tables.
The
percentages and weighted average lives in the tables on pages S-92 through
S-93
were determined based on the assumptions listed below.
·
The
mortgage loans have the characteristics set forth in the table
below.
·
Distributions
on the certificates are received, in cash, on the 25th
day
of each month, commencing on March 25,2006.
·
The
mortgage loans prepay at the related constant percentages of CPR
as set
forth in the table of prepayment scenarios
below.
·
No
defaults or delinquencies occur in the payment by borrowers of principal
and interest on the mortgage loans and no net interest shortfalls
are
incurred.
·
No
mortgage loan is purchased by the sponsor or an originator from the
trust
fund pursuant to any obligation or option under the pooling agreement
(other than an optional termination as described
below).
·
Scheduled
monthly payments on the mortgage loans are received on the first
day of
each month commencing in March 2006, and are computed prior to giving
effect to any prepayments, which are computed after giving effect
to
scheduled payments received on the following day, received in the
prior
month.
·
Prepayments
representing payment in full of individual mortgage loans are received
on
the last day of each month commencing in February 2006, and include
30
days’ interest for the mortgage
loans.
·
The
scheduled monthly payment for each mortgage loan is calculated based
on
its principal balance, loan rate and remaining term to maturity such
that
the mortgage loan will amortize in amounts sufficient to repay the
remaining principal balance of the mortgage loan by its remaining
term to
maturity and on the fifth payment adjustment date of a mortgage loan,
and
every fifth payment adjustment date thereafter, the monthly payment
due on
that mortgage loan will be recast without regard to the related payment
cap in order to provide for the outstanding balance of the mortgage
loan
to be paid in full in equal monthly installments at its maturity,
if
necessary.
·
Interest
accrues on each certificate at the related pass-through rate described
under “Description of the Certificates—Interest—Pass-Through Rates” in
this prospectus supplement.
·
The
initial class principal balance of each class of certificates is
as set
forth on the cover or as described in this prospectus
supplement.
·
One-Month
LIBOR is 4.57%, MTA is 3.751% and COFI is
3.296%.
·
No
optional termination of the trust fund will occur, except that this
assumption does not apply to the calculation of weighted average
lives to
the optional termination.
S-88
·
The
rate at which the certificate insurer fee is calculated is the per
annum
rate set forth in the premium fee letter, on the basis of a 360-day
year
and assuming 31 days for the first accrual period and the actual
number of
days elapsed in the related accrual period
thereafter.
There
were sufficient funds on deposit in the Basis Risk Reserve Fund to
cover
Basis Risk Shortfalls for the senior certificates on the first
distribution date.
S-89
Assumed
Mortgage Loan Characteristics
Assumed
Mortgage Loan Number
Current
Balance ($)
Current
Gross Mortgage
Rate
(%)
Trust
Expense Fee Rate (%)
Index
Rate
Adjustment Frequency (Months)
Months
to Next Rate Adjustment Date
Payment
Adjustment Frequency (Months)
Months
to Next Payment Adjustment Date
Gross
Margin (%)
Maximum
Rate (%)
Minimum
Rate (%)
Original
Term to Maturity (Months)
Remaining
Term to Maturity (Months)
Payment
Cap (%)
Negative
Amortization Limit (%)
Current
Principal
and
Interest
Payment ($)(1)
1
2,120,904.15
6.63561
0.38750
MTA
1
1
12
9
3.01761
9.95000
3.01761
360
356
7.50000
115.00000
6,978.08
2
356,624,979.48
6.65972
0.40685
MTA
1
1
12
10
3.08676
9.95305
3.08676
360
357
7.50000
114.94488
1,204,283.21
3
696,128.63
6.99676
0.38750
MTA
1
1
12
10
3.37876
9.95000
3.37876
360
357
7.50000
115.00000
2,665.26
4
341,208,605.02
6.75534
0.41303
MTA
1
1
12
10
3.17266
9.96880
3.16466
360
357
7.50000
114.92689
1,163,958.89
5
439,058.10
6.50000
0.37500
MTA
1
1
12
23
2.90000
12.50000
2.90000
360
358
7.50000
110.00000
1,463.65
6
204,530.37
6.37500
0.37500
MTA
1
1
12
24
2.77500
12.50000
2.77500
360
359
7.50000
110.00000
683.17
7
271,376.88
6.75000
0.37500
MTA
1
1
12
24
3.07500
12.50000
3.07500
360
359
7.50000
110.00000
906.45
8
319,376.81
6.50000
0.37500
MTA
1
1
12
60
2.90000
19.90000
2.90000
360
359
7.50000
110.00000
1,223.19
9
1,657,655.90
6.48689
0.37500
MTA
1
1
12
60
2.85838
17.04852
2.85838
360
359
7.50000
110.00000
6,349.12
10
1,025,809.25
7.83026
0.37500
COFI
1
1
12
12
4.64961
12.50000
4.64961
360
359
7.50000
110.00000
3,650.75
11
721,279.81
6.57147
0.37500
COFI
1
1
12
12
3.37067
12.50000
3.37067
360
359
7.50000
110.00000
2,409.76
12
115,723.56
6.87500
0.37500
COFI
1
1
12
12
3.70000
12.50000
3.70000
360
359
7.50000
110.00000
373.11
13
800,733.53
7.02220
0.37500
COFI
1
1
12
12
3.79720
12.50000
3.79720
360
359
7.50000
110.00000
2,769.61
14
18,188,197.04
6.73120
0.37500
MTA
1
1
12
12
3.12614
12.50000
3.12614
360
359
7.50000
110.00000
61,607.79
15
24,418,763.05
6.38733
0.37500
MTA
1
1
12
12
3.04049
12.50000
3.04049
360
359
7.50000
110.00000
82,170.02
16
7,702,553.52
6.83349
0.37500
MTA
1
1
12
12
3.22922
12.50000
3.22922
360
359
7.50000
110.00000
26,232.72
17
31,901,080.06
7.05730
0.37500
MTA
1
1
12
12
3.40878
12.50000
3.40878
360
359
7.50000
110.00000
109,006.19
18
981,303.49
6.54985
0.37500
MTA
1
1
12
11
2.94819
12.50000
2.94819
480
478
7.50000
110.00000
2,881.07
19
4,628,310.50
7.03163
0.37500
MTA
1
1
12
12
3.42098
12.50000
3.42098
480
479
7.50000
110.00000
12,407.17
20
2,376,144.01
7.10369
0.37500
MTA
1
1
12
12
3.50369
12.50000
3.50369
480
479
7.50000
110.00000
6,012.94
21
5,071,329.18
7.18560
0.37500
MTA
1
1
12
12
3.52490
12.50000
3.52490
480
479
7.50000
110.00000
14,099.09
(1)
The
minimum principal and interest payment will reset on each payment adjustment
date.
S-90
There
will be discrepancies between the characteristics of the actual mortgage loans
and the characteristics assumed in preparing the tables. Any such discrepancy
may have an effect upon the percentages of the original class principal balance
outstanding (rounded to the nearest whole percentage) and the weighted average
lives of the certificates set forth in the table. In addition, to the extent
that the actual mortgage loans have characteristics that differ from those
assumed in preparing the tables set forth below, the certificates may mature
earlier or later than indicated by the table. Based on the foregoing
assumptions, the following tables indicate the projected weighted average lives
of each class of offered certificates and set forth the percentages of the
initial class principal balance of each class that would be outstanding after
each of the distribution dates shown, at various constant prepayment
percentages. Neither the prepayment model used in this prospectus supplement
nor
any other prepayment model or assumption purports to be an historical
description of prepayment experience or a prediction of the anticipated rate
of
prepayment of any pool of mortgage loans, including the mortgage loans included
in the trust fund. Variations in the prepayment experience and the balance
of
the mortgage loans that prepay may increase or decrease the percentages of
initial class principal balances and the weighted average lives shown in the
following tables. Those variations may occur even if the average prepayment
experience of all the mortgage loans equals any of the specified percentages
of
CPR. For purposes of calculating the tables on pages S-92 through S-93 and
the
tables under “—Yield Considerations with Respect to the Class X Certificates,”
the following prepayment scenarios have been used:
The
weighted average life of any class of certificates is determined
by:
·
multiplying
the assumed net reduction, if any, in the principal amount of that
class
of certificates on each distribution date by the number of years
from the
date of issuance of the certificates to the related distribution
date,
·
summing
the results, and
·
dividing
the sum by the aggregate amount of the assumed net reductions in
the
principal amount of that class.
S-91
Percent
of Original Class Principal Balance Outstanding
Yield
Considerations with Respect to the Class X Certificates
The
Class
X Certificates will receive only distributions of interest. The yield to
maturity on the Class X Certificates will be extremely sensitive to the level
of
prepayments on the mortgage loans. The faster that the mortgage loans prepay,
the less interest the Class X Certificates will receive. Furthermore, if the
mortgage loans having higher rates prepay more rapidly than those having lower
rates, the net WAC on the mortgage loans will decline, and thus, the rate at
which interest accrues on the Class X Certificates is also likely to decline.
In
addition, to the extent amounts otherwise distributable to the Class X
Certificates are applied to pay Basis Risk Shortfalls, the yield on the Class
X
Certificates will be reduced. Prospective investors should fully consider the
risks associated with an investment in the Class X Certificates, including
the
possibility that if the rate of prepayments on the mortgage loans is faster
than
expected or an optional termination of the trust fund occurs earlier than
expected, investors may not fully recover their initial
investments.
To
illustrate the significance of different rates of prepayment on the
distributions on the Class X Certificates, the tables below indicates the
approximate pre-tax yields to maturity for the Class X Certificates (on a
corporate bond equivalent basis) under the different prepayment scenarios
indicated.
Any
differences between the assumptions and the actual characteristics and
performance of the mortgage loans and of the certificates may result in a yield
to maturity being different from those shown in the table. Discrepancies between
assumed and actual characteristics and performances underscore the hypothetical
nature of the table, which is provided only to give a general sense of the
sensitivity of the yield to maturity in varying prepayment scenarios. In
addition, it is highly unlikely that the mortgage loans will prepay at a
constant level of the CPR until maturity or that all of the mortgage loans
will
prepay at the same rate. The timing of changes to the rate of prepayments may
significantly affect the actual yield to maturity to an investor, even if the
average rate of prepayments is consistent with an investor’s expectation. In
general, the earlier a payment of principal on the mortgage loans, the greater
the effect on an investor’s yield to maturity. As a result, the effect on an
investor’s yield to maturity of prepayments occurring at a rate higher (or
lower) than the rate anticipated by the investor during the period immediately
following the issuance of the certificates will not be equally offset by a
later
like reduction (or increase) in the rate of prepayments.
The
following sensitivity tables for the Class X Certificates are based on
distributions to the Class X Certificates and the Structuring Assumptions and
assume further that the Class X Certificates are purchased at the price set
forth in the related table plus accrued interest on the notional amount from
the
cut-off date. There can be no assurance that the mortgage loans will have the
assumed characteristics or will prepay at any of the rates shown below, that
the
purchase price of the Class X Certificates will be as assumed or that the pre
tax yield to maturity will correspond to any of the pre-tax yields shown in
the
table below. The actual price to be paid on the Class X Certificates has not
been determined and will depend on the characteristics of the mortgage pool
as
ultimately constituted. In addition to any other factors an investor may
consider material, each investor must make its own decision as to the
appropriate prepayment assumptions to be used in deciding whether or not to
purchase a class of offered certificates.
Pre-Tax
Yield to Maturity of the Class X Certificates at an Assumed Purchase
Price
of
3.671875% of the Class X Certificates Notional Amount Plus Accrued
Interest from the Cut-Off Date
CPR
15%
20%
25%
30%
40%
26.2%
19.3%
12.1%
4.5%
(12.0)%
Based
on
the Structuring Assumptions, a purchase price (including accrued interest)
for
the Class X Certificates of approximately $30,123,013
and
assuming prepayments occur at approximately 33.0%
CPR, the
pre-tax yields of the Class X Certificates would be equal to approximately
0%.
If the actual prepayment rate on the Mortgage Loans were to exceed such rate,
then assuming the Mortgage Loans behave in conformity with all other Structuring
Assumptions, initial investors in the Class
X
Certificates
would
not fully recover their initial investment.
S-94
Material
Federal Income Tax Consequences
General
The
pooling agreement provides that a specified portion of the trust fund will
constitute multiple “real estate mortgage investment conduits” or REMICs. An
election will be made to treat each REMIC created by the pooling agreement
as a
REMIC for federal income tax purposes.
Assuming
compliance with the pooling agreement, in the opinion of McKee Nelson
LLP
·
each
REMIC created pursuant to the pooling agreement will be characterized
as a
REMIC within the meaning of section 860D of the Internal Revenue
Code of
1986, as amended;
·
each
class of offered certificates (other than the Class A-R Certificate
and
exclusive of certain contractual rights and obligations) will represent
beneficial ownership of regular interests issued by a REMIC for federal
income tax purposes; and
·
the
Class A-R Certificate will represent beneficial ownership of the
residual
interest in each REMIC created pursuant to the pooling
agreement.
Taxation
of Regular Interests
Interest
on a REMIC regular interest must be included in income by a certificateholder
under the accrual method of accounting, regardless of the certificateholder’s
regular method of accounting. In addition, the Class X and Class PO Certificates
will be, and certain other classes of offered certificates may be, issued with
original issue discount (“OID”). See “Material Federal Income Tax
Considerations—REMIC Certificates—C. Regular Certificates—Original
Issue Discount and Premium”
in
the
prospectus. The prepayment assumption that will be used in determining the
accrual of any OID, market discount or bond premium will be 25% CPR for the
mortgage loans. No representation is made that the mortgage loans will prepay
at
that rate or at any other rate. OID must be included in income as it accrues
on
a constant yield method, regardless of whether the certificateholder receives
currently the cash attributable to OID.
The
Basis Risk Reserve Fund
The
Basis
Risk Reserve Fund shall be treated as an outside reserve fund, within the
meaning of Treasury Regulation Section 1.860G-2(h), that is beneficially owned
by the beneficial owners of the Class X Certificates.
Tax
Treatment of the LIBOR Certificates
For
federal income tax information reporting purposes, a beneficial owner of a
LIBOR
Certificate (a “Component Certificate”) will be treated (i) as holding an
undivided interest in a REMIC regular interest corresponding to that certificate
and (ii) as having entered into a limited recourse interest rate cap
contract written by the beneficial holders of the Class X Certificates,, in
favor of the beneficial owners of such Component Certificate (the “Cap
Contract”). The REMIC regular interest corresponding to the Component
Certificate will be entitled to receive interest and principal payments at
the
times and in the amounts equal to those made on the Component Certificate to
which it corresponds, except that the interest payments will be determined
without regard to any payments made from the Basis Risk Reserve Fund. Any
payment on a Component Certificate that is made from the Basis Risk Reserve
Fund
will be deemed to have been paid pursuant to the Cap Contract. Consequently,
each beneficial owner of a Component Certificate will be required to report
income accruing with respect to the REMIC regular interest component as
discussed under “Material Federal Income Tax Consequences - REMIC
Certificates—C. Regular Certificates” in the prospectus. In addition, each
beneficial owner of a Component Certificate will be required to report net
income with respect to the Cap Contract component and will be permitted to
recognize a net deduction with respect to the Cap Contract component, subject
to
the discussion under “—The Cap Contract Components” below. Prospective investors
should consult their own tax advisors regarding the consequences to them in
light of their own particular circumstances of taxing separately the two
components constituting each Component Certificate.
S-95
Allocations.
A
beneficial owner of a Component Certificate must allocate its purchase price
for
the certificate between its components—the REMIC regular interest component and
the Cap Contract component. For information reporting purposes the Cap Contract
components will be treated as having nominal value. Each Cap Contract is
difficult to value, and the Internal Revenue Service (“IRS”) could assert that
the value of a Cap Contract component as of the closing date is greater than
the
value used for information reporting purposes. Prospective investors should
consider the tax consequences to them if the IRS were to assert a different
value for the Cap Contract components.
Upon
the
sale, exchange, or other disposition of a Component Certificate, the beneficial
owner of the certificate must allocate the amount realized between the
components of the certificate based on the relative fair market values of those
components at the time of sale and must treat the sale, exchange or other
disposition as a sale, exchange or disposition of the REMIC regular interest
component and the Cap Contract component. Assuming that the Component
Certificate is held as a “capital asset” within the meaning of section 1221 of
the Code, gain or loss on the disposition of an interest in the Cap Contract
component should be capital gain or loss. For a discussion of the material
federal income tax consequences to a beneficial owner upon disposition of a
REMIC regular interest, see “Material Federal Income Tax
Consequences —REMIC Certificates—C. Regular Certificates” in the
prospectus.
The
Cap Contract Component.
The
portion of the overall purchase price of a Component Certificate attributable
to
the Cap Contract component must be amortized over the life of such certificate,
taking into account the declining balance of the related REMIC regular interest
component. Treasury regulations concerning notional principal contracts provide
alternative methods for amortizing the purchase price of an interest rate cap
contract. Under one method—the level yield constant interest method—the price
paid for an interest rate cap is amortized over the life of the cap as though
it
were the principal amount of a loan bearing interest at a reasonable rate.
Prospective investors are urged to consult their tax advisors concerning the
methods that can be employed to amortize the portion of the purchase price
paid
for the Cap Contract component of an offered certificate.
Any
payments made to a beneficial owner of a Component Certificate from a Basis
Risk
Reserve Fund will be treated as periodic payments on an interest rate cap
contract. To the extent the sum of such periodic payments for any year exceeds
that year’s amortized cost of the Cap Contract component, such excess represents
net income for that year. Conversely, to the extent that the amount of that
year’s amortized cost exceeds the sum of the period payments, such excess shall
represent a net deduction for that year. Although not clear, net income or
a net
deduction should be treated as ordinary income or as an ordinary
deduction.
Tax
Treatment of the Class
X Certificates
The
Class
X
Certificates
represent the beneficial ownership of a REMIC regular interest and ownership
of
the Basis Risk Reserve Fund. The holders of the Class
X
Certificates
are
treated as having obligations under the Cap Contract to make payments in respect
of the Component Certificates. The obligations to make payments will be
accounted for as an interest rate cap contract for which the Class
X
Certificateholders
receive
a nominal premium. Any premium the Certificateholders are considered to receive
for undertaking such obligations should be amortized and taken into income
in
accordance with the treasury regulations addressing the treatment of notional
principal contracts, see “—the Cap Contract Component.” Deposits made to the
Basis Risk Reserve Fund will be treated as distributions to the Class
X
Certificateholders.
Payments from the Basis Risk Reserve Fund will be treated as payments by the
Class
X
Certificateholders pursuant
to the Cap Contract. Because the Class
X
Certificates
represent an obligation to make Basis Risk Shortfall payments separate from
a
REMIC regular interest, such Certificates should not be acquired by an entity
intending to qualify as a REMIC as such obligation could prevent the entity
from
so qualifying. Investors should consult with their own tax advisors regarding
the consequences of owning the Class
X
Certificates.
Limitations
on deductions with respect to Cap Contracts
A
beneficial owner’s ability to recognize a net deduction with respect to the Cap
Contract may be limited in the case of (i) estates and trusts and
(ii) individuals owning an interest in such component directly or through a
“pass-through entity” (other than in connection with such individual’s trade or
business). Pass-through entities include partnerships, S corporations, grantor
trusts and non-publicly offered regulated investment companies, but do not
include estates, non-grantor trusts, cooperatives, real estate investment trusts
and publicly offered regulated investment companies. Further, such a beneficial
owner will not be able to recognize a net deduction with respect to the Cap
Contract in computing the beneficial owner’s alternative minimum tax
liability.
S-96
Tax
Treatment of Offered Certificates For Certain Purposes
Each
of
the offered certificates (other than any portion thereof representing the right
to receive, or the obligation to make, payments with respect to Basis Risk
Shortfalls) will constitute:
·
a
“real estate asset” within the meaning of section 856(c)(4)(A) of the Code
for a real estate investment trust;
·
except
in the case of the Class A-R Certificate, an “obligation . . . principally
secured by an interest in real property” within the meaning of section
860G(a)(3) Code if held by a REMIC;
or
·
an
asset described in section 7701(a)(19)(C)(xi) of the Code if held
by a
domestic building and loan
association.
The
Class A-R Certificate
The
holder of the Class A-R Certificate must include the taxable income of each
REMIC in its federal taxable income. The resulting tax liability of such holder
may exceed cash distributions to such holder during certain periods. All or
a
portion of the taxable income from the Class A-R Certificate recognized by
a
holder may be treated as “excess inclusion” income, which, with limited
exceptions, is subject to U.S. federal income tax.
The
purchaser of the Class A-R Certificate should consider carefully the tax
consequences of an investment in residual certificates as discussed in the
Prospectus and should consult its own tax advisors with respect to those
consequences. See“Material
Federal Income Tax Consequences—REMIC Certificates—D. Residual Certificates” in
the prospectus. Specifically, prospective holders of the Class A-R Certificate
should consult their tax advisors regarding whether, at the time of acquisition,
the Class A-R Certificate will be treated as a “non-economic” residual interest,
a “non-significant value” residual interest or a “tax avoidance potential”
residual interest. See“Certain
Federal Income Tax Consequences—REMIC Certificates—J. Tax-Related Restrictions
on Transfer of Residual Certificates—Non-economic
Residual Certificates”
in the
prospectus. Additionally, for information regarding prohibited transactions
and
treatment of Realized Losses, see
“Material
Federal Income Tax Consequences—REMIC Certificates—E. Prohibited Transactions
and Other Taxes” and “—REMIC Certificates—C. Regular Certificates—Treatment
of Realized Losses”
in the
prospectus.
Reportable
Transactions
Pursuant
to recently enacted legislation, a penalty in the amount of $10,000 in the
case
of a natural person and $50,000 in any other case is imposed on any taxpayer
that fails to file timely an information return with the IRS with respect to
a
“reportable transaction” (as defined in Section 6011 of the Code). The rules
defining “reportable transactions” are complex and include transactions that
result in certain losses that exceed threshold amounts. Prospective investors
are advised to consult their own tax advisers regarding any possible disclosure
obligations in light of their particular circumstances.
State
Taxes
The
depositor makes no representations regarding the tax consequences of the
purchase, ownership or disposition of the offered certificates under the tax
laws of any state. Investors considering an investment in the offered
certificates should consult their own tax advisors regarding those tax
consequences.
All
investors should consult their own tax advisors regarding the federal, state,
local or foreign income tax consequences of the purchase, ownership and
disposition of the offered certificates.
S-97
ERISA
Considerations
ERISA
and
the Internal Revenue Code impose requirements on certain employee benefit
plans—and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities, educational savings accounts,
Keogh plans and collective investment funds and separate accounts in which
plans, accounts or arrangements are invested—and on persons who are fiduciaries
with respect to these types of plans and arrangements. In this prospectus
supplement we refer to these types of plans and arrangements as
“Plans.”
ERISA
prohibits “parties in interest” with respect to a Plan from engaging in certain
transactions involving the Plan and its assets unless a statutory, regulatory
or
administrative exemption applies to the transaction. Section 4975 of the Code
imposes certain excise taxes on prohibited transactions involving plans
described under that section; ERISA authorizes the imposition of civil penalties
for prohibited transactions involving plans not covered under Section 4975
of
the Code. Any Plan fiduciary which proposes to cause a Plan to acquire any
of
the offered certificates should consult with its counsel with respect to the
potential consequences under ERISA and the Code of the Plan’s acquisition and
ownership of such Certificates. See “ERISA Considerations” in the
prospectus.
Certain
employee benefit plans, including governmental plans and certain church plans,
are not subject to ERISA’s requirements. Accordingly, assets of those plans may
be invested in the offered certificates without regard to the ERISA
considerations described in this prospectus supplement and in the prospectus,
subject to the provisions of other applicable federal and state law. Any such
plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code may nonetheless be subject to the prohibited transaction
rules set forth in Section 503 of the Code.
Investments
by Plans that are subject to ERISA are subject to ERISA’s general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan’s investments be made in
accordance with the documents governing the Plan. A fiduciary which decides
to
invest the assets of a Plan in the offered certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the underlying mortgage
loans.
The
U.S.
Department of Labor has granted to Greenwich Capital Markets, Inc. Prohibited
Transaction Exemption (“PTE”) 90-59, as amended by PTE 2002-41, which exempts
from the application of the prohibited transaction rules transactions relating
to
·
the
acquisition, holding and sale by Plans of certain securities representing
an undivided interest in certain asset-backed pass-through entities,
such
as the trust fund, holding assets such as the mortgage loans, with
respect
to which Greenwich Capital Markets, Inc. or any of its affiliates
is the
sole underwriter or the manager or co-manager of the underwriting
syndicate, and
·
the
servicing, operation and management of such asset-backed pass-through
entities,
provided
that the general conditions and certain other requirements set forth in the
exemption are satisfied.
Each
of
the conditions listed below must be satisfied for the exemption to
apply.
·
The
acquisition of the certificates by a Plan is on terms (including
the price
for the certificates) that are at least as favorable to the Plan
as they
would be in an arm’s length transaction with an unrelated
party.
·
The
certificates acquired by the Plan have received a rating at the time
of
such acquisition that is one of the four highest generic rating
categories.
·
The
trustee must not be an affiliate of any other member of the “restricted
group” (defined below in the second following paragraph), other than the
underwriter.
·
The
sum of all payments made to and retained by the underwriters in connection
with the distribution of the applicable certificates represents not
more
than reasonable compensation for underwriting the certificates; the
sum of
all payments made to and retained by the seller pursuant to the assignment
of the trust fund to the trust fund represents not more than the
fair
market value of such loans; the sum of all payments made to and retained
by the servicer represents not more than reasonable compensation
for the
servicer’s services under the agreement pursuant to which the loans are
pooled and reimbursements of such person’s reasonable expenses in
connection therewith.
S-98
·
The
Plan investing in the certificates is an “accredited investor” as defined
in Rule 501(a)(1) of Regulation D of the SEC under the Securities
Act of
1933.
·
The
mortgage loans held in the trust fund must be of the type that have
been
included in other investment pools.
·
Certificates
evidencing interests in such other investment pools must have been
rated
in one of the four highest generic rating categories by a rating
agency
for at least one year prior to the Plan’s acquisition of
certificates.
·
Certificates
evidencing interests in such other investment pools must have been
purchased by investors other than Plans for at least one year prior
to any
Plan’s acquisition of certificates.
Moreover,
the exemption provides relief from certain self-dealing/conflict of interest
prohibited transactions that may occur when the Plan fiduciary causes a Plan
to
acquire certificates in a trust holding receivables as to which the fiduciary
(or its affiliate) is an obligor provided, among other requirements, that
·
in
the case of an acquisition in connection with the initial issuance
of
certificates, at least 50% of each class of certificates in which
Plans
have invested and at least 50% of the aggregate interests in the
trust
fund is acquired by persons independent of the restricted group;
·
such
fiduciary (or its affiliate) is an obligor with respect to not more
than
5% of the fair market value of the obligations contained in the trust
fund;
·
the
Plan’s investment in certificates of any class does not exceed 25% of
all
of the certificates of that class outstanding at the time of the
acquisition; and
·
immediately
after the acquisition, no more than 25% of the assets of any Plan
with
respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more issuers containing assets
sold or
serviced by the same entity.
This
relief does not apply to Plans sponsored by members of the “restricted group”
consisting of the depositor, the servicers, the master servicer, the securities
administrator, the trustee, any indemnitor or any obligor with respect to
mortgage loans included in the trust fund constituting more than 5% of the
aggregate unamortized principal balance of the assets of the trust fund, or
any
affiliate of these parties.
It
is
expected that the exemption will apply to the acquisition and holding by Plans
of the offered certificates (the “Exemption Eligible Certificates”) and that all
conditions of the exemption other than those within the control of the investors
will be met. Each fiduciary of a Plan should satisfy itself that the exemption
will apply to the acquisition and holding by such Plan of the offered
certificates.
The
rating of an offered certificate may change. If a class of offered certificates
no longer has a rating of at least “BBB-“ (or its equivalent), certificates of
that class will no longer be eligible for relief under the exemption (although
a
Plan that had purchased the offered certificate when it had an investment-grade
rating would not be required by the exemption to dispose of it). In
addition, because the characteristics of the offered certificates, other than
the Exemption Eligible Certificates, may not meet the requirements of the
exemption discussed above or any other issued exemption under ERISA including
Prohibited Transaction Class Exemption (“PTCE”) 83-1 discussed under “ERISA
Considerations” in the prospectus, the purchase and holding of any class of
offered certificates, other than the Exemption Eligible Certificates, by a
Plan
may result in prohibited transactions or the imposition of excise taxes or
civil
penalties. Consequently, the initial acquisition and subsequent transfers of
the
offered certificates, other then the Exemption Eligible Certificates and any
Exemption Eligible Certificates rated below “BBB-“ (or its equivalent)
(collectively “ERISA-Restricted Offered Certificates”) will not be registered by
the securities administrator,
as
certificate registrar, unless
the certificate registrar receives:
S-99
·
a
representation from the acquirer or transferee of the ERISA-Restricted
Offered
Certificate to the effect that the transferee is not a Plan or a
person
acting for, or on behalf of, any such Plan or using the assets of
such
Plan or arrangement to effect such transfer,
or
·
if
the purchaser is an insurance company, a representation that the
purchaser
is an insurance company which is purchasing the ERISA-Restricted
Offered
Certificate with funds contained in an “insurance company general account”
(as such term is defined in Section V(e) of PTCE 95-60) and that
the
purchase and holding of the ERISA-Restricted
Offered
Certificate are covered under Sections I and III of PTCE 95-60,
or
·
in
the case of the Class A-R Certificate, an opinion of counsel pursuant
to
the pooling agreement to the effect that the purchase and holding
of the
Class A-R Certificate will not result in a non-exempt prohibited
transaction under Section 406 of ERISA or Section 4975 of the Code
and
will not subject the certificate registrar, the servicers, the master
servicer, the securities administrator, the trustee or the depositor
to
any obligation in addition to those undertaken under the pooling
agreement.
Acquirers
or transferees of interests in ERISA-Restricted Offered Certificates will be
deemed to have made the representations set forth in the first two items
above.
Legal
Investment Considerations
The
senior certificates and the Class B-1 Certificates will constitute “mortgage
related securities” for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 (“SMMEA”) so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating organization
and, as such, are legal investments for certain entities to the extent provided
for in SMMEA.
There
may
be restrictions on the ability of certain investors, including depository
institutions, either to purchase the offered certificates or to purchase offered
certificates representing more than a specified percentage of the investor’s
assets. Investors should consult their own legal advisors in determining whether
and to what extent the offered certificates constitute legal investments for
those investors. See “Legal Investment Considerations” in the
prospectus.
Use
of Proceeds
The
net
proceeds from the sale of the offered certificates will be applied by the
depositor toward the purchase of the mortgage loans from the seller of the
mortgage loans. The mortgage loans will be acquired by the depositor from the
seller in a privately negotiated transaction.
Method
of Distribution
Subject
to the terms and conditions set forth in the underwriting agreement among the
depositor, Greenwich Capital Markets, Inc., which is an affiliate of the
depositor, and WaMu Capital Corp., the depositor has agreed to sell to each
of
the underwriters, and each underwriter has severally agreed to purchase from
the
depositor, the offered certificates in the respective amounts listed in the
following table.
Class
Greenwich
Capital Markets, Inc.
WaMu
Capital Corp.
Class
A1A
$
408,872,400
$
21,519,600
Class
A1B
$
170,363,500
$
8,966,500
Class
A1C
$
102,218,100
$
5,379,900
Class X
$
761,400,150
*
$
40,073,692
*
Class
PO
$
100
—
Class
A-R
$
100
—
Class
B-1
$
28,170,350
$
1,482,650
Class
B-2
$
17,512,300
$
921,700
Class
B-3
$
10,659,950
$
561,050
______________
*
Notional Amount.
S-100
Distribution
of the offered certificates will be made by the underwriters from time to time
in negotiated transactions or otherwise at varying prices to be determined
at
the time of sale. The underwriters may effect those transactions by selling
offered certificates to or through dealers and those dealers may receive from
such underwriters, for which they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The underwriters and any
dealers that participate with such underwriter in the distribution of the
offered certificates may be deemed to be an underwriter, and any discounts,
commissions or concessions received by them, and any profits on resale of the
offered certificates purchased by them, may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933.
Immediately
prior to the sale of the mortgage loans to the trustee, certain of the mortgage
loans were subject to financing provided by an affiliate of Greenwich Capital
Markets, Inc. A portion of the proceeds from the sale of the certificates will
be used to repay the financing.
The
depositor has been advised by each underwriter that it intends to make a market
in the offered certificates purchased by it but has no obligation to do so.
There can be no assurance that a secondary market for the offered certificates
will develop or, if it does develop, that it will continue.
The
depositor has agreed to indemnify each underwriter against, or make
contributions to each underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933.
Experts
The
consolidated balance sheets (restated) of FSA and its subsidiaries as of
December 31, 2004 and 2003 and the related consolidated statements of operations
and comprehensive income (restated), changes in shareholder’s equity (restated),
and cash flows (restated) for each of the three years in the period ended
December 31, 2004, incorporated by reference in this prospectus supplement
have
been incorporated in this prospectus supplement, in reliance on the report
of
PricewaterhouseCoopers LLP, independent registered public accounting firm,
given
on the authority of that firm as experts in accounting and
auditing.
Legal
Matters
Certain
legal matters in connection with the issuance of the offered certificates will
be passed upon by McKee Nelson LLP as
counsel for the depositor and for the underwriters. Certain federal income
tax
consequences with respect to the certificates will be passed upon for the trust
fund by McKee Nelson LLP. Certain legal matters in connection with the issuance
of the offered certificates will be passed upon by Hunton & Williams LLP as
counsel for the sponsor and for the seller.
Ratings
It
is a
condition to the issuance of the offered certificates that they have the
applicable rating or ratings by Moody’s Investors Service, Inc. (“Moody’s”) and
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies,
Inc. (“S&P”), indicated under “Initial Certificate Ratings” in the table on
page S-1.
The
ratings assigned by each rating agency named above address the likelihood of
the
receipt of all distributions on the mortgage loans by the related
certificateholders under the agreement pursuant to which the certificates are
issued. The ratings of each rating agency take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with the certificates, and the extent
to
which the payment stream on that mortgage pool is adequate to make payments
required by the certificates. However, ratings of the certificates do not
constitute a statement regarding frequency of prepayments on the related
mortgage loans.
S-101
The
ratings do not address the possibility that, as a result of principal
prepayments, holders of the offered certificates may receive a lower than
anticipated yield, and such ratings do not address the ability of the seller
to
repurchase certain mortgage loans for which the interest rate or terms have
converted.
The
ratings assigned to the offered certificates should be evaluated independently
from similar ratings on other types of securities. A rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or
withdrawal at any time by such rating agency.
The
ratings do not address the likelihood that any Basis Risk Shortfalls will be
repaid to holders of the LIBOR Certificates.
The
depositor has not engaged any rating agency other than Moody’s and S&P to
provide ratings on the offered certificates. However, there can be no assurance
as to whether any other rating agency will rate the offered certificates or,
if
it does, what ratings would be assigned by that rating agency. Any rating on
the
offered certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the offered certificates by Moody’s and
S&P.
S-102
Glossary
of Terms
AB
Servicing Criteria.
The
minimum servicing criteria established in Item 1122(d) of Regulation
AB.
Aggregate
Subordinate Percentage.
For any
distribution date, the percentage equivalent of a fraction the numerator of
which is the aggregate class principal balance of the subordinate certificates
immediately prior to that date and the denominator of which is the Pool
Balance.
Applicable
Credit Support Percentage.
For
each class of subordinate certificates and any distribution date, the sum of
the
Class Subordination Percentage of that class and the aggregate Class
Subordination Percentage of all other classes of subordinate certificates having
higher numerical class designations than that class.
Available
Funds.
For any
distribution date, an amount equal to:
(A)
the
sum
of
the following with respect to each mortgage
loan:
·
all
scheduled installments of interest and principal due on the due date
in
the month in which that distribution date occurs and in each case
received
prior to the related Determination Date, together with any advances
in
respect of the mortgage loan;
·
all
net proceeds of any insurance policies with respect to the mortgage
loan,
to the extent those proceeds are not applied to the restoration of
the
related mortgaged property or released to the related borrower in
accordance with the related servicer’s normal servicing procedures and, if
the mortgage is a defaulted mortgage loan, all net liquidation proceeds
with respect to the mortgage loan;
·
any
amounts received with respect to foreclosed properties for that
distribution date;
·
any
amount of compensating interest received in respect of the mortgage
loan
for that distribution date;
·
all
partial or full prepayments of the mortgage loan, received during
the
related Prepayment Period for that distribution date and all Recoveries,
if any, for that distribution date;
and
·
if
the mortgage loan is repurchased or substituted for by the sponsor
or an
originator due to a defect or breach, or if the mortgage loan is
repurchased or substituted for by the sponsor or a servicer pursuant
to
any applicable option to repurchase, amounts received during the
related
Prepayment Period as payment of the purchase price or substitution
adjustment amount for the mortgage
loan;
reduced
by
(B)
the
aggregate of the sum
of
the following with respect to each mortgage
loan:
·
amounts
in reimbursement for advances previously made in respect of the mortgage
loan and other amounts as to which the servicers, the master servicer,
the
custodian, the securities administrator and the trustee are entitled
to be
reimbursed pursuant to the pooling
agreement;
·
the
expense fees of the trust fund for such distribution date;
and
·
the
portion of the premium payable on such distribution date to the
certificate insurer from the mortgage
loans.
Class
Subordination Percentage.
For any
distribution date and each class of subordinate certificates, a fraction
(expressed as a percentage) the numerator of which is the class principal
balance of that class immediately before that date and the denominator of which
is the aggregate class principal balance of all classes of certificates
immediately before that date.
S-103
Determination
Date.
For any
distribution date and each mortgage loan, the date set forth in the related
servicing agreement on which the related servicer determines the amount to
be
remitted to the master servicer.
Due
Period.
For any
distribution date, the period commencing on the second day of the month
preceding the month in which that distribution date occurs and ending on the
first day of the month in which that distribution date occurs.
Monthly
Interest Distributable Amount.
With
respect to each class of Certificates (other than the Class PO Certificates)
and
any distribution date, the amount of interest accrued during the related accrual
period at the lesser of the related adjusted cap rate and the related pass
through rate on the certificate principal balance or certificate notional
balance, as applicable, immediately prior to that distribution
date.
Net
Principal Prepayments.
The
excess, if any, of principal prepayments over deferred interest on the related
mortgage loans during the related collection period.
Original
Applicable Credit Support Percentage.
For
each class of subordinate certificates, the Applicable Credit Support Percentage
for that class on the date of issuance of the certificates.
Pool
Balance.
For any
distribution date, the aggregate of the Stated Principal Balances of the
mortgage loans as of the due date in the month preceding the month of that
distribution date.
Prepayment
Period.
For any
distribution date, the calendar month preceding the month in which that
distribution date occurs.
Principal
Distribution Amount.
For any
distribution date, the sum of the following for each mortgage loan:
·
each
scheduled payment of principal collected or advanced (before taking
into
account any deficient valuations or debt service reductions) on the
mortgage loan by a servicer in the related Due
Period;
·
if
the mortgage loan is purchased, the principal portion of the related
purchase price, for the loan, deposited in the distribution account
during
the related Prepayment Period;
·
if
the mortgage loan is substituted for, the principal portion of any
related
substitution adjustment amount for the mortgage loan deposited in
the
distribution account during the related Prepayment
Period;
·
if
the mortgage loan is not yet a liquidated mortgage loan, the principal
portion of all insurance and other proceeds for the mortgage loan
received
during the related Prepayment
Period;
·
if
the mortgage loan is a liquidated mortgage loan, the principal portion
of
all net liquidation proceeds for the mortgage loan received during
the
related Prepayment Period, other than Recoveries;
and
·
the
principal portion of all partial and full principal prepayments of
the
mortgage loan received during the related Prepayment Period (net
of
deferred interest) and all Recoveries, if any, for that distribution
date.
Realized
Loss:
With
respect to any liquidated mortgage loan, the amount of loss realized equal
to
the portion of the principal balance and accrued interest remaining unpaid
after
application of all net liquidation proceeds in respect of such liquidated
mortgage loan.
Recovery.
With
respect to any distribution date and mortgage loan that became a liquidated
mortgage loan in a month preceding the month of that distribution date, an
amount received in respect of such liquidated mortgage loan during the prior
calendar month which has previously been allocated as a Realized Loss to a
class
or classes of certificates or principal-only component, net of reimbursable
expenses.
S-104
Senior
Credit Support Depletion Date.
The
date on which the aggregate class principal balance of the subordinate
certificates has been reduced to zero.
Senior
Percentage.
For
each distribution date, the percentage equivalent of a fraction the numerator
of
which is the aggregate of the class principal balance of the class or classes
of
senior certificates immediately prior to that date and the denominator of which
is the sum of the Stated Principal Balance of all mortgage loans as of the
due
date in the month immediately preceding the month of that distribution
date.
Senior
Prepayment Percentage.
For any
distribution date occurring before March 2016, 100%. Thereafter, each Senior
Prepayment Percentage will be subject to gradual reduction as described in
the
following paragraphs. This disproportionate allocation of unscheduled payments
of principal (net of deferred interest) will have the effect of accelerating
the
amortization of the senior certificates while, in the absence of Realized
Losses, increasing the interest in the principal balance of the mortgage loans
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates.
For
any
distribution date occurring on or after the distribution date in March 2016,
the
related Senior Prepayment Percentage will be as follows:
·
for
any distribution date in the first year thereafter, the related Senior
Percentage plus 70% of the related Subordinate Percentage for that
date;
·
for
any distribution date in the second year thereafter, the related
Senior
Percentage plus 60% of the related Subordinate Percentage for that
date;
·
for
any distribution date in the third year thereafter, the related Senior
Percentage plus 40% of the related Subordinate Percentage for that
date;
·
for
any distribution date in the fourth year thereafter, the related
Senior
Percentage plus 20% of the related Subordinate Percentage for that
date;
and
·
for
any distribution date thereafter, the related Senior Percentage for
that
date.
Notwithstanding
the preceding paragraphs, no decrease in the Senior Prepayment Percentage will
occur unless the Step Down Test is satisfied on such distribution
date.
However,
if, on any distribution date occurring on or after the distribution date in
March 2016, the Senior Percentage exceeds the initial Senior Percentage, the
related Senior Prepayment Percentage for that date will once again equal
100%.
Notwithstanding
the preceding paragraphs, if on any distribution date, the Two Times Test is
satisfied, the Senior Prepayment Percentage will equal (a) prior to the
distribution date in March 2009, the Senior Percentage plus 50% of the related
Subordinate Percentage and (b) on or after the distribution date in March
2009, the related Senior Percentage for that date.
Senior
Principal Distribution Amount.
For any
distribution date, will equal the sum
of:
·
the
Senior Percentage of all amounts for that date described in the first
four
bullets of the definition of “Principal Distribution
Amount”;
plus
S-105
·
for
each mortgage loan that became a liquidated mortgage loan during
the
related Prepayment Period, the lesser
of:
(a)
the
Senior Percentage of the Stated Principal Balance of that mortgage loan,
and
(b)
(x)
the Senior Prepayment Percentage of the amount of the net liquidation
proceeds allocable to principal received on that mortgage loan;
plus
·
the
Senior Prepayment Percentage of the amounts for that distribution
date
described in the sixth bullet of the definition of “Principal Distribution
Amount.”
Stated
Principal Balance.
For any
mortgage loan and any date, the unpaid principal balance of the mortgage loan
as
of the immediately preceding due date, as specified in its amortization schedule
at the time (before any adjustment to the amortization schedule for any
moratorium or similar waiver or grace period), after giving effect to any
previous partial prepayments, net liquidation proceeds received, the payment
of
principal due on or prior to that due date irrespective of any delinquency
in
payment by the related borrower and any deferred interest added to the principal
balance of that mortgage loan pursuant to the terms of the related mortgage
note
on or prior to that due date.
Step
Down Test.
As to
any distribution date, the application of both of the following conditions
(which conditions may or may not be satisfied):
first,
the
outstanding principal balance of all mortgage loans delinquent
60 days or more (including mortgage loans in foreclosure and REO
property), averaged over the preceding six month period, as a percentage
of the aggregate class principal balance of the subordinate certificates,
does not equal or exceed 50%, and
second,
cumulative
Realized Losses on all of the mortgage loans do not
exceed:
·
for
any distribution date on or after the tenth anniversary of the first
distribution date, 30% of the aggregate class principal balance of
the
subordinate certificates as of the closing
date,
·
for
any distribution date on or after the eleventh anniversary of the
first
distribution date, 35% of the aggregate class principal balance of
the
subordinate certificates as of the closing
date,
·
for
any distribution date on or after the twelfth anniversary of the
first
distribution date, 40% of the aggregate class principal balance of
the
subordinate certificates as of the closing
date,
·
for
any distribution date on or after the thirteenth anniversary of the
first
distribution date, 45% of the aggregate class principal balance of
the
subordinate certificates as of the closing date,
and
·
for
any distribution date on or after the fourteenth anniversary of the
first
distribution date, 50% of the aggregate class principal balance of
the
subordinate certificates as of the closing
date.
Subordinate
Percentage.
For any
distribution date will be equal to the difference between 100% and the Senior
Percentage on such distribution date.
Subordinate
Prepayment Percentage.
For any
distribution date, the difference between 100% and the related Senior Prepayment
Percentage for that date.
Subordinate
Principal Distribution Amount.
For any
distribution date will equal the sum
of the
following amounts:
·
the
Subordinate Percentage of all amounts for that date described in
the first
four bullets in the definition of “Principal Distribution
Amount,”
S-106
·
for
each mortgage loan that became a liquidated mortgage loan during
the
related Prepayment Period, the portion of the net liquidation proceeds
allocable to principal received on the loan, after application of
the
amounts pursuant to the second bullet in the definition of “Senior
Principal Distribution Amount” up to the related Subordinate Percentage of
the Stated Principal Balance of the mortgage loan,
and
·
the
Subordinate Prepayment Percentage of the amounts for that distribution
date described in the sixth bullet in the definition of “Principal
Distribution Amount.”
TwoTimes
Test.
On any
distribution date, the satisfaction of all of the following
conditions:
·
the
Aggregate Subordinate Percentage is at least two times the Aggregate
Subordinate Percentage as of the closing
date,
·
the
condition described in clause first
of
the definition of “Step Down Test” is satisfied,
and
·
on
or after the distribution date in March 2009, cumulative Realized
Losses
do not exceed 30% of the aggregate class principal balance of the
subordinate certificates as of the closing date, or prior to the
distribution date in March 2009, cumulative Realized Losses do not
exceed
20% of the aggregate class principal balance of the subordinate
certificates as of the closing
date.
S-107
(This
page has been left blank intentionally.)
Annex
A:
Global
Clearance, Settlement and Tax Documentation Procedures
Except
in
certain limited circumstances, the globally offered Luminent Mortgage Trust
2006-2 Mortgage Loan Pass-Through Certificates, Series 2006-2 (the “Global
Securities”), will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of DTC, Clearstream
Luxembourg or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary
market trading between investors holding Global Securities through Clearstream
Luxembourg and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e.,
seven
calendar day settlement).
Secondary
market trading between investors holding Global Securities through DTC will
be
conducted according to the rules and procedures applicable to U.S. corporate
debt obligations and prior mortgage loan asset backed certificates
issues.
Secondary
cross-market trading between Clearstream Luxembourg or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream Luxembourg and
Euroclear (in such capacity) and as DTC Participants.
A
holder
that is not a United States person (as described below) of Global Securities
will be subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial
Settlement
All
Global Securities will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors’ interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Clearstream Luxembourg and
Euroclear will hold positions on behalf of their participants through their
respective Relevant Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors
electing to hold their Global Securities through DTC will follow the settlement
practices applicable to prior mortgage loan asset backed certificates issues.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors
electing to hold their Global Securities through Clearstream Luxembourg or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no “lock-up” or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary
Market Trading
Because
the purchaser determines the place of delivery, it is important to establish
at
the time of the trade where both the purchaser’s and seller’s accounts are
located to ensure that settlement can be made on the desired value
date.
Trading
Between DTC Participants.
Secondary
market trading between DTC Participants will be settled using the procedures
applicable to prior mortgage loan asset backed certificates issues in same-day
funds.
Trading
Between Clearstream Luxembourg and/or Euroclear
Participants.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
A-1
Trading
Between DTC Seller and Clearstream Luxembourg or Euroclear
Purchaser.
When
Global Securities are to be transferred from the account of a DTC Participant
to
the account of a Clearstream Luxembourg Participant or a Euroclear Participant,
the purchaser will send instructions to Clearstream Luxembourg or Euroclear
through a Clearstream Luxembourg Participant or Euroclear Participant at least
one business day prior to settlement. Clearstream Luxembourg or Euroclear will
instruct the respective Relevant Depositary, as the case may be, to receive
the
Global Securities against payment. Payment will include interest accrued on
the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of either the actual number of
days
in such accrual period and a year assumed to consist of 360 days or a 360-day
year of twelve 30-day months as applicable to the related class of Global
Securities. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Relevant Depositary of the DTC
Participant’s account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Luxembourg Participant’s or Euroclear
Participant’s account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e.,
the
trade fails), the Clearstream Luxembourg or Euroclear cash debt will be valued
instead as of the actual settlement date.
Clearstream
Luxembourg Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day
funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Clearstream Luxembourg or Euroclear. Under
this approach, they may take on credit exposure to Clearstream Luxembourg or
Euroclear until the Global Securities are credited to their accounts one day
later.
As
an
alternative, if Clearstream Luxembourg or Euroclear has extended a line of
credit to them, Clearstream Luxembourg Participants or Euroclear Participants
can elect not to preposition funds and allow that credit line to be drawn upon
the finance settlement. Under this procedure, Clearstream Luxembourg
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases
the
investment income on the Global Securities earned during that one-day period
may
substantially reduce or offset the amount of such overdraft charges, although
this result will depend on each Clearstream Luxembourg Participant’s or
Euroclear Participant’s particular cost of funds.
Because
the settlement is taking place during New York business hours, DTC Participants
can employ their usual procedures for sending Global Securities to the
respective European Depositary for the benefit of Clearstream Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available
to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two
DTC
Participants.
Trading
Between Clearstream Luxembourg or Euroclear Seller and DTC
Purchaser.
Due to
time zone differences in their favor, Clearstream Luxembourg Participants and
Euroclear Participants may employ their customary procedures for transactions
in
which Global Securities are to be transferred by the respective clearing system,
through the respective Relevant Depositary, to a DTC Participant. The seller
will send instructions to Clearstream Luxembourg or Euroclear through a
Clearstream Luxembourg Participant or Euroclear Participant at least one
business day prior to settlement. In these cases Clearstream Luxembourg or
Euroclear will instruct the respective Relevant Depositary, as appropriate,
to
deliver the Global Securities to the DTC Participant’s account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of either the actual number of days in such accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in
the
account of the Clearstream Luxembourg Participant or Euroclear Participant
the
following day, and receipt of the cash proceeds in the Clearstream Luxembourg
Participant’s or Euroclear Participant’s account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream Luxembourg Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day period.
If settlement is not completed on the intended value date (i.e.,
the
trade fails), receipt of the cash proceeds in the Clearstream Luxembourg
Participant’s or Euroclear Participant’s account would instead be valued as of
the actual settlement date.
A-2
Finally,
day traders that use Clearstream Luxembourg or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Clearstream Luxembourg
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing
through Clearstream Luxembourg or Euroclear for one day (until the purchase
side
of the day trade is reflected in their Clearstream Luxembourg or Euroclear
accounts) in accordance with the clearing system’s customary
procedures;
(b) borrowing
the Global Securities in the U.S. from a DTC Participant no later than one
day
prior to the settlement, which would give the Global Securities sufficient
time
to be reflected in their Clearstream Luxembourg or Euroclear account in order
to
settle the sale side of the trade; or
(c) staggering
the value dates for the buy and sell sides of the trade so that the value date
for the purchase from the DTC Participant is at least one day prior to the
value
date for the sale to the Clearstream Luxembourg or Euroclear
Participant.
Certain
U.S. Federal Income Tax Documentation Requirements
A
holder
that is not a “United States person” within the meaning of Section 7701(a)(30)
of the Internal Revenue Code of 1986 holding a book-entry certificate through
Clearstream, Euroclear or DTC may be subject to U.S. withholding tax at a rate
of 30% unless such holder provides certain documentation to the securities
administrator or to the U.S. entity required to withhold tax (the “U.S.
withholding agent”) establishing an exemption from withholding. A holder that is
not a United States person may be subject to 30% withholding
unless:
I. the
securities administrator or the U.S. withholding agent receives a
statement—
(a) from
the
holder on Internal Revenue Service (“IRS”) Form W-8BEN (or any successor form)
that—
(i) is
signed
by the holder under penalties of perjury,
(ii) certifies
that such owner is not a United States person, and
(iii) provides
the name and address of the holder, or
(b) from
a
securities clearing organization, a bank or other financial institution that
holds customers’ securities in the ordinary course of its trade or business that
-
(i) is
signed
under penalties of perjury by an authorized representative of the financial
institution,
(ii) states
that the financial institution has received an IRS Form W-8BEN (or any successor
form) from the holder or that another financial institution acting on behalf
of
the holder has received such IRS Form W-8BEN (or any successor
form),
(iii) provides
the name and address of the holder, and
(iv) attaches
the IRS Form W-8BEN (or any successor form) provided by the holder;
II. the
holder claims an exemption or reduced rate based on a treaty and provides a
properly executed IRS Form W-8BEN (or any successor form) to the securities
administrator or the U.S. withholding agent;
A-3
III. the
holder claims an exemption stating that the income is effectively connected
to a
U.S. trade or business and provides a properly executed IRS Form W-8ECI (or
any
successor form) to the securities administrator or the U.S. withholding agent;
or
IV. the
holder is a “nonwithholding partnership” and provides a properly executed IRS
Form W-8IMY (or any successor form) with all necessary attachments to the
securities administrator or the U.S. withholding agent. Certain pass-through
entities that have entered into agreements with the Internal Revenue Service
(for example “qualified intermediaries”) may be subject to different
documentation requirements; it is recommended that such holders consult with
their tax advisors when purchasing the Certificates.
A
holder
holding book-entry certificates through Clearstream or Euroclear provides the
forms and statements referred to above by submitting them to the person through
which he holds an interest in the book-entry certificates, which is the clearing
agency, in the case of persons holding directly on the books of the clearing
agency. Under certain circumstances a Form W-8BEN, if furnished with a taxpayer
identification number, (“TIN”), will remain in effect until the status of the
beneficial owner changes, or a change in circumstances makes any information
on
the form incorrect. A Form W-8BEN, if furnished without a TIN, and a Form W-8ECI
will remain in effect for a period starting on the date the form is signed
and
ending on the last day of the third succeeding calendar year, unless a change
in
circumstances makes any information on the form incorrect. In addition, all
holders holding book-entry certificates through Clearstream, Euroclear or DTC
may be subject to backup withholding at a rate of up to 31% unless the
holder:
I. provides
a properly executed IRS Form W-8BEN, Form W-8ECI or Form W-8IMY (or any
successor forms) if that person is not a United States person;
II. provides
a properly executed IRS Form W-9 (or any substitute form) if that person is
a
United States person; or
III. is
a
corporation, within the meaning of Section 7701(a) of the Internal Revenue
Code
of 1986, or otherwise establishes that it is a recipient exempt from United
States backup withholding.
This
summary does not deal with all aspects of federal income tax withholding or
backup withholding that may be relevant to investors that are not “United States
persons” within the meaning of Section 7701(a)(30) of the Internal Revenue Code.
Such investors are advised to consult their own tax advisors for specific tax
advice concerning their holding and disposing of the book-entry
certificates.
The
term
“United States person” means (1) a citizen or resident of the United States, (2)
a corporation or partnership organized in or under the laws of the United States
or any state or the District of Columbia (other than a partnership that is
not
treated as a United States person under any applicable Treasury regulations),
(3) an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source, (4) a trust if a court within
the
United States is able to exercise primary supervision over the administration
of
the trust fund and one or more United States persons have authority to control
all substantial decisions of the trust fund, and (5) to the extent provided
in
regulations, certain trusts in existence on August 20, 1996 that are treated
as
United States persons prior to such date and that elect to continue to be
treated as United States persons.
A-4
Prospectus
Mortgage-Backed/Asset-Backed
Securities
(Issuable
In Series)
Greenwich
Capital Acceptance, Inc. or Financial Asset Securities
Corp.
Depositor
The
Securities
Each
issue of securities will have its own series designation and will evidence
either the ownership of assets in the related trust or debt obligations secured
by trust assets.
·
Each
series of securities will consist of one or more
classes.
·
Each
class of securities will represent the entitlement to a specified
portion
of interest payments and a specified portion of principal payments
on the
trust assets.
·
A
series may include classes of securities that are senior in right
of
payment to other classes. Classes of securities may be entitled to
receive
principal, interest or both prior to other classes or before or after
specified events.
·
No
market will exist for the securities of any series before they are
issued.
In addition, even after the securities of a series have been issued
and
sold, there can be no assurance that a resale market for them will
develop.
The
Trust and Its Assets
As
specified in the related prospectus supplement, the assets of a trust will
include one or more of the following:
·
mortgage
loans secured generally by senior liens on one- to four-family residential
properties,
·
closed-end
and/or revolving home equity loans generally secured by junior liens
on
one- to four-family residential
properties,
·
mortgage
loans secured by senior liens on multifamily residential
properties,
·
conditional
sales contracts, installment sales agreements or loan agreements
secured
by manufactured housing,
·
home
improvement installment sales contracts and loan agreements that
are
either unsecured or secured generally by junior liens on one- to
four-family residential properties or by purchase money security
interests
in the related home improvements,
·
mortgage
pass-through securities issued or guaranteed by Ginnie Mae, Fannie
Mae or
Freddie Mac, or
·
private
label mortgage-backed or asset-backed
securities.
Offers
of the Securities
Offers
of
the securities may be made through one or more different methods. All securities
will be distributed by, or sold through underwriters managed by, Greenwich
Capital Markets, Inc.
Consider
carefully the risk factors beginning on page 6 of this
prospectus.
The
securities represent obligations of the trust only and do not represent
an
interest in or obligation of the applicable depositor, seller, master
servicer or any of their affiliates.
This
prospectus may be used to offer and sell the securities only if
accompanied by a prospectus
supplement.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved these securities or determined that this prospectus is accurate or
complete. Any representation to the contrary is a criminal
offense.
Important
Notice About Information In This Prospectus And Each Accompanying
Prospectus
Supplement
5
Risk
Factors
6
The
Trust Fund
17
The
Mortgage Loans—General
18
Single
Family Loans
22
Home
Equity Loans
23
Multifamily
Loans
23
Manufactured
Housing Contracts
24
Home
Improvement Contracts
25
Agency
Securities
25
Private
Label Securities
31
Incorporation
of Certain Information by Reference
34
Use
of Proceeds
34
The
Depositors
35
Loan
Program
35
Underwriting
Standards
35
Qualifications
of Sellers
36
Representations
by Sellers; Repurchases or Substitutions
36
Description
of the Securities
39
General
40
Distributions
on Securities
42
Advances
46
Reports
to Securityholders
47
Credit
Enhancement
48
General
48
Subordination
49
Pool
Insurance Policies
51
FHA
Insurance; VA Guarantees
53
Special
Hazard Insurance Policies
55
Bankruptcy
Bonds
56
FHA
Insurance on Multifamily Loans
57
Reserve
Accounts
57
Cross
Support
58
Other
Insurance, Surety Bonds, Guaranties, Letters of Credit and Similar
Instruments or Agreements
58
Financial
Instruments
59
Yield
and Prepayment Considerations
59
2
Operative
Agreements
63
Assignment
of Trust Fund Assets
63
Payments
on Loans; Deposits to Security Account
66
Pre-Funding
Account
68
Sub-Servicing
of Loans
68
Collection
Procedures
70
Hazard
Insurance
72
Realization
upon Defaulted Mortgage Loans
73
Servicing
and Other Compensation and Payment of Expenses
76
Evidence
as to Compliance
77
Certain
Matters Regarding the Master Servicer and the Depositors
77
Events
of Default; Rights upon Event of Default
78
Amendment
81
Termination;
Optional Termination; Calls
82
The
Trustee
84
Material
Legal Aspects of the Loans
84
General
84
Foreclosure
87
Repossession
of Manufactured Homes
90
Rights
of Redemption
91
Equitable
Limitations on Remedies
92
Anti-Deficiency
Legislation and Other Limitations on Lenders
92
Homeownership
Act and Similar State Laws
93
Due-on-Sale
Clauses
95
Prepayment
Charges; Late Fees
96
Applicability
of Usury Laws
97
Servicemembers
Civil Relief Act
97
Environmental
Risks
98
The
Home Improvement Contracts
100
Installment
Contracts
101
Junior
Mortgages; Rights of Senior Mortgagees
102
The
Title I Program
103
Material
Federal Income Tax Consequences
107
General
108
Taxation
of Debt Securities
109
Non-REMIC
Certificates
117
REMIC
Certificates
129
State
Tax Considerations
154
ERISA
Considerations
155
Insurance
Company General Accounts
156
Prohibited
Transaction Class Exemption 83-1
157
Underwriter
Exemption
157
Legal
Investment Considerations
160
Method
of Distribution
163
Legal
Matters
164
3
Financial
Information
164
Available
Information
164
Ratings
164
Glossary
Of Terms
165
4
Important
Notice About Information in This Prospectus
and
Each Accompanying Prospectus Supplement
Information
about each series of securities is contained in two separate documents:
·
this
prospectus, which provides general information, some of which may
not
apply to a particular series; and
·
the
accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that
series.
Although
the accompanying prospectus supplement for a particular series of securities
cannot contradict the information contained in this prospectus, insofar as
the
prospectus supplement contains specific information about the series that
differs from the more general information contained in this prospectus, you
should rely on the information in the prospectus supplement.
You
should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide
you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
We
include cross-references in this prospectus and each accompanying prospectus
supplement to captions in these materials where you can find further related
discussions. There is a Glossary of Terms beginning on page 165 where you will
find definitions of certain capitalized terms used in this prospectus. The
preceding Table of Contents and the Table of Contents included in each
accompanying prospectus supplement provide the pages on which these captions
are
located.
________________
If
you
require additional information, the mailing address of the depositor’s principal
executive offices is either Greenwich Capital Acceptance, Inc. or Financial
Acceptance Securities Corp., at 600 Steamboat Road, Greenwich, Connecticut06830
and the telephone number is (203) 625- 2700. For other means of acquiring
additional information about us or a series of securities, see “The Trust Fund —
Incorporation of Certain Information by Reference” on page 34 of this
prospectus.
________________
5
Risk
Factors
You
should carefully consider the following information, together with the
information set forth under “Risk Factors” in the related prospectus supplement,
since it identifies the principal risk factors associated with an investment
in
the securities.
Principal
prepayments on the
loans
may adversely affect the
average
life of, and rate of return
on,
your securities
You
may be unable to reinvest the principal payments on your securities
at a
rate of return at least equal to the rate on your securities. The
timing
of principal payments on the securities of a series will be affected
by a
number of factors, including the following:
· the
extent of prepayments on the loans in the trust or, if the trust
is
comprised of underlying securities, on the loans backing the underlying
securities;
· how
payments of principal are allocated among the classes of securities
of the
series as specified in the related prospectus supplement;
· if
any party has an option to terminate the related trust early or to
call
your securities, the effect of the exercise of the option;
· the
rate and timing of defaults and losses on the assets in the related
trust;
and
· repurchases
of assets in the related trust as a result of material breaches of
representations and warranties made by the depositor or master
servicer.
The
rate of prepayment of the loans included in, or underlying the assets
held
in, each trust may affect the average life of the
securities.
6
Only
the assets of the related
trust
are available to pay your
securities
Unless
the applicable prospectus supplement provides otherwise, the securities
of
each series will be payable solely from the assets of the related
trust,
including any applicable credit enhancement, and will not have a
claim
against the assets of any other trust. If the assets of the related
trust
are not sufficient, you may suffer a loss on your securities. Moreover,
at
the times specified in the related prospectus supplement, assets
of the
trust may be released to the applicable depositor, master servicer,
any
servicer, credit enhancement provider or other specified person,
if all
payments then due on the securities have been made and adequate provision
for future payments on the remaining securities has been made. Once
released, these assets will no longer be available to make payments
on
your securities There will be no recourse against the depositor,
the
master servicer, any servicer or any of their affiliates if a required
distribution on the securities is not made. The securities will not
represent an interest in, or an obligation of, the depositor, the
master
servicer, any servicer or any of their affiliates.
The
depositor’s obligations are limited to its representations and warranties
concerning the trust assets. Because the depositor has no significant
assets, if it is required to repurchase trust assets due to the breach
of
a representation or warranty, the depositor’s source of funds for the
repurchase would be limited to:
· moneys
obtained from enforcing any similar obligation of the seller or originator
of the asset, or
· funds
from a reserve account or other credit enhancement established to
pay for
asset repurchases.
Credit
enhancement may not be
adequate
to prevent losses on
your
securities
Credit
enhancement is intended to reduce the effect of delinquent payments
or
loan losses on those classes of securities that have the benefit
of the
credit enhancement. Nevertheless, the amount of any credit enhancement
is
subject to the limits described in the related prospectus supplement.
Moreover, the amount of credit enhancement may decline or be depleted
under certain circumstances before the securities are paid in full.
As a
result, securityholders may suffer losses. In addition, credit enhancement
may not cover all potential sources of risk of loss, such as fraud
or
negligence by a loan originator or other parties.
7
The
interest accrual period may
reduce
the effective yield
on
your securities
Interest
payable on the securities on any distribution date will include all
interest accrued during the related interest accrual period. The
interest
accrual period for the securities of each series will be specified
in the
applicable prospectus supplement. If the interest accrual period
ends two
or more days before the related distribution date, your effective
yield
will be less than it would be if the interest accrual period ended
the day
before the distribution date. As a result, your effective yield at
par
would be less than the indicated coupon
rate.
Economic,
legal and other
factors
could reduce the amount
and
delay the timing of recoveries
on
defaulted loans
The
following factors, among others, could adversely affect property
values in
such a way that the outstanding balance of the related loans would
equal
or exceed those values:
· an
overall decline in the residential real estate markets where the
properties are located,
· failure
of borrowers to maintain their properties adequately, and
· natural
disasters that are not necessarily covered by hazard insurance, such
as
earthquakes and floods.
If
property values decline, actual rates of delinquencies, foreclosures
and
losses on the loans could be higher than those currently experienced
by
the mortgage lending industry in general.
Even
if you assume that the mortgaged properties provide adequate security
for
the loans, substantial delays could occur before defaulted loans
are
liquidated and the proceeds forwarded to investors. Property foreclosure
actions are regulated by state statutes and rules and are subject
to many
of the delays and expenses that characterize other types of lawsuits
if
defenses or counterclaims are made. As a result, foreclosure actions
can
sometimes take several years to complete. Moreover, some states prohibit
a
mortgage lender from obtaining a judgment against the borrower for
amounts
not covered by property proceeds if the property is sold outside
of a
judicial proceeding. As a result, if a borrower defaults, these
restrictions may impede the servicer’s ability to dispose of the
borrower’s property and obtain sufficient proceeds to repay the loan in
full. In addition, the servicer is entitled to deduct from liquidation
proceeds all the expenses it reasonably incurs in trying to recover
on the
defaulted loan, including legal fees and costs, real estate taxes,
and
property preservation and maintenance
expenses.
8
State
laws generally regulate interest rates and other loan charges, require
certain disclosures, and often require licensing of loan originators
and
servicers. In addition, most states have other laws and public policies
for the protection of consumers that prohibit unfair and deceptive
practices in the origination, servicing and collection of loans.
Depending
on the provisions of the particular law or policy and the specific
facts
and circumstances involved, violations may limit the ability of the
servicer to collect interest or principal on the loans. Also, the
borrower
may be entitled to a refund of amounts previously paid and the servicer
may be subject to damage claims and administrative
sanctions.
Loans
secured by junior liens are
subject
to additional risks
If
a loan is in a junior lien position, a decline in property values
could
extinguish the value of the junior lien loan before having any effect
on
the related senior lien loan or loans. In general, the expenses of
liquidating defaulted loans do not vary directly with the unpaid
amount.
So, assuming that a servicer would take the same steps to recover
a
defaulted loan with a small unpaid balance as it would a loan with
a large
unpaid balance, the net amount realized after paying liquidation
expenses
would be a smaller percentage of the balance of the small loan than
of the
large loan. Since the mortgages securing home equity loans typically
will
be in a junior lien position, the proceeds from any liquidation will
be
applied first to the claims of the related senior mortgageholders,
including foreclosure costs. In addition, a junior mortgage lender
may
only foreclose subject to any related senior mortgage. As a result,
the
junior mortgage lender generally must either pay each related senior
mortgage lender in full at or before the foreclosure sale or agree
to make
the regular payments on each senior mortgage. Since the trust will
not
have any source of funds to satisfy any senior mortgages or to continue
making payments on them, the trust’s ability as a practical matter to
foreclose on any junior lien will be
limited.
9
Loans
to lower credit quality
borrowers
are more likely
to
experience late payments
and
defaults and increase your
risk
of loss.
Trust
assets may have been made to lower credit quality borrowers who fall
into
one of two categories:
· customers
with moderate income, limited assets and other income characteristics
that
cause difficulty in borrowing from banks and other traditional lenders;
or
· customers
with a history of irregular employment, previous bankruptcy filings,
repossession of property, charged-off loans or garnishment of wages.
The
average interest rate charged on loans made to these types of borrowers
is
generally higher than that charged by lenders that typically impose
more
stringent credit requirements. There is a greater likelihood of late
payments on loans made to these types of borrowers than on loans
to
borrowers with a higher credit quality. In particular, payments from
borrowers with a lower credit quality are more likely to be sensitive
to
changes in the economic climate in the areas in which they
reside.
As
much as 20% (by principal balance) of the trust assets for any particular
series of securities may be contractually delinquent as of the related
cut-off date.
10
Failure
to perfect security
interests
in manufactured
homes
may result in losses
on
your securities
Each
manufactured housing conditional sales contract or installment loan
agreement that is included in a trust fund will be secured by a security
interest in the related manufactured home. The steps necessary to
perfect
the security interest in a manufactured home will vary from state
state.
If, as a result of clerical error or otherwise, the master servicer
fails
to take the appropriate steps to perfect the security interest in
a
manufactured home that secures a conditional sales contract or installment
loan agreement included in the trust, the trustee may not have a
first
priority security interest in that manufactured home. Moreover, the
master
servicer will not amend the certificate of title to a manufactured
home to
name the trustee as lienholder, note the trustee’s interest on the
certificate of title or deliver the certificate of title to the trustee.
As a result, in some states the assignment of the security interest
in the
manufactured home to the trustee may not be perfected or may not
be
effective against creditors of the master servicer or a bankruptcy
trustee
in the event of a bankruptcy of the master servicer.
In
addition, courts in many states have held that manufactured homes
may, in
certain circumstances, become subject to real estate title and recording
laws. As a result, the security interest in each manufactured home
could
be rendered subordinate to the interests of other parties claiming
an
interest in that manufactured home under applicable state real estate
law.
The
failure to properly perfect a valid, first priority security interest
in a
manufactured home that secures a conditional sales contract or installment
loan agreement included in the trust could lead to losses that, to
the
extent not covered by any credit enhancement, could adversely affect
the
yield to maturity of the related securities.
11
Multifamily
loans generally
are
riskier than single family
loans
Loans
that are secured by first liens on rental apartment buildings or
projects
containing five or more residential units, together with loans that
are
secured by first liens on mixed-use properties, shall not in the
aggregate
constitute 10% or more of any pool by principal balance. Multifamily
loans
are generally considered riskier than single-family loans for the
following reasons:
· Multifamily
loans typically are much larger in amount, which increases the risk
represented by the default of a single borrower.
· Repayment
of a multifamily loan usually depends upon successful management
of the
related mortgaged property.
· Changing
economic conditions in particular markets can affect the supply and
demand
of rental units and the rents that those markets will bear.
· Government
regulations, including rental control laws, may adversely affect
future
income from mortgaged properties that are subject to those regulations.
In
addition, because individual multifamily loans often are relatively
large
in amount, principal prepayments resulting from defaults, casualties,
condemnations or breaches of representations and warranties may adversely
affect your yield.
Loans
with balloon payments
may
increase your risk of loss
Certain
loans may not be fully amortizing and may require a substantial principal
payment (a “balloon” payment) at their stated maturity. Loans of this type
involve greater risk than fully amortizing loans since the borrower
must
generally be able to refinance the loan or sell the related property
prior
to the loan’s maturity date. The borrower’s ability to do so will depend
on such factors as the level of available mortgage rates at the time
of
sale or refinancing, the relative strength of the local housing market,
the borrower’s equity in the property, the borrower’s general financial
condition and tax laws.
If
amounts in any pre-funding
account
are not used to
purchase
trust assets, you will
receive
a prepayment on the
related
securities
The
related prospectus supplement may provide that the depositor transfer
a
specified amount into a pre-funding account on the date the securities
are
issued. In this case, the transferred funds may be used only to acquire
additional assets for the trust during a set period after the issuance.
Any amounts remaining in the account at the end of the period will
be
distributed as a prepayment of principal to the holders of the related
securities. The resulting prepayment could adversely affect the yield
on
those securities.
12
Violations
of applicable federal
laws
may reduce or delay
mortgage
loan collections
The
loans may also be subject to federal laws relating to the origination
and
underwriting. These laws
· require
certain disclosures to the borrowers regarding the terms of the loans;
· prohibit
discrimination on the basis of age, race, color, sex, religion, marital
status, national origin, receipt of public assistance or the exercise
of
any right under the consumer credit protection act, in the extension
of
credit;
· regulate
the use and reporting of information related to the borrower’s credit
experience; and
· require
additional application disclosures, limit changes that may be made
to the
loan documents without the borrower’s consent and restrict a lender’s
ability to declare a default or to suspend or reduce a borrower’s credit
limit to certain enumerated events.
Loans
may also be subject to federal laws that impose additional disclosure
requirements on creditors for nonpurchase money loans with high interest
rates or high upfront fees and charges. These laws can impose specific
statutory liabilities upon creditors that fail to comply and may
affect
the enforceability of the related loans. In addition, any assignee
of the
creditor (including the trust) would generally be subject to all
claims
and defenses that the borrower could assert against the creditor,
including the right to rescind the loan.
Loans
relating to home improvement contracts may be subject to federal
laws that
protect the borrower from defective or incomplete work by a contractor.
These laws permit the borrower to withhold payment if the work does
not
meet the quality and durability standards agreed to between the borrower
and the contractor. These laws have the effect of subjecting any
assignee
of the seller (including the trust) to all claims and defenses which
the
borrower in a sale transaction could assert against the seller of
defective goods.
If
certain provisions of these federal laws are violated, the master
servicer
may be unable to collect all or part of the principal or interest
on the
loans. The trust also could be subject to damages and administrative
enforcement.
13
Proceeds
of liquidated loans
generally
are paid first to
providers
of trust services
There
is no assurance that the value of the trust assets for any series
of
securities at any time will equal or exceed the principal amount
of the
outstanding securities of that series. If trust assets have to be
sold
because of an event of default or otherwise, providers of services
to the
trust (including the trustee, the master servicer and the credit
enhancer,
if any) generally will be entitled to receive the proceeds of the
sale to
the extent of their unpaid fees and other amounts due them before
any
proceeds are paid to investors. As a result, the proceeds of such
a sale
may be insufficient to pay the full amount of interest and principal
of
the related securities.
Mortgaged
properties may be
subject
to environmental risks
that
could result in losses
Federal,
state and local laws and regulations impose a wide range of requirements
on activities that may affect the environment, health and safety.
In
certain circumstances, these laws and regulations impose obligations
on
owners or operators of residential properties such as those that
secure
the loans included in a trust. Failure to comply with these laws
and
regulations can result in fines and penalties that could be assessed
against the trust as owner of the related property.
In
some states, a lien on the property due to contamination has priority
over
the lien of an existing mortgage. Further, a mortgage lender may
be held
liable as an “owner” or “operator” for costs associated with the release
of petroleum from an underground storage tank under certain circumstances.
If the trust is considered the owner or operator of a property, it
will
suffer losses as a result of any liability imposed for environmental
hazards on the property.
You
may have difficulty
selling
your securities or
obtaining
your desired price
No
market will exist for the securities before they are issued. In addition,
there can be no assurance that a secondary market will develop following
the issuance and sale of the securities. Even if a secondary market
does
develop, you may not be able to sell your securities when you wish
to or
at the price you want.
14
Ratings
of the securities do not
address
all investment risks and
must
be viewed with caution.
Any
class of securities issued under this prospectus and the accompanying
prospectus supplement will be rated in one of the four highest generic
rating categories of a nationally recognized rating agency. A rating
is
based on the adequacy of the value of the trust assets and any credit
enhancement for that class and reflects the rating agency’s assessment of
how likely it is that holders of the class of securities will receive
the
payments to which they are entitled. A rating does not constitute
an
assessment of how likely it is that principal prepayments on the
loans
will be made, the degree to which the rate of prepayments might differ
from that originally anticipated or the likelihood of early, optional
termination of the securities. You must not view a rating as a
recommendation to purchase, hold or sell securities because it does
not
address the market price or suitability of the securities for any
particular investor.
There
is no assurance that any rating will remain in effect for any given
period
of time or that the rating agency will not lower or withdraw it entirely
in the future.
The
rating agency could lower or withdraw its rating due to:
· any
decrease in the adequacy of the value of the trust assets or any
related
credit enhancement,
· an
adverse change in the financial or other condition of a credit enhancement
provider, or
· a
change in the rating of the credit enhancement provider’s long-term
debt.
15
Book-entry
registration may limit
your
ability to sell securities
and
delay your receipt of
payments
Limit
on Liquidity of Securities.
Securities issued in bookentry form may have only limited liquidity
in the
resale market, since investors may be unwilling to purchase securities
for
which they cannot obtain physical instruments.
Limit
on Ability to Transfer or Pledge.
Transactions in book-entry securities can be effected only through
The
Depository Trust Company, its participating organizations, its indirect
participants and certain banks. As a result, your ability to transfer
or
pledge securities issued in book-entry form may be limited.
Delays
in Distributions.
You may experience some delay in the receipt of distributions on
book-entry securities since the distributions will be forwarded by
the
trustee to DTC for DTC to credit the accounts of its participants.
In
turn, these participants will thereafter credit the distributions
to your
account either directly or indirectly through indirect
participants.
There
is
a Glossary of Terms beginning on page 165 of this prospectus where you will
find
definitions of the capitalized terms used in this prospectus.
16
The
Trust Fund
The
trust
fund for each series of certificates will be held by the trustee named in the
related prospectus supplement for the benefit of the related securityholders.
Each trust fund will consist of one or more pools of the following asset
types:
·
Single
Family Loans,
·
Home
Equity Loans,
·
Multifamily
Loans,
·
Manufactured
Housing Contracts,
·
Home
Improvement Contracts,
·
Agency
Securities or
·
Private
Label Securities,
in
each
case as specified in the related prospectus supplement, as well as payments
relating to the assets and other accounts, obligations or agreements, as
specified in the related prospectus supplement.
Whenever
the terms “pool,”“certificates” and “notes” are used in this prospectus, these
terms are intended to apply, unless the context indicates otherwise, to a
discrete asset pool and the certificates representing undivided interests in,
or
the notes secured by the assets of, a particular trust fund consisting primarily
of the loans in that pool. Similarly, the term “pass-through rate” refers to the
pass-through rate borne by the certificates of a particular series, the term
“interest rate” refers to the coupon borne by notes of a particular series and
the term “trust fund” refers to the related trust fund.
Unless
the context indicates otherwise, the term “loan” includes Single Family Loans,
Home Equity Loans, Multifamily Loans, Manufactured Housing Contracts and Home
Improvement Contracts. Unless the context indicates otherwise, the term
“underlying loan” refers to the Single Family Loans, Home Equity Loans,
Multifamily Loans, Manufactured Housing Contracts or Home Improvement Contracts
backing or securing Agency Securities or Private Label Securities.
The
securities will be entitled to payment from the assets of the related trust
fund
or other assets pledged for the benefit of the securityholders as specified
in
the related prospectus supplement. The securities will not be entitled to
payments from the assets of any other trust fund established by the
depositor.
The
loans, Agency Securities and Private Label Securities will be acquired by the
applicable depositor, either directly or through affiliates, from sellers and
conveyed by that depositor to the trustee named in the related prospectus
supplement for the benefit of the holders of the securities of the related
series. Sellers may have originated or purchased the assets. Loans acquired
by
the applicable depositor will have been originated principally in accordance
with the general underwriting criteria specified in this prospectus under the
heading “Loan Program— Underwriting Standards” and as more specifically provided
in a related prospectus supplement.
17
Because
the securities issued by a trust will be secured by assets transferred to that
trust by one of the depositors you should construe all references in this
prospectus to the “depositor” as referring to the applicable depositor that
transfers assets to your trust under the applicable operative
documents.
The
master servicer named in the related prospectus supplement will service the
trust fund assets, either directly or through sub-servicers, under a servicing
agreement for the related series of securities. If the securities are
certificates, the servicing agreement will be in the form of a pooling and
servicing agreement among the depositor, the master servicer and the trustee.
If
the securities are notes, the servicing agreement generally will be between
the
trustee and the master servicer.
The
following sections contain a brief description of the assets expected to be
included in the trust funds. If specific information respecting the assets
is
not known at the time the related series of securities initially is offered,
more general information of the nature described below will be provided in
the
related prospectus supplement, and specific information will be set forth in
a
report on Form 8-K to be filed with the SEC within 15 days after the initial
issuance of the securities. A copy of the operative agreements with respect
to
the related series of securities will be attached to the Form 8-K and will
be
available for inspection at the corporate trust office of the trustee specified
in the related prospectus supplement. A schedule of the assets relating to
the
series will be attached to the related servicing agreement delivered to the
trustee upon issuance of the securities.
The
Mortgage Loans—General
The
loans
in each trust fund are secured by the related mortgaged properties. Except
in
the case of Multifamily Loans, the related mortgaged properties generally
consist of detached or semi-detached one- to four-family dwellings, town houses,
rowhouses, individual units in condominiums, individual units in planned unit
developments and certain other dwelling units. In addition, if the related
prospectus supplement so provides, the mortgaged properties may include
mixed-use properties. Mixed-use properties consist of structures principally
containing residential units but also including other space used for retail,
professional and other commercial uses. Loans that are secured by multifamily
and mixed-use properties shall not in the aggregate constitute 10% or more
of
any pool by principal balance.
The
mortgaged properties may include vacation and second homes, investment
properties and leasehold interests as specified in the related prospectus
supplement. The mortgaged properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory
of
the United States. If a loan has a loan-to-value ratio or principal balance
in
excess of a particular benchmark, it may be covered in whole or in part by
a
primary mortgage insurance policy. If the loans in a pool are covered by this
type of policy, the related prospectus supplement will describe the existence,
extent and duration of the coverage.
18
Unless
otherwise specified in the related prospectus supplement, all of the loans
in a
pool will have monthly payments due on the first day of each month. The payment
terms of the mortgage loans to be included in a trust fund will be described
in
the related prospectus supplement and may include one or more of the following
features or other features described in the related prospectus
supplement:
·
Interest
may be payable at
·
a
fixed rate,
·
a
rate that adjusts from time to time in relation to an index that
will be
specified in the related prospectus
supplement,
·
a
rate that is fixed for a period of time or under certain circumstances
and
is followed by an adjustable rate,
·
a
rate that otherwise varies from time to time,
or
·
a
rate that is convertible from an adjustable rate to a fixed
rate.
Changes
to an adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of these limitations. Accrued interest may be
deferred and added to the principal of a loan for the periods and under the
circumstances specified in the related prospectus supplement. A mortgage loan
may provide for the payment of interest at a rate lower than the specified
interest rate borne by the loan for a period of time or for the life of the
loan, and the amount of any difference may be contributed from funds supplied
by
the seller of the related mortgaged property or another source.
·
Principal
may be
·
payable
on a level debt service basis to fully amortize the loan over its
term,
·
calculated
on the basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate
that is
different from the loan rate, or
·
nonamortizing
during all or a portion of the original
term.
Payment
of all or a substantial portion of the principal may be due on maturity in
the
form of a “balloon” payment. Principal may include interest that has been
deferred and added to the principal balance of the loan.
·
Monthly
payments of principal and interest
may
·
be
fixed for the life of the loan,
·
increase
over a specified period of time, or
19
·
change
from period to period.
Loans
may
include limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments.
·
Prepayments
of principal may be subject to a prepayment fee, which may be fixed
for
the life of the loan or may decline over time, and may be prohibited
for
the life of the loan or during any lockout periods. Some loans may
permit
prepayments after expiration of the applicable lockout period and
may
require the payment of a prepayment fee in connection with any subsequent
prepayment. Other loans may permit prepayments without payment of
a fee
unless the prepayment occurs during specified time periods. The loans
may
include “due-on-sale” clauses which permit the lender to demand payment of
the entire loan in connection with the sale or certain transfers
of the
related mortgaged property. Other loans may be assumable by persons
meeting the then applicable underwriting standards of the related
seller.
Each
prospectus supplement will contain information, as of the date of the prospectus
supplement and to the extent then specifically known to the depositor, with
respect to the loans contained in the related pool, including
·
the
aggregate outstanding principal balance and the average outstanding
principal balance of the loans as of the applicable cut-off
date,
·
the
type of mortgaged property securing each
loan,
·
the
original terms to maturity of the
loans,
·
the
largest principal balance and the smallest principal balance of the
loans,
·
the
earliest origination date and latest maturity date of the
loans,
·
the
aggregate principal balance of loans having loan-to-value ratios
at
origination exceeding 80%,
·
the
loan rates or fixed percentage rates (APRs) or range of loan rates
or APRs
borne by the loans, and
·
the
geographical location of the related mortgaged properties on a
state-by-state basis.
If
specific information respecting the loans is not known to the depositor at
the
time the related securities are initially offered, more general information
of
the nature described in the immediately preceding sentence will be provided
in
the related prospectus supplement, and specific information will be set forth
in
the Form 8-K to be filed with the SEC within 15 days after
issuance.
20
The
loan-to-value ratio of a loan at any given time is the ratio, expressed as
a
percentage, of the then outstanding principal balance of the loan to the
collateral value of the related mortgaged property. Unless otherwise specified
in the related prospectus supplement, the collateral value of a mortgaged
property, other than with respect to loans used to refinance an existing loan,
is the lesser of (a) the appraised value determined in an appraisal obtained
by
the originator at origination of the loan and (b) the sales price for the
property. In the case of refinance loans, the collateral value of the related
mortgaged property is the appraised value of the property determined in an
appraisal obtained at the time of refinancing. Unless otherwise specified in
the
related prospectus supplement, for purposes of calculating the loan-to-value
ratio of a Manufactured Housing Contract relating to a new manufactured home,
the collateral value is no greater than the sum of
·
a
fixed percentage of the list price of the unit actually billed by
the
manufacturer to the dealer, net of freight to the dealer site but
including any accessories identified in the invoice (i.e.,
the “manufacturer invoice price”),
·
the
actual cost of any accessories depending on the size of the unit,
and
·
the
cost of state and local taxes, filing fees and up to three years’ prepaid
hazard insurance premiums.
Unless
otherwise specified in the related prospectus supplement, the collateral value
of a used manufactured home is the least of the sales price, appraised value,
and National Automobile Dealers’ Association book value plus prepaid taxes and
hazard insurance premiums. The appraised value of a manufactured home is based
upon the age and condition of the manufactured housing unit and the quality
and
condition of the mobile home park in which it is situated, if
applicable.
The
loan-to-value ratio of a Home Improvement Contract will be computed in the
manner described in the related prospectus supplement.
No
assurance can be given that values of the mortgaged properties have remained
or
will remain at their levels on the dates of origination of the related loans.
If
the residential real estate market should experience an overall decline in
property values such that the outstanding principal balances of the loans in
a
particular pool, and any secondary financing on the mortgaged properties, become
equal to or greater than the value of the mortgaged properties, the actual
rates
of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions and other factors which may or may not affect real property
values may affect the timely payment by borrowers of scheduled payments of
principal and interest on the loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to any pool. In the case
of
Multifamily Loans, these other factors could include
·
excessive
building resulting in an oversupply of rental housing
stock,
·
a
decrease in employment reducing the demand for rental units in an
area,
21
·
federal,
state or local regulations and controls affecting rents, prices of
goods
and energy,
·
environmental
restrictions,
·
increasing
labor and material costs, and
·
the
relative attractiveness to tenants of the mortgaged
properties.
To
the
extent that losses are not covered by subordination provisions or alternative
arrangements, losses will be borne, at least in part, by the securityholders
of
the securities of the related series.
Unless
otherwise specified in the related prospectus supplement, the only obligations
of the depositor with respect to a series of certificates will be to obtain
certain representations and warranties from the related seller and to assign
to
the trustee for that series of certificates the depositor’s rights with respect
to those representations and warranties. See“Operative
Agreements—Assignment of Trust Fund Assets” in this prospectus.
The
obligations of the master servicer with respect to the mortgage loans will
consist principally of:
·
its
contractual servicing obligations under the related servicing agreement,
including its obligation to enforce the obligations of the sub-servicers
or sellers, or both, as more fully described in this prospectus under
the
headings “Mortgage Loan Program—Representations by Sellers; Repurchases”
and “Operative Agreements— Sub-Servicing by Sellers” and “—Assignment of
Trust Fund Assets”; and
·
its
obligation to make certain cash advances in the event of delinquencies
in
payments with respect to the mortgage loans in the amounts described
in
this prospectus under the heading “Description of the
Certificates—Advances”.
The
obligations of the master servicer to make advances may be subject to
limitations, to the extent provided in this prospectus and in the related
prospectus supplement.
Single
Family Loans
Unless
otherwise specified in the related prospectus supplement, Single Family Loans
will consist of loans or participations or other beneficial interests in loans
secured by mortgages or deeds of trust that create first liens on one- to
four-family residential properties. If specified in the related prospectus
supplement, Single Family Loans may include cooperative loans secured by
security interests in shares issued by private, non-profit, cooperative housing
corporations and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives’
buildings. If specified in the related prospectus supplement, the assets of
the
related trust fund may include mortgage participation certificates evidencing
interests in Single Family Loans. Single Family Loans may be conventional loans
(loans that are not insured or guaranteed by any governmental agency), loans
insured by the Federal Housing Administration (FHA) or partially guaranteed
by
the Veterans Administration (VA), as specified in the related prospectus
supplement. Unless otherwise specified in the related prospectus supplement,
Single Family Loans will have individual principal balances at origination
of
not less than $25,000 and not more than $1,000,000, and original terms to stated
maturity of from ten to 40 years.
22
If
specified in the related prospectus supplement, the mortgaged properties
securing Single Family Loans may include five- to eight-family residential
properties and small mixed-use properties. In the case of leasehold interests,
the term of the leasehold will exceed the scheduled maturity of the related
mortgage loan by at least five years, unless otherwise specified in the related
prospectus supplement.
Home
Equity Loans
Unless
otherwise specified in the related prospectus supplement, Home Equity Loans
will
consist of closed-end and/or revolving home equity loans generally secured
by
junior liens on one- to four-family residential properties.
As
more
fully described in the related prospectus supplement, interest on each revolving
credit line loan, excluding introductory rates offered from time to time during
promotional periods, is computed and payable monthly on the average daily
outstanding principal balance of the loan. Principal amounts on a revolving
credit line loan may be drawn down (up to the maximum amount specified in the
related prospectus supplement) or repaid from time to time, but may be subject
to a minimum periodic payment. Except to the extent provided in the related
prospectus supplement, the trust fund will not include any amounts borrowed
under a revolving credit line loan after the cut-off date. The full amount
of a
closed-end loan is advanced at the inception of the loan and generally is
repayable in equal (or substantially equal) installments in an amount necessary
to fully amortize such loan at its stated maturity. Except to the extent
provided in the related prospectus supplement, the original terms to stated
maturity of closed-end loans will not exceed 360 months. Under certain
circumstances, under either a revolving credit line loan or a closed-end loan,
a
borrower may choose an interest only payment option, in which event the borrower
is obligated to pay only the amount of interest which accrued on the loan during
the billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance
of
the loan.
Multifamily
Loans
Multifamily
Loans will consist of loans or participations or other beneficial interests
in
loans secured by mortgages that create first liens on rental apartment buildings
or projects containing five or more residential units. If specified in the
related prospectus supplement, the mortgage assets of a trust fund may include
mortgage participation certificates evidencing interests in Multifamily Loans.
Multifamily Loans may be conventional loans or FHA-insured loans, as specified
in the related prospectus supplement. Unless otherwise specified in the related
prospectus supplement, all Multifamily Loans will have original terms to stated
maturity of not more than 40 years.
23
Multifamily
Loans shall not constitute 10% or more of any pool by principal
balance.
Mortgaged
properties securing Multifamily Loans may include high-rise, mid-rise and garden
apartments. Multifamily Loans may be secured by apartment buildings owned by
cooperatives. A cooperative owns all the apartment units in its building and
all
common areas and is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a cooperative must
make
a monthly payment to the cooperative representing such tenant-stockholder’s pro
rata share of the cooperative’s payments for the cooperative’s mortgage loan,
real property taxes, maintenance expenses and other capital or ordinary
expenses. Those payments are in addition to any payments of principal and
interest the tenant-stockholder must make on any loans to the tenant-stockholder
secured by his shares in the cooperative. The cooperative will be directly
responsible for building management and, in most cases, payment of real estate
taxes and hazard and liability insurance. A cooperative’s ability to meet debt
service obligations on a Multifamily Loan, as well as all other operating
expenses, will be dependent in large part on the receipt of maintenance payments
from the tenant-stockholders, as well as any rental income from units or
commercial areas the cooperative might control. Unanticipated expenditures
may
in some cases have to be paid by special assessments on the
tenant-stockholders.
Manufactured
Housing Contracts
Manufactured
Housing Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements, each secured by a
manufactured home. Manufactured Housing Contracts may be conventional, insured
by the FHA or partially guaranteed by the VA, as specified in the related
prospectus supplement. Unless otherwise specified in the related prospectus
supplement, each Manufactured Housing Contract will be fully amortizing and
will
bear interest at a fixed percentage rate or APR. Unless otherwise specified
in
the related prospectus supplement, Manufactured Housing Contracts will all
have
individual principal balances at origination of not less than $10,000 and not
more than $1,000,000 and original terms to stated maturity of from five to
30
years.
When
we
use the term “manufactured home” in this prospectus, we mean, as stated in 42
U.S.C. §. 5402(6), “a structure, transportable in one or more sections which, in
the traveling mode, is eight body feet or more in width or forty body feet
or
more in length or, when erected on site, is three hundred twenty or more square
feet, and which is built on a permanent chassis and designed to be used as
a
dwelling with or without a permanent foundation when connected to the required
utilities, and includes the plumbing, heating, air conditioning, and electrical
systems contained therein; except that such term shall include any structure
which meets all the requirements of this paragraph except the size requirements
and with respect to which the manufacturer voluntarily files a certification
required by the Secretary of Housing and Urban Development and complies with
the
standards established under this chapter.”
Each
prospectus supplement will specify for the Manufactured Housing Contracts
contained in the related trust fund, among other things, the dates of
origination of the Manufactured Housing Contracts, the APRs on the Manufactured
Housing Contracts, the loan- to-value ratios of the Manufactured Housing
Contracts, the minimum and maximum outstanding principal balances as of the
cut-off date and the average outstanding principal balance, the outstanding
principal balances of the Manufactured Housing Contracts included in the related
trust fund, and the original maturities of the Manufactured Housing Contracts
and the last maturity date of any Manufactured Housing Contract.
24
Home
Improvement Contracts
Home
Improvement Contracts are originated by home improvement contractors, thrifts
or
commercial mortgage bankers in the ordinary course of business. As specified
in
the related prospectus supplement, the Home Improvement Contracts will either
be
unsecured or secured by mortgages or deeds of trust generally creating a junior
lien on the related mortgaged properties, or secured by purchase money security
interests in the financed home improvements. Unless otherwise specified in
the
related prospectus supplement, the Home Improvement Contracts will be fully
amortizing and may have fixed interest rates or adjustable interest rates and
may provide for other payment characteristics as described in the related
prospectus supplement.
Unless
otherwise specified in the related prospectus supplement, the home improvements
securing the Home Improvement Contracts will include, but are not limited to,
replacement windows, house siding, new roofs, swimming pools, satellite dishes,
kitchen and bathroom remodeling goods and solar heating panels.
Agency
Securities
Government
National Mortgage Association or Ginnie Mae.
The
Government National Mortgage Association (Ginnie Mae) is a wholly-owned
corporate instrumentality of the United States within the Department of Housing
and Urban Development. Section 306(g) of Title II of the National Housing Act
of
1934, as amended, authorizes Ginnie Mae to guarantee the timely payment of
the
principal of and interest on certificates which represent an interest in a
pool
of FHA loans, which are mortgage loans insured by the FHA under the National
Housing Act or under Title V of the Housing Act of 1949, or VA loans, which
are
mortgage loans partially guaranteed by the VA under the Servicemen’s
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38 of the United
States Code.
Section
306(g) of the National Housing Act provides that “the full faith and credit of
the United States is pledged to the payment of all amounts which may be required
to be paid under any guaranty under this subsection.” In order to meet its
obligations under any such guarantee, Ginnie Mae may, under Section 306(d)
of
the National Housing Act, borrow from the United States Treasury in an unlimited
amount which is at any time sufficient to enable Ginnie Mae to perform its
obligations under its guarantee.
Ginnie
Mae Certificates.
Each
Ginnie Mae Certificate held in a trust fund will be a “fully modified
pass-through” mortgage-backed certificate issued and serviced by a Ginnie Mae
issuer that is a mortgage banking company or other financial concern approved
by
Ginnie Mae or approved by Fannie Mae as a seller-servicer of FHA loans and/or
VA
loans. The Ginnie Mae Certificates may be either Ginnie Mae I Certificates
issued under the Ginnie Mae I program or Ginnie Mae II Certificates issued
under
the Ginnie Mae II program. The mortgage loans underlying the Ginnie Mae
Certificates will consist of FHA loans and/or VA loans. Each such mortgage
loan
is secured by a one- to four-family or multifamily residential property. Ginnie
Mae will approve the issuance of each Ginnie Mae Certificate in accordance
with
a guaranty agreement between Ginnie Mae and the Ginnie Mae issuer. Pursuant
to
its guaranty agreement, a Ginnie Mae issuer will be required to advance its
own
funds in order to make timely payments of all amounts due on each Ginnie Mae
Certificate, even if the payments received by the Ginnie Mae issuer on the
underlying FHA loans or VA loans are less than the amounts due on the related
Ginnie Mae Certificate.
25
The
full
and timely payment of principal of and interest on each Ginnie Mae Certificate
will be guaranteed by Ginnie Mae, which obligation is backed by the full faith
and credit of the United States. Each Ginnie Mae Certificate will have an
original maturity of not more than 30 years, but may have original maturities
of
substantially less than 30 years. Each Ginnie Mae Certificate will be based
on
and backed by a pool of FHA loans or VA loans secured by one- to four-family
residential properties and will provide for the payment by or on behalf of
the
Ginnie Mae issuer to the registered holder of the Ginnie Mae Certificate
scheduled monthly payments of principal and interest equal to the registered
holder’s proportionate interest in the aggregate amount of the monthly principal
and interest payment on each FHA Loan or VA Loan underlying the Ginnie Mae
Certificate, less the applicable servicing and guarantee fee which together
equal the difference between the interest on the FHA Loan or VA Loan and the
pass-through rate on the Ginnie Mae Certificate. In addition, each payment
will
include proportionate pass-through payments of any prepayments of principal
on
the FHA loans or VA loans underlying the Ginnie Mae Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
loans or VA loans.
If
a
Ginnie Mae issuer is unable to make the payments on a Ginnie Mae Certificate
as
they become due, it must promptly notify Ginnie Mae and request Ginnie Mae
to
make the payments. Upon notification and request, Ginnie Mae will make payments
directly to the registered holder of the Ginnie Mae Certificate. In the event
no
payment is made by a Ginnie Mae issuer and the Ginnie Mae issuer fails to notify
and request Ginnie Mae to make the payment, the holder of the Ginnie Mae
Certificate will have recourse only against Ginnie Mae to obtain payment. The
trustee or its nominee, as registered holder of the Ginnie Mae Certificates
held
in a trust fund, will have the right to proceed directly against Ginnie Mae
under the terms of the guaranty agreements relating to those Ginnie Mae
Certificates for any amounts that are not paid when due.
All
mortgage loans underlying a particular Ginnie Mae I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on a Ginnie Mae I
Certificate will equal the interest rate on the mortgage loans included in
the
pool of mortgage loans underlying the Ginnie Mae I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage
loans underlying a particular Ginnie Mae II Certificate may have per annum
interest rates that vary from one another by up to one percentage point. The
interest rate on each Ginnie Mae II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying the Ginnie Mae II Certificate (except for pools of mortgage loans
secured by manufactured homes).
26
Regular
monthly installment payments on each Ginnie Mae Certificate held in a trust
fund
will be comprised of interest due as specified on the Ginnie Mae Certificate
plus the scheduled principal payments on the FHA loans or VA loans underlying
the Ginnie Mae Certificate due on the first day of the month in which the
scheduled monthly installments on the Ginnie Mae Certificate are due. Regular
monthly installments on each Ginnie Mae Certificate are required to be paid
to
the trustee as registered holder by the 15th day of each month in the case
of a
Ginnie Mae I Certificate, and are required to be mailed to the trustee by the
20th day of each month in the case of a Ginnie Mae II Certificate. Any principal
prepayments on any FHA loans or VA loans underlying a Ginnie Mae Certificate
held in a trust fund or any other early recovery of principal on such loan
will
be passed through to the trustee as the registered holder of the Ginnie Mae
Certificate.
Ginnie
Mae Certificates may be backed by graduated payment mortgage loans or by
“buydown” mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers’ monthly payments during the early years of such mortgage loans.
Payments due the registered holders of Ginnie Mae Certificates backed by pools
containing “buydown” mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae Certificates and will include amounts
to
be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid
will
be added to the principal of the graduated payment mortgage loans and, together
with interest thereon, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae Issuer will be the same irrespective of whether
the Ginnie Mae Certificates are backed by graduated payment mortgage loans
or
“buydown” mortgage loans. No statistics comparable to the FHA’s prepayment
experience on level payment, non-”buydown” mortgage loans are available in
respect of graduated payment or “buydown” mortgages. Ginnie Mae Certificates
related to a series of certificates may be held in book-entry form.
If
specified in a prospectus supplement, Ginnie Mae Certificates may be backed
by
multifamily mortgage loans having the characteristics specified in the
prospectus supplement.
Federal
Home Loan Mortgage Corporation or Freddie Mac.
The
Federal Home Loan Mortgage Corporation (Freddie Mac) is a shareholder-owned,
government sponsored enterprise created pursuant to Title III of the Emergency
Home Finance Act of 1970, as amended. Freddie Mac was established primarily
for
the purpose of increasing the availability of mortgage credit for the financing
of urgently needed housing. It seeks to provide an enhanced degree of liquidity
for residential mortgage investments primarily by assisting in the development
of secondary markets for conventional mortgages. The principal activity of
Freddie Mac currently consists of the purchase of first lien conventional
mortgage loans, or participation interests in the mortgage loans, and the sale
of the mortgage loans or participations so purchased in the form of mortgage
securities, primarily Freddie Mac Certificates. Freddie Mac is confined to
purchasing, so far as practicable, mortgage loans that it deems to be of such
quality, type and class as to meet generally the purchase standards imposed
by
private institutional mortgage investors.
27
Freddie
Mac Certificates.
Each
Freddie Mac Certificate represents an undivided interest in a pool of mortgage
loans that may consist of first lien conventional loans, FHA loans or VA loans.
Freddie Mac Certificates are sold under the terms of a mortgage participation
certificate agreement. A Freddie Mac Certificate may be issued under either
Freddie Mac’s Cash Program or its Guarantor Program.
Mortgage
loans underlying the Freddie Mac Certificates held by a trust fund will consist
of mortgage loans with original terms to maturity of from ten to 40 years.
Each
such mortgage loan must meet the applicable standards set forth in the
legislation that established Freddie Mac. The pool of loans backing a Freddie
Mac Certificate may include whole loans, participation interests in whole loans
and undivided interests in whole loans and/or participations comprising another
Freddie Mac pool. Under the Guarantor Program, however, the pool of loans
backing a Freddie Mac Certificate may include only whole loans or participation
interests in whole loans.
Freddie
Mac guarantees to each registered holder of a Freddie Mac Certificate the timely
payment of interest on the underlying mortgage loans to the extent of the
applicable certificate rate on the registered holder’s pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans
represented by that Freddie Mac Certificate, whether or not received. Freddie
Mac also guarantees to each registered holder of a Freddie Mac Certificate
that
the holder will collect all principal on the underlying mortgage loans, without
any offset or deduction, to the extent of such holder’s pro rata share thereof,
but does not, except if and to the extent specified in the related prospectus
supplement for a series of certificates, guarantee the timely payment of
scheduled principal. Under Freddie Mac’s Gold PC Program, Freddie Mac guarantees
the timely payment of principal based on the difference between the pool factor,
published in the month preceding the month of distribution, and the pool factor
published in such month of distribution. Pursuant to its guarantees, Freddie
Mac
indemnifies holders of Freddie Mac Certificates against any diminution in
principal by reason of charges for property repairs, maintenance and
foreclosure. Freddie Mac may remit the amount due on account of its guaranty
of
collection of principal at any time after default on an underlying mortgage
loan, but not later than (i) 30 days following foreclosure sale, (ii) 30 days
following payment of the claim by any mortgage insurer or (iii) 30 days
following the expiration of any right of redemption, whichever occurs later,
but
in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. In taking actions regarding
the
collection of principal after default on the mortgage loans underlying Freddie
Mac Certificates, including the timing of demand for acceleration, Freddie
Mac
reserves the right to exercise its judgment with respect to the mortgage loans
in the same manner as for mortgage loans which it has purchased but not sold.
The length of time necessary for Freddie Mac to determine that a mortgage loan
should be accelerated varies with the particular circumstances of each
mortgagor, and Freddie Mac has not adopted standards which require that the
demand be made within any specified period.
Freddie
Mac Certificates are not guaranteed by the United States or by any Federal
Home
Loan Bank and do not constitute debts or obligations of the United States or
any
Federal Home Loan Bank. The obligations of Freddie Mac under its guarantee
are
obligations solely of Freddie Mac and are not backed by, or entitled to, the
full faith and credit of the United States. If Freddie Mac were unable to
satisfy such obligations, distributions to holders of Freddie Mac Certificates
would consist solely of payments and other recoveries on the underlying mortgage
loans and, accordingly, monthly distributions to holders of Freddie Mac
Certificates would be affected by delinquent payments and defaults on such
mortgage loans.
28
Registered
holders of Freddie Mac Certificates are entitled to receive their monthly pro
rata share of all principal payments on the underlying mortgage loans received
by Freddie Mac, including any scheduled principal payments, full and partial
repayments of principal and principal received by Freddie Mac by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by Freddie Mac or the seller thereof. Freddie Mac is required
to
remit each registered Freddie Mac Certificateholder’s pro rata share of
principal payments on the underlying mortgage loans, interest at the Freddie
Mac
pass-through rate and any other sums such as prepayment fees, within 60 days
of
the date on which those payments are deemed to have been received by Freddie
Mac.
Under
Freddie Mac’s Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a Freddie Mac Certificate may
exceed the pass-through rate on the Freddie Mac Certificate. Under this program,
Freddie Mac purchases groups of whole mortgage loans from sellers at specified
percentages of their unpaid principal balances, adjusted for accrued or prepaid
interest, which, when applied to the interest rate of the mortgage loans and
participations purchased, results in the yield (expressed as a percentage)
required by Freddie Mac. The required yield, which includes a minimum servicing
fee retained by the servicer, is calculated using the outstanding principal
balance. The range of interest rates on the mortgage loans and participations
in
a particular Freddie Mac pool under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a Freddie Mac pool based
upon their yield to Freddie Mac rather than on the interest rate on the
underlying mortgage loans. Under Freddie Mac’s Guarantor Program, the
pass-through rate on a Freddie Mac Certificate is established based upon the
lowest interest rate on the underlying mortgage loans, minus a minimum servicing
fee and the amount of Freddie Mac’s management and guaranty income as agreed
upon between the related seller and Freddie Mac.
Freddie
Mac Certificates duly presented for registration of ownership on or before
the
last business day of a month are registered effective as of the first day of
the
month. The first remittance to a registered holder of a Freddie Mac Certificate
will be distributed so as to be received normally by the 15th day of the second
month following the month in which the purchaser becomes a registered holder
of
the Freddie Mac Certificates. Thereafter, such remittance will be distributed
monthly to the registered holder so as to be received normally by the 15th
day
of each month. The Federal Reserve Bank of New York maintains book-entry
accounts with respect to Freddie Mac Certificates sold by Freddie Mac, and
makes
payments of principal and interest each month to the registered Freddie Mac
Certificateholders in accordance with the holders’ instructions.
Federal
National Mortgage Association or Fannie Mae.
The
Federal National Mortgage Association (Fannie Mae) is a federally chartered
and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, as amended. Fannie Mae was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately-managed corporation by legislation enacted in 1968.
29
Fannie
Mae provides funds to the mortgage market primarily by purchasing mortgage
loans
from lenders, thereby replenishing their funds for additional lending. Fannie
Mae acquires funds to purchase mortgage loans from many capital market investors
that may not ordinarily invest in mortgages, thereby expanding the total amount
of funds available for housing. Operating nationwide, Fannie Mae helps to
redistribute mortgage funds from capital-surplus to capital-short
areas.
Fannie
Mae Certificates.
Fannie
Mae Certificates are Guaranteed Mortgage Pass- Through Certificates representing
fractional undivided interests in a pool of mortgage loans formed by Fannie
Mae.
Each mortgage loan must meet the applicable standards of the Fannie Mae purchase
program. Mortgage loans comprising a pool are either provided by Fannie Mae
from
its own portfolio or purchased pursuant to the criteria of the Fannie Mae
purchase program.
Mortgage
loans underlying Fannie Mae Certificates held by a trust fund will consist
of
conventional mortgage loans, FHA loans or VA loans. Original maturities of
substantially all of the conventional, level payment mortgage loans underlying
a
Fannie Mae Certificate are expected to be from eight to 15 years or from 20
to
40 years. The original maturities of substantially all of the fixed rate level
payment FHA loans or VA loans are expected to be 30 years.
Mortgage
loans underlying a Fannie Mae Certificate may have annual interest rates that
vary by as much as two percentage points from one another. The rate of interest
payable on a Fannie Mae Certificate is equal to the lowest interest rate of
any
mortgage loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and Fannie Mae’s guaranty fee. Under a
regular servicing option pursuant to which the mortgagee or each other servicer
assumes the entire risk of foreclosure losses, the annual interest rates on
the
mortgage loans underlying a Fannie Mae Certificate will be between 25 basis
points and 250 basis points greater than is its annual pass-through rate. Under
a special servicing option pursuant to which Fannie Mae assumes the entire
risk
for foreclosure losses, the annual interest rates on the mortgage loans
underlying a Fannie Mae Certificate will generally be between 30 basis points
and 255 basis points greater than the annual Fannie Mae Certificate pass-through
rate. If specified in the related prospectus supplement, Fannie Mae Certificates
may be backed by adjustable rate mortgages.
Fannie
Mae guarantees to each registered holder of a Fannie Mae Certificate that it
will distribute amounts representing the holder’s proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by the Fannie Mae Certificate on the underlying mortgage loans,
whether or not received, and the holder’s proportionate share of the full
principal amount of any foreclosed or other finally liquidated mortgage loan,
whether or not such principal amount is actually recovered. The obligations
of
Fannie Mae under its guarantees are obligations solely of Fannie Mae and are
not
backed by, or entitled to, the full faith and credit of the United States.
Although the Secretary of the Treasury of the United States has discretionary
authority to lend Fannie Mae up to $2.25 billion outstanding at any time,
neither the United States nor any of its agencies or instrumentalities is
obligated to finance Fannie Mae’s operations or to assist Fannie Mae in any
other manner. If Fannie Mae were unable to satisfy its obligations,
distributions to holders of Fannie Mae Certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of Fannie Mae Certificates would be affected
by
delinquent payments and defaults on such mortgage loans.
30
Fannie
Mae Certificates evidencing interests in pools of mortgage loans formed on
or
after May 1, 1985 (other than Fannie Mae Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal
and
interest on each Fannie Mae Certificate will be made by Fannie Mae on the 25th
day of each month to the persons in whose name the Fannie Mae Certificate is
entered in the books of the Federal Reserve Banks (or registered on the Fannie
Mae Certificate register in the case of fully registered Fannie Mae
Certificates) as of the close of business on the last day of the preceding
month. With respect to Fannie Mae Certificates issued in book-entry form,
distributions will be made by wire and, with respect to fully registered Fannie
Mae Certificates, distributions will be made by check.
Stripped
Mortgage-Backed Securities.
Agency
Securities may consist of one or more stripped mortgage-backed securities as
described in this prospectus and in the related prospectus supplement. Each
Agency Security of this type will represent an undivided interest in all or
part
of the principal distributions - but not the interest distributions, or the
interest distributions - but not the principal distributions, or in some
specified portion of the principal and interest distributions on certain Freddie
Mac, Fannie Mae or Ginnie Mae Certificates. The underlying securities will
be
held under a trust agreement by Freddie Mac, Fannie Mae or Ginnie Mae, each
as
trustee, or by another trustee named in the related prospectus supplement.
Freddie Mac, Fannie Mae or Ginnie Mae will guaranty each stripped Agency
Security to the same extent as such entity guarantees the underlying securities
backing the stripped Agency Security, unless otherwise specified in the related
prospectus supplement.
Other
Agency Securities.
If
specified in the related prospectus supplement, a trust fund may include other
mortgage pass-through certificates issued or guaranteed by Freddie Mac, Fannie
Mae or Ginnie Mae. The characteristics of any such mortgage pass-through
certificates will be described in the related prospectus supplement. If
specified in the related prospectus supplement, a combination of different
types
of Agency Securities may be held in a trust fund.
Private
Label Securities
General.
Private
Label Securities or PLS (i.e.,
private mortgage-backed or asset-backed securities) may consist of
·
pass-through
certificates or participation certificates evidencing an undivided
interest in a pool of Single Family Loans, Home Equity Loans, Multifamily
Loans, Manufactured Housing Contracts or Home Improvement
Contracts,
·
collateralized
mortgage obligations secured by Single Family Loans, Home Equity
Loans,
Multifamily Loans, Manufactured Housing Contracts or Home Improvement
Contracts, or
·
other
Private Label Securities.
31
Private
Label Securities may include stripped mortgage-backed securities representing
an
undivided interest in all or a part of the principal distributions - but not
the
interest distributions, or the interest distributions - but not the principal
distributions, or in some specified portion of the principal and interest
distributions on certain mortgage loans. The Private Label Securities will
have
been issued pursuant to a pooling and servicing agreement, an indenture or
similar agreement. Unless otherwise specified in the related prospectus
supplement, the seller/servicer of the underlying loans will have entered into
a
PLS Agreement with a trustee under that agreement. The PLS trustee or its agent,
or a custodian, will possess the mortgage loans underlying the Private Label
Securities. The loans underlying the Private Label Securities will be serviced
by a PLS servicer directly or by one or more sub-servicers which may be subject
to the supervision of the PLS servicer. Unless otherwise specified in the
related prospectus supplement, the PLS servicer will be a Fannie Mae- or Freddie
Mac-approved servicer and, if FHA loans underlie the Private Label Securities,
approved by HUD as an FHA mortgagee.
The
PLS
issuer will be a financial institution or other entity engaged generally in
the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for
the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to trusts and selling beneficial interests in trusts. If specified
in the related prospectus supplement, the PLS issuer may be an affiliate of
the
depositor. The obligations of the PLS issuer will generally be limited to
certain representations and warranties with respect to the assets it conveys
to
the related trust. Unless otherwise specified in the related prospectus
supplement, the PLS issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Label Securities issued under the
PLS
agreement. Additionally, although the loans underlying the Private Label
Securities may be guaranteed by an agency or instrumentality of the United
States, the Private Label Securities themselves will not be so guaranteed,
unless the related prospectus supplement specifies otherwise.
Distributions
of principal and interest will be made on the Private Label Securities on the
dates specified in the related prospectus supplement. The Private Label
Securities may be entitled to receive nominal or no principal distributions
or
nominal or no interest distributions. Principal and interest distributions
will
be made on the Private Label Securities by the PLS trustee or the PLS servicer.
The PLS issuer or the PLS servicer may have the right to repurchase assets
underlying the Private Label Securities after a particular date or under other
circumstances specified in the related prospectus supplement.
Underlying
Loans.
The
loans underlying the PMBS may consist of fixed rate, level payment, fully
amortizing loans or graduated payment mortgage loans, buydown loans, adjustable
rate mortgage loans, or loans having balloon or other special payment features.
The loans may be secured by one- to four-family residential property, small
mixed-use property, five-to eight-family residential property, multifamily
property, manufactured homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a cooperative and
the
related shares issued by the cooperative. Except as otherwise specified in
the
related prospectus supplement, the loans will have the following
characteristics:
·
no
loan will have had a loan-to-value ratio at origination in excess
of
95%;
32
·
each
Single Family Loan secured by a mortgaged property having a loan-to-value
ratio in excess of 80% at origination will be covered by a primary
mortgage insurance policy;
·
each
loan will have had an original term to stated maturity of not less
than
five years and not more than 40
years;
·
no
loan that was more than 89 days delinquent as to the payment of principal
or interest will have been eligible for inclusion in the assets under
the
related PLS agreement;
·
each
loan (other than a cooperative loan) will be required to be covered
by a
standard hazard insurance policy (which may be a blanket policy);
and
·
each
loan (other than a cooperative loan or a Manufactured Housing Contract)
will be covered by a title insurance
policy.
Credit
Support Relating to Private Label Securities.
Credit
support in the form of reserve funds, subordination of other private label
securities issued under the PLS agreement, letters of credit, surety bonds,
insurance policies or other types of credit support may be provided with respect
to the loans underlying the Private Label Securities or with respect to the
Private Label Securities themselves.
Additional
Information.
If the
trust fund for a series of securities includes Private Label Securities, the
related prospectus supplement will specify
·
the
aggregate approximate principal amount and type of Private Label
Securities to be included in the trust
fund,
·
the
maximum original term-to-stated maturity of the
PLS,
·
the
weighted average term-to-stated maturity of the
PLS,
·
the
pass-through or certificate rate of the
PLS,
·
the
weighted average pass-through or interest rate of the
PLS,
·
the
PLS issuer, the PLS servicer (if other than the PLS issuer) and the
PLS
trustee,
·
certain
characteristics of any credit support such as reserve funds, insurance
policies, surety bonds, letters of credit or guaranties relating
to the
loans underlying the Private Label Securities
themselves,
·
the
terms on which the loans underlying the PLS may, or are required
to, be
purchased prior to their stated maturity or the stated maturity of
the PLS
and
33
·
the
terms on which mortgage loans may be substituted for those originally
underlying the PLS.
In
addition, the related prospectus supplement will provide information about
the
loans which comprise the underlying assets of the Private Label Securities,
including
·
the
payment features of the mortgage
loans,
·
the
approximate aggregate principal balance, if known, of underlying
loans
insured or guaranteed by a governmental
entity,
·
the
servicing fee or range of servicing fees with respect to the loans,
and
·
the
minimum and maximum stated maturities of the underlying loans at
origination.
Incorporation
of Certain Information by Reference
We
incorporate in this prospectus by reference all documents and reports filed
by
the applicable depositor, Greenwich Capital Acceptance, Inc. (GCA) or Financial
Acceptance Securities Corp. (FASCO), with respect to a trust fund pursuant
to
Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
prior to the termination of the offering of certificates evidencing interests
in
that trust fund. Upon request by any person to whom this prospectus is delivered
in connection with the offering of one or more classes of certificates, the
applicable depositor will provide without charge a copy of any such documents
and/or reports incorporated herein by reference, in each case to the extent
that
the documents or reports relate to those classes of certificates, other than
the
exhibits to the documents (unless the exhibits are specifically incorporated
by
reference in such documents). Requests to the depositors should be directed
in
writing to: Paul D. Stevelman, Greenwich Capital Acceptance, Inc. or Financial
Acceptance Securities Corp. as applicable, 600 Steamboat Road, Greenwich,
Connecticut06830, telephone number (203) 625-2700. Each depositor has
determined that its financial statements are not material to the offering of
any
of the securities.
Investors
may read and copy the documents and/or reports incorporated herein by reference
at the Public Reference Room of the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, DC 20549. Investors may obtain information
on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
In addition, the SEC maintains a website at http:\\www.sec.gov containing
reports, proxy and information statements and other information regarding
issuers, including each trust fund, that file electronically with the
SEC.
Use
of Proceeds
The
net
proceeds to be received from the sale of the securities will be applied by
the
applicable depositor to the purchase of trust fund assets or will be used by
the
depositor for general corporate purposes. The depositors expect to sell
securities in series from time to time, but the timing and amount of offerings
of securities will depend on a number of factors, including the volume of assets
acquired by the depositors, prevailing interest rates, availability of funds
and
general market conditions.
34
The
Depositors
Greenwich
Capital Acceptance, Inc. is a Delaware corporation organized on April 23, 1987,
and Financial Asset Securities Corp. is a Delaware corporation organized on
August 2, 1995, in each case for the limited purpose of acquiring, owning and
transferring mortgage assets and selling interests in those assets or bonds
secured by those assets. Each of the depositors is a limited purpose finance
subsidiary of Greenwich Capital Holdings, Inc. and an affiliate of Greenwich
Capital Markets, Inc. Greenwich Capital Markets, Inc. is a registered
broker-dealer engaged in the U.S. government securities market and related
capital markets business. Each of the depositors maintains its principal office
at 600 Steamboat Road, Greenwich, Connecticut06830 and the telephone number
is
(203) 625-2700.
Neither
the depositors nor any of their affiliates will ensure or guarantee
distributions on the securities of any series.
Loan
Program
The
depositor will have purchased the loans, either directly or through affiliates,
from sellers. Unless otherwise specified in the related prospectus supplement,
the loans acquired by the depositor will have been originated in accordance
with
the underwriting criteria specified under the heading “—Underwriting Standards”
below.
Underwriting
Standards
Unless
otherwise specified in the related prospectus supplement, each seller will
represent and warrant that all the loans that it originated and/or sold to
the
depositor or one of the depositor’s affiliates will have been underwritten in
accordance with standards consistent with those utilized by institutional
lenders generally during the period of origination for similar types of loans.
As to any loan insured by the FHA or partially guaranteed by the VA, the related
seller will represent that it has complied with the underwriting policies of
the
FHA or the VA, as the case may be.
Underwriting
standards are applied by or on behalf of a lender to evaluate a prospective
borrower’s credit standing and repayment ability, and the value and adequacy of
the mortgaged property as collateral. In general, a prospective borrower
applying for a loan is required to fill out a detailed application designed
to
provide to the underwriting officer pertinent credit information, including
the
principal balance and payment history of any senior lien loan on the related
mortgaged property. As part of the description of the borrower’s financial
condition, the borrower generally is required to provide a current list of
assets and liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower’s
credit history with local merchants and lenders and any record of bankruptcy.
Generally, an employment verification is obtained from an independent source,
which is typically the borrower’s employer. The verification reports the
borrower’s length of employment with its employer, current salary, and
expectations of continued employment. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
Underwriting standards which pertain to the creditworthiness of borrowers
seeking Multifamily Loans will be described in the related prospectus
supplement.
35
In
determining the adequacy of the mortgaged property as collateral, an appraisal
is made of each property considered for financing. The appraiser is required
to
inspect the property and verify that it is in good repair and that construction,
if new, has been completed. The appraisal generally is based on the market
value
of comparable homes, the estimated rental income (if considered applicable
by
the appraiser) and the cost of replacing the subject home. In connection with
a
Manufactured Housing Contract, the appraisal is based on recent sales of
comparable manufactured homes and, when deemed applicable, a replacement cost
analysis based on the cost of a comparable manufactured home. In connection
with
a Multifamily Loan, the appraisal must specify whether an income analysis,
a
market analysis or a cost analysis was used. An appraisal employing the income
approach to value analyzes a multifamily project’s cashflow, expenses,
capitalization and other operational information in determining the property’s
value. The market approach to value focuses its analysis on the prices paid
for
the purchase of similar properties in the multifamily project’s area, with
adjustments made for variations between these other properties and the
multifamily project being appraised. The cost approach calls for the appraiser
to make an estimate of land value and then determine the current cost of
reproducing the building less any accrued depreciation. In any case, the value
of the property being financed, as indicated by the appraisal, must be such
that
it currently supports, and is anticipated to support in the future, the
outstanding loan balance.
Once
all
applicable employment, credit and property information is received, a
determination generally is made as to whether the prospective borrower has
sufficient monthly income available
·
to
meet the borrower’s monthly obligations on the proposed loan, generally
determined on the basis of the monthly payments due in the year of
origination, and other expenses related to the mortgaged property
such as
property taxes and hazard insurance,
and
·
to
meet monthly housing expenses and other financial obligations and
monthly
living expenses.
The
underwriting standards applied by sellers, particularly with respect to the
level of loan documentation and the borrower’s income and credit history, may be
varied in appropriate cases where factors such as low loan-to-value ratios
or
other favorable credit exist.
In
the
case of a loan secured by a leasehold interest in real property, the title
to
which is held by a third-party lessor, the related seller will represent and
warrant, among other things, that the remaining term of the lease and any
sublease is at least five years longer than the remaining term of the related
mortgage note.
Some
types of loans which may be included in the pools may involve additional
uncertainties not present in traditional types of loans. For example, loans
may
provide for escalating or variable payments by the borrower. These types of
loans are generally underwritten on the basis of a judgment that borrowers
will
have the ability to make the monthly payments required initially. In some
instances, however, their incomes may not be sufficient to permit continued
loan
payments as payments increase. These types of loans may also be underwritten
primarily upon the basis of loan-to-value ratios or other favorable credit
factors.
36
Qualifications
of Sellers
Unless
otherwise specified in the related prospectus supplement, each seller will
be
required to satisfy the qualifications set forth in the following sentence.
Each
seller must
·
be
an institution experienced in originating and servicing loans of
the type
contained in the related pool in accordance with accepted practices
and
prudent guidelines,
·
maintain
satisfactory facilities to originate and service the
loans,
·
be
a seller/servicer approved by either Fannie Mae or Freddie Mac,
and
·
be
a mortgagee approved by the FHA or an institution the deposit accounts
in
which are insured by the Federal Deposit Insurance Corporation
(FDIC).
Representations
by Sellers; Repurchases or Substitutions
Each
seller will have made representations and warranties in respect of the loans
sold by that seller and evidenced by a series of securities. These
representations and warranties, unless otherwise provided in the related
prospectus supplement, generally include the following:
·
Except
in the case of a cooperative loan, each Single Family Loan, Home
Equity
Loan or Multifamily Loan has a title insurance policy, required hazard
insurance policy and any required primary mortgage insurance policy,
each
of which was in effect at the origination of the loan and remained
in
effect on the date that the loan was purchased from the seller by
or on
behalf of the depositor. If the related mortgaged property is located
in
an area where title insurance policies are generally not available,
an
attorney’s certificate of title may be
substituted.
·
The
seller had good title to each loan and no loan was subject to offsets,
defenses, counterclaims or rights of rescission except to the extent
that
any specified buydown agreement may forgive certain indebtedness
of a
borrower.
·
Each
loan constituted a valid lien on, or a perfected security interest
with
respect to, the related mortgaged property, subject only to permissible
title insurance exceptions, if applicable, and certain other exceptions
described in the related servicing
agreement.
·
The
mortgaged property was free from damage and was in acceptable
condition.
·
There
were no delinquent tax or assessment liens against the mortgaged
property.
37
·
No
required payment on a loan was delinquent more than 30
days.
·
Each
loan was made in compliance with, and is enforceable under, all applicable
local, state and federal laws and regulations, in all material
respects.
If
specified in the related prospectus supplement, the representations and
warranties of a seller in respect of a loan will be made not as of the related
cut-off date but as of the date on which the seller sold the loan to the
depositor or one of its affiliates. Under these circumstances, a substantial
period of time may have elapsed between that date and the date of initial
issuance of the series of securities evidencing an interest in, or secured
by,
the loan. Since the representations and warranties of a seller do not address
events that may occur following the sale of the loan by that seller, the
repurchase obligation described in the following paragraph will not arise if
the
relevant event that would otherwise have given rise to the obligation occurs
after the date when the seller sold the loan to the depositor or one of its
affiliates. However, the depositor will not include any loan in a trust fund
if
anything has come to the depositor’s attention that would cause it to believe
that the representations and warranties of the related seller regarding that
loan will not be accurate and complete in all material respects as of the date
when the related series of securities is issued. If the master servicer is
also
a seller of loans for a particular series, these representations will be in
addition to the representations and warranties made by the master servicer
in
its capacity as master servicer.
Unless
otherwise specified in the related prospectus supplement, the seller will make
certain representations and warranties in connection with Manufactured Housing
Contracts included in the trust with respect to the enforceability of coverage
under any related insurance policy or hazard insurance policy. The seller,
if
required by the rating agencies rating the related issue of securities, will
obtain a surety bond, guaranty, letter of credit or other acceptable instrument
to support its repurchase or substitution obligation specified in the
immediately following paragraph.
The
master servicer, or the trustee if the master servicer is the seller, will
promptly notify the relevant seller of any breach of any representation or
warranty made by that seller in respect of a loan which materially and adversely
affects the interests of the securityholders in the loan. Unless otherwise
specified in the related prospectus supplement, if the seller cannot cure the
breach within 90 days after notice from the master servicer or the trustee,
as
the case may be, then the seller will be obligated either
·
to
repurchase that loan from the trust fund at a purchase price equal
to 100%
of the loan’s unpaid principal balance as of the date of the repurchase
plus accrued interest thereon to the first day of the month following
the
month of repurchase at the related loan rate, less any advances made
by
the seller or amount payable as related servicing compensation if
the
seller is the master servicer, or
·
substitute
for that loan a replacement loan that satisfies the requirements
set forth
in the related prospectus
supplement.
This
repurchase or substitution obligation will constitute the sole remedy available
to the securityholders or the trustee for a breach of representation or warranty
by the seller.
38
Except
in
those cases in which the master servicer is the seller, the master servicer
will
be required under the applicable servicing agreement to enforce this obligation
for the benefit of the trustee and the related securityholders, following the
practices it would employ in its good faith business judgment were it the owner
of the loan.
If
a
REMIC election is to be made with respect to a trust fund, unless otherwise
provided in the related prospectus supplement, the master servicer or a holder
of the related residual certificate will be obligated to pay any prohibited
transaction tax which may arise in connection with a repurchase or substitution.
Unless otherwise specified in the related prospectus supplement, the master
servicer will be entitled to reimbursement for any such payment from the assets
of the related trust fund or from any holder of the related residual
certificate. See “Description of the Securities—General” in this
prospectus.
Neither
the depositor nor the master servicer - unless the master servicer is the seller
- will be obligated to purchase a loan if the seller defaults on its obligation
to do so. No assurance can be given that sellers will carry out their respective
repurchase or substitution obligations with respect to the loans. However,
to
the extent that a breach of a representation and warranty of a seller may also
constitute a breach of a representation made by the master servicer, the master
servicer may have a repurchase or substitution obligation as described under
the
heading “Operative Agreements—Assignment of Trust Fund Assets” in this
prospectus.
Description
of the Securities
Either
Greenwich Capital Acceptance, Inc. or Financial Asset Securities Corp., as
depositor, will establish a trust fund for each series of securities. A
particular series of securities will consist of mortgage-backed or asset-backed
certificates or notes or both certificates and notes.
Each
series of certificates will be issued pursuant to a pooling and servicing
agreement or a trust agreement, dated as of the related cut-off date, among
the
depositor, the trustee and, if the trust includes loans, the related master
servicer. The provisions of each pooling and servicing agreement or trust
agreement will vary depending upon the nature of the related certificates and
the related trust fund. Forms of pooling and servicing and trust agreements
are
exhibits to the Registration Statement of which this prospectus forms a
part.
Each
series of notes will be issued under an indenture between the related trust
fund
and the trustee named in the prospectus supplement for that series. If the
trust
fund includes loans, the trust fund and the servicer of the loans will also
enter into a servicing agreement. Forms of indenture and servicing agreement
have been filed as an exhibit to the registration statement of which this
prospectus forms a part.
The
following summaries describe the material provisions which may appear in each
pooling and servicing agreement or trust agreement, in the case of a series
of
certificates, and in each indenture and servicing agreement, in the case of
a
series of notes. The prospectus supplement for each series of securities will
describe any provision of the operative agreements relating to that series
which
materially differs from the description contained in this prospectus. The
summaries do not purport to be complete and are subject to, and are qualified
in
their entirety by reference to, all of the provisions of the related agreements
and prospectus supplement. The applicable depositor will provide a copy of
the
operative agreements (without exhibits) relating to any series without charge,
upon written request of a holder of record of a certificate or note of the
series, addressed to Greenwich Capital Acceptance, Inc. or Financial Asset
Securities Corp., as applicable, 600 Steamboat Road, Greenwich, Connecticut06830, Attention: Asset Backed Finance Group.
39
General
Unless
otherwise specified in the related prospectus supplement, the securities of
each
series will
·
be
issued in fully registered form only, in the authorized denominations
specified in the prospectus
supplement,
·
evidence
specified beneficial ownership interests in the trust fund assets,
in the
case of a series of certificates, or be secured by the pledge of
the trust
fund assets, in the case of a series of notes,
and
·
not
be entitled to payments in respect of the assets included in any
other
trust fund established by the
depositor.
The
securities will not represent obligations of the depositor or any of its
affiliates. The loans will not be insured or guaranteed by any governmental
entity or other person, unless otherwise specified in the related prospectus
supplement.
To
the
extent provided in the related operative agreements, each trust fund will
consist of the following:
·
the
assets as from time to time are subject to the related agreement,
exclusive of any amounts specified in the related prospectus supplement
as
“retained interest”;
·
those
assets as from time to time are required to be deposited in the related
security account as defined under the heading “Operative
Agreements—Payments on Loans; Deposits to Security Account” in this
prospectus;
·
property
which secured a loan and which is acquired on behalf of the
securityholders by foreclosure or deed in lieu of foreclosure;
and
·
primary
mortgage insurance policies, FHA insurance and VA guarantees, if
any, and
any other insurance policies or other forms of credit enhancement
required
to be maintained pursuant to the related
agreement.
If
specified in the related prospectus supplement, a trust fund may also include
one or more of the following:
·
reinvestment
income on payments received on the trust fund
assets,
40
·
a
reserve fund,
·
a
pool insurance policy,
·
a
special hazard insurance policy,
·
a
bankruptcy bond,
·
one
or more letters of credit,
·
a
surety bond,
·
guaranties,
or
·
similar
instruments or other agreements.
Each
series of securities will be issued in one or more classes. Each class of
securities of a series will evidence beneficial ownership of a specified portion
or percentage - which may be 0% - of future interest payments and a specified
portion or percentage - which may be 0% - of future principal payments on the
assets in the related trust fund. A series of securities may include one or
more
classes that are senior in right to payment to one or more other classes of
securities of the series. A series or classes of securities may be covered
by
insurance policies, surety bonds or other forms of credit enhancement, in each
case as described in this prospectus and in the related prospectus supplement.
Distributions on one or more classes of a series of securities may be made
prior
to being made on one or more other classes, after the occurrence of specified
events, in accordance with a schedule or formula, on the basis of collections
from designated portions of the trust fund assets or on a different basis,
in
each case as specified in the related prospectus supplement. The timing and
amounts of distributions may vary among classes or over time as specified in
the
related prospectus supplement.
Unless
otherwise specified in the related prospectus supplement, distributions of
principal and interest, or, where applicable, of principal only or interest
only, on the related securities will be made by the trustee on each distribution
date. Distributions will be made monthly, quarterly, semi-annually, or at such
other intervals and on the dates as are specified in the related prospectus
supplement, in proportion to the percentages specified in the prospectus
supplement. Distributions will be made to the persons in whose names the
securities are registered at the close of business on the applicable record
date
specified in the related prospectus supplement. Distributions will be made
in
the manner specified in the related prospectus supplement to the persons
entitled to them at the address appearing in the register maintained for the
securityholders. In the case of the final distribution in retirement of the
securities, payment will be made only upon presentation and surrender of the
securities at the office or agency of the trustee or other person specified
in
the notice to securityholders of the final distribution.
The
securities will be freely transferable and exchangeable at the corporate trust
office of the trustee named in the related prospectus supplement. No service
charge will be made for any registration of exchange or transfer of securities
of any series but the trustee may require payment of a sum sufficient to cover
any related tax or other governmental charge.
41
Under
current law, the purchase and holding of certain classes of securities by or
on
behalf of, or with the assets of, an employee benefit plan or other retirement
plan or arrangement subject to the provisions of ERISA or Section 4975 of the
Internal Revenue Code may result in “prohibited transactions” within the meaning
of Section 406 of ERISA or Section 4975 of the Code. See“ERISA
Considerations” in this prospectus.
As
to
each series of securities, an election may be made to treat the related trust
fund, or designated portion of the trust fund, as a “real estate mortgage
investment conduit” (REMIC) as defined in the Internal Revenue Code. The related
prospectus supplement will specify whether a REMIC election is to be made.
Alternatively, the operative agreement for a series may provide that a REMIC
election may be made at the discretion of the depositor or the master servicer
and may only be made if certain conditions are satisfied. As to any series
of
securities for which a REMIC election will be made, the terms and provisions
applicable to the making of the REMIC election, as well as any material federal
income tax consequences to securityholders not otherwise described in this
prospectus, will be set forth in the related prospectus supplement. If a REMIC
election is made with respect to a series, one of the classes will be designated
as evidencing the sole class of “residual interests” in the related REMIC, as
defined in the Code. All other classes of securities in that series will
constitute “regular interests” in the related REMIC, as defined in the Code. As
to each series with respect to which a REMIC election is to be made, the master
servicer or a holder of the related residual certificate will be obligated
to
take all actions required in order to comply with applicable laws and
regulations and will be obligated to pay any prohibited transaction taxes.
Unless otherwise specified in the related prospectus supplement, the master
servicer will be entitled to reimbursement for any such payment from the assets
of the trust fund or from any holder of the related residual
certificate.
Distributions
on Securities
General.
In
general, the method of determining the amount of distributions on a particular
series of securities will depend on the type of credit support, if any, that
is
used with respect to that series. See “Credit Enhancement” in this prospectus.
Set forth below are descriptions of various methods that may be used to
determine the amount of distributions on the securities of a particular series.
The prospectus supplement for each series of securities will describe the method
to be used in determining the amount of distributions on the securities of
that
series.
The
trustee will make distributions allocable to principal and interest on the
securities out of, and only to the extent of, funds in the related security
account, including any funds transferred from any reserve account. As between
securities of different classes and as between distributions of principal (and,
if applicable, between distributions of principal prepayments and scheduled
payments of principal) and interest, distributions made on any distribution
date
will be applied as specified in the related prospectus supplement. Unless
otherwise specified in the related prospectus supplement, distributions to
any
class of securities will be made pro rata to all securityholders of that
class.
Available
Funds.
All
distributions on the securities of each series on each distribution date will
be
made from Available Funds in accordance with the terms described in the related
prospectus supplement and specified in the related operative agreement. Unless
otherwise provided in the related prospectus supplement, the term “Available
Funds” for each distribution date will equal the sum of the following
amounts:
42
(i)
the
aggregate of all previously undistributed payments on account of
principal, including principal prepayments, if any, and prepayment
penalties, if so provided in the related prospectus supplement, and
interest on the mortgage loans in the related trust fund (including
Liquidation Proceeds and Insurance Proceeds and amounts drawn under
letters of credit or other credit enhancement instruments as permitted
thereunder and as specified in the related operative agreement) received
by the master servicer after the cut-off date and on or prior to
the
related determination date specified in the prospectus supplement
except:
·
all
payments which were due on or before the cut-off
date;
·
all
Liquidation Proceeds and all Insurance Proceeds, all principal prepayments
and all other proceeds of any loan purchased by the depositor, the
master
servicer, any sub-servicer or any seller pursuant to the related
operative
agreement that were received after the prepayment period specified
in the
prospectus supplement and all related payments of interest representing
interest for any period after the related collection
period;
·
all
scheduled payments of principal and interest due on a date or dates
subsequent to the first day of the month of
distribution;
·
amounts
received on particular loans as late payments of principal or interest
or
other amounts required to be paid by borrowers, but only to the extent
of
any unreimbursed advance in respect of those loans made by the master
servicer, the related sub-servicers, support servicers or the
trustee;
·
amounts
representing reimbursement, to the extent permitted by the related
operative agreement and as described under the heading “—Advances”
immediately below, for advances made by the master servicer,
sub-servicers, support servicers or the trustee that were deposited
into
the security account, and amounts representing reimbursement for
certain
other losses and expenses incurred by the master servicer or the
depositor
and described below; and
·
that
portion of each collection of interest on a particular loan in the
trust
fund which represents servicing compensation payable to the master
servicer or retained interest which is to be retained from such collection
or is permitted to be retained from related Insurance Proceeds,
Liquidation Proceeds or proceeds of loans purchased pursuant to the
related operative agreement;
(ii)
the
amount of any advance made by the master servicer, sub-servicer,
support
servicer or the trustee as described under “—Advances” immediately below
and deposited by it in the security
account;
(iii)
if
applicable, amounts withdrawn from a reserve
account;
43
(iv)
any
applicable, amounts provided under a letter of credit, insurance
policy,
surety bond or other third-party credit enhancement;
and
(v)
if
applicable, the amount of any prepayment interest
shortfall.
Distributions
of Interest.
Unless
otherwise specified in the related prospectus supplement, interest will accrue
on the aggregate principal balance of each class of securities or the aggregate
notional principal balance of each class of securities entitled to distributions
of interest only at the pass-through rate (or interest rate) and for the periods
specified in the prospectus supplement. Except in the case of a class of accrual
securities that provides for interest that accrues but is not currently payable,
the pass-through rate may be a fixed rate or an adjustable rate that adjusts
as
specified in the prospectus supplement. Interest accrued during each specified
period on each class of securities entitled to interest will be distributable
on
the distribution dates specified in the related prospectus supplement, to the
extent that funds are available, until the aggregate principal balance of the
securities of that class has been distributed in full or, in the case of a
class
of securities entitled only to distributions allocable to interest, until the
aggregate notional principal balance of that class is reduced to zero or for
the
period of time designated in the related prospectus supplement. The original
principal balance of each security will equal the aggregate distributions
allocable to principal to which that security is entitled. Unless otherwise
specified in the related prospectus supplement, distributions allocable to
interest on each security that is not entitled to distributions allocable to
principal will be calculated based on the notional principal balance of that
security. The notional principal balance of a security will not evidence an
interest in or entitlement to distributions allocable to principal but will
be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
With
respect to any class of accrual securities, if specified in the related
prospectus supplement, any interest that has accrued but is not paid on any
distribution date will be added to the aggregate principal balance of that
class
on that distribution date. Unless otherwise specified in the related prospectus
supplement, distributions of interest on each class of accrual securities will
commence only after the occurrence of the events specified in the prospectus
supplement. Unless otherwise specified in the related prospectus supplement,
the
beneficial ownership interest of a class of accrual securities in the trust
fund
will increase on each distribution date, as reflected in the aggregate principal
balance of that class, by the amount of interest that accrued on that class
during the preceding interest accrual period but was not required to be
distributed to the class on the distribution date. Each class of accrual
securities will thereafter accrue interest on the outstanding aggregate
principal balance of that class as so increased.
Distributions
of Principal.
Unless
otherwise specified in the related prospectus supplement, the aggregate
principal balance of any class of securities entitled to distributions of
principal will equal
·
the
original aggregate principal balance of that class as specified in
the
related prospectus supplement
44
reduced
by
·
all
distributions reported to securityholders of that class as allocable
to
principal
increased
by
·
in
the case of a class of accrual securities, all interest accrued but
not
then distributable on that class
and
subject
to
·
in
the case of adjustable rate certificates, the effect of any negative
amortization.
The
related prospectus supplement will specify the method by which the amount of
principal to be distributed on the securities on each distribution date will
be
calculated and the manner in which the amount will be allocated among the
classes of securities entitled to distributions of principal.
If
so
provided in the related prospectus supplement, one or more classes of senior
securities will be entitled to receive all or a disproportionate percentage
of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments in the percentages and under
the
circumstances or for the periods specified in the prospectus supplement. Any
allocation of principal prepayments to a class or classes of senior securities
will have the effect of accelerating the amortization of the senior securities
while increasing the interests evidenced by the subordinated securities in
the
related trust fund. Increasing the interests of the subordinated securities
relative to that of the senior securities is intended to preserve the
availability of the subordination provided by the subordinated securities.
See
“Credit Enhancement—Subordination” in this prospectus.
Unscheduled
Distributions.
If
specified in the related prospectus supplement, the securities will be subject
to receipt of distributions before the next scheduled distribution date under
the circumstances and in the manner described in this paragraph and the
following paragraph and in the prospectus supplement. The trustee will be
required to make such unscheduled distributions on the day and in the amount
specified in the related prospectus supplement if, due to substantial payments
of principal - including principal prepayments - on the trust fund assets,
the
trustee or the master servicer determines that the funds available or
anticipated to be available from the security account and, if applicable, from
any reserve account may be insufficient to make required distributions on the
securities on that distribution date. Unless otherwise specified in the related
prospectus supplement, the amount of any unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have
been
required to be distributed as principal on the securities on the next
distribution date. Unless otherwise specified in the related prospectus
supplement, all unscheduled distributions will include interest at the
applicable pass-through rate, if any, on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified
in
the prospectus supplement.
45
Unless
otherwise specified in the related prospectus supplement, all distributions
allocable to principal in any unscheduled distribution will be made in the
same
priority and manner as distributions of principal on the securities would have
been made on the next distribution date, and with respect to securities of
the
same class, unscheduled distributions of principal will be made on a pro rata
basis. Notice of any unscheduled distribution will be given by the trustee
prior
to the date of distribution.
Advances
Unless
otherwise provided in the related prospectus supplement, the master servicer
will be required to make advances, from its own funds, from funds advanced
by
sub-servicers or support servicers or from funds held in the security account
for future distributions to the securityholders. On each distribution date,
the
amount of any advances will be equal to the aggregate of payments of principal
and interest that were delinquent on the related determination date and were
not
advanced by any sub-servicer, subject to the master servicer’s determination
that these advances will be recoverable from late payments by borrowers,
Liquidation Proceeds, Insurance Proceeds or otherwise. In the case of
cooperative loans, the master servicer also will be required to advance any
unpaid maintenance fees and other charges under the related proprietary leases
as specified in the related prospectus supplement.
In
making
advances, the master servicer will endeavor to maintain a regular flow of
scheduled interest and principal payments to the securityholders rather than
to
guarantee or insure against losses. If advances are made by the master servicer
from cash being held for future distribution to securityholders, the master
servicer will replace those funds on or before any future distribution date
to
the extent that funds in the applicable security account on a distribution
date
would be less than the amount required to be available for distributions to
securityholders on that date. Any funds advanced by the master servicer will
be
reimbursable to the master servicer out of recoveries on the specific loans
with
respect to which the advances were made (e.g.,
late
payments made by the related borrower, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any loan purchased by a sub-servicer or
a
seller under the circumstances described in this prospectus). Advances by the
master servicer and any advances by a sub-servicer or a support servicer also
will be reimbursable to the master servicer or sub-servicer or support servicer,
as applicable, from cash otherwise distributable to securityholders, including
the holders of senior securities, to the extent that the master servicer
determines that any advances previously made are not ultimately recoverable
as
described in this paragraph. The master servicer also will be obligated to
make
advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of certain taxes and insurance premiums not
paid by borrowers on a timely basis. Funds so advanced are reimbursable to
the
master servicer to the extent permitted by the related operative agreement.
If
specified in the related prospectus supplement, the obligations of the master
servicer to make advances may be supported by a cash advance reserve fund,
a
surety bond or other arrangement, in each case as described in the related
prospectus supplement.
The
master servicer or sub-servicer may enter into a support agreement with a
support servicer pursuant to which the support servicer agrees to provide funds
on behalf of the master servicer or sub-servicer in connection with the
obligation of the master servicer or sub-servicer, as the case may be, to make
advances. The support agreement will be delivered to the trustee and the trustee
will be authorized to accept a substitute support agreement in exchange for
an
original support agreement, provided that the substitution of the support
agreement will not adversely affect the rating or ratings assigned to the
securities by each rating agency named in the related prospectus
supplement.
46
Unless
otherwise provided in the prospectus supplement, in the event the master
servicer, a sub-servicer or a support servicer fails to make an advance, the
trustee will be obligated to make the advance in its capacity as successor
servicer. If the trustee makes an advance, it will be entitled to be reimbursed
for that advance to the same extent and degree as the master servicer, a
sub-servicer or a support servicer is entitled to be reimbursed for advances.
See “—Distributions on Securities” above.
Reports
to Securityholders
Prior
to
or concurrently with each distribution on a distribution date and except as
otherwise set forth in the related prospectus supplement, the master servicer
or
the trustee will furnish to each securityholder of record of the related series
a statement setting forth, to the extent applicable to that series of
securities, among other things:
·
the
amount of the distribution that is allocable to principal, separately
identifying the aggregate amount of any principal prepayments and,
if
specified in the prospectus supplement, any prepayment penalties
included
in the distribution;
·
the
amount of the distribution allocable to
interest;
·
the
amount of any advances;
·
the
aggregate amount (a) otherwise allocable to the subordinated
securityholders on that distribution date and (b) withdrawn from
the
reserve fund, if any, that is included in the amounts distributed
to the
senior securityholders;
·
the
outstanding aggregate principal balance or notional principal balance
of
each class after giving effect to the distribution of principal on
that
distribution date;
·
the
percentage of principal payments on the loans (excluding prepayments),
if
any, which each class will be entitled to receive on the following
distribution date;
·
the
percentage of principal prepayments on the mortgage loans, if any,
which
each class will be entitled to receive on the following distribution
date;
·
the
amount of the servicing compensation retained or withdrawn from the
security account by the master servicer and the amount of additional
servicing compensation received by the master servicer attributable
to
penalties, fees, excess Liquidation Proceeds and other similar charges
and
items;
·
the
number and aggregate principal balance of mortgage loans delinquent,
but
not in foreclosure, (i) from 30 to 59 days, (ii) from 60 to 89 days
and
(iii) 90 days or more, as of the close of business on the last day
of the
calendar month preceding that distribution
date;
47
·
the
number and aggregate principal balance of mortgage loans delinquent
and in
foreclosure (i) from 30 to 59 days, (ii) from 60 to 89 days and (iii)
90
days or more, as of the close of business on the last day of the
calendar
month preceding that distribution
date;
·
the
book value of any real estate acquired through foreclosure or grant
of a
deed in lieu of foreclosure and, if the real estate secured a Multifamily
Loan, any additional information specified in the prospectus
supplement;
·
if
a class is entitled only to a specified portion of interest payments
on
the loans in the related pool, the pass-through rate, if adjusted
from the
date of the last statement, of the loans expected to be applicable
to the
next distribution to that class;
·
if
applicable, the amount remaining in any reserve account at the close
of
business on that distribution date;
·
the
pass-through rate as of the day prior to the immediately preceding
distribution date; and
·
the
amounts remaining under any letters of credit, pool policies or other
forms of credit enhancement applicable to the
certificates.
Where
applicable, any amount set forth in the above list may be expressed as a dollar
amount per single security of the relevant class having the percentage interest
specified in the prospectus supplement. The report to securityholders for any
series of securities may include additional or other information of a similar
nature to that specified in the above list.
In
addition, within a reasonable period of time after the end of each calendar
year, the master servicer or the trustee will mail, to each securityholder
of
record at any time during such calendar year, a report setting
forth:
·
the
aggregate of the amounts for that calendar year reported pursuant
to the
first two bullet points in the immediately preceding list or, in
the event
that the recipient was a securityholder of record only during a portion
of
the calendar year, for the applicable portion of the year;
and
·
other
customary information as may be deemed necessary or desirable for
securityholders to have in order to prepare their tax
returns.
Credit
Enhancement
General
Credit
enhancement may be provided with respect to one or more classes of a series
of
securities or with respect to the assets in the related trust fund. Credit
enhancement may take the form of one or more of the following:
48
·
a
limited financial guaranty policy issued by an entity named in the
related
prospectus supplement,
·
the
subordination of one or more classes of the securities of that
series,
·
the
establishment of one or more reserve accounts, the use of a cross-support
feature,
·
a
pool insurance policy, bankruptcy bond, special hazard insurance
policy,
surety bond, letter of credit, guaranteed investment contract,
or
·
any
other method of credit enhancement described in the related prospectus
supplement.
Unless
otherwise specified in the related prospectus supplement, any credit enhancement
will not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the securities and interest. If
losses occur which exceed the amount covered by the credit enhancement or which
are not covered by the credit enhancement, securityholders will bear their
allocable share of deficiencies.
Subordination
If
specified in the related prospectus supplement, protection afforded to holders
of one or more classes of the senior securities of a series by means of the
subordination feature will be accomplished by the holders of one or more other
classes of that series having a preferential right to distributions in respect
of scheduled principal, principal prepayments, interest or any combination
thereof that otherwise would have been payable to the holders of one or more
other subordinated classes of securities of that series under the circumstances
and to the extent specified in the prospectus supplement. If specified in the
related prospectus supplement, protection may also be afforded to the holders
of
the senior securities of a series by:
·
reducing
the ownership interest of the holders of the related subordinated
securities,
·
a
combination of the subordination feature and reducing the ownership
interest of the subordinated securityholders,
or
·
as
otherwise described in the related prospectus
supplement.
If
specified in the related prospectus supplement, delays in receipt of scheduled
payments on the loans and losses on defaulted loans will be borne first by
the
various classes of subordinated securities and thereafter by the various classes
of senior securities, in each case under the circumstances and subject to the
limitations specified in that prospectus supplement.
The
related prospectus supplement may also limit the following:
·
the
aggregate distributions in respect of delinquent payments on the
loans
over the lives of the securities or at any
time,
49
·
the
aggregate losses in respect of defaulted loans which must be borne
by the
subordinated securities by virtue of their subordination,
and
·
the
amount of the distributions otherwise distributable to the subordinated
securityholders that will be distributable to senior securityholders
on
any distribution date.
If
aggregate distributions in respect of delinquent payments on the loans or
aggregate losses in respect of the loans were to exceed the amount specified
in
the related prospectus supplement, holders of the senior securities would
experience losses on their securities.
In
addition to or in lieu of the foregoing, if specified in the related prospectus
supplement, all or any portion of distributions otherwise payable to holders
of
the subordinated securities on any distribution date may instead be deposited
into one or more reserve accounts established with the trustee. The related
prospectus supplement may specify that deposits in any reserve account may
be
made
·
on
each distribution date,
·
for
specified periods, or
·
until
the balance in the reserve account has reached a specified amount
and,
following payments from the reserve account to holders of the senior
securities or otherwise, thereafter to the extent necessary to restore
the
balance in the reserve account to the specified
level.
If
specified in the related prospectus supplement, amounts on deposit in the
reserve account may be released to the holders of the class or classes of
securities specified in the prospectus supplement at the times and under the
circumstances specified in the prospectus supplement.
If
specified in the related prospectus supplement, various classes of senior
securities and subordinated securities may themselves be subordinate in their
right to receive certain distributions to other classes of senior and
subordinated securities, respectively, through a cross-support mechanism or
otherwise.
As
among
classes of senior securities and as among classes of subordinated securities,
distributions may be allocated among these classes as follows:
·
in
the order of their scheduled final distribution
dates,
·
in
accordance with a schedule or
formula,
·
in
relation to the occurrence of events or
otherwise,
in
each
case as specified in the related prospectus supplement. As among classes of
subordinated securities, the related prospectus supplement will specify the
allocation of payments to holders of the related senior securities on account
of
delinquencies or losses and the allocation payments to any reserve
account.
50
Pool
Insurance Policies
The
related prospectus supplement may specify that a separate pool insurance policy
will be obtained for the pool. This policy will be issued by the pool insurer
named in the prospectus supplement. Subject to the limits described in this
section, each pool insurance policy will cover loss by reason of default in
payment on loans in the related pool in an amount equal to a percentage, which
is specified in the related prospectus supplement, of the aggregate principal
balances of the loans on the cut-off date which are not covered as to their
entire outstanding principal balances by primary mortgage insurance policies.
As
more fully described in the following paragraph, the master servicer will
present claims to the pool insurer on behalf of itself, the trustee and the
securityholders. However, the pool insurance policies are not blanket policies
against loss, since claims under the policies may only be made respecting
particular defaulted loans and only upon satisfaction of the conditions
precedent described in the following paragraph. Unless otherwise specified
in
the related prospectus supplement, no pool insurance policy will cover losses
due to a failure to pay or denial of a claim under a primary mortgage insurance
policy.
Unless
otherwise specified in the related prospectus supplement, the pool insurance
policy will provide that no claims may be validly presented unless the following
conditions are satisfied:
·
any
required primary mortgage insurance policy is in effect for the defaulted
loan and a claim under that policy has been submitted and
settled;
·
hazard
insurance on the related mortgaged property has been kept in force
and
real estate taxes and other protection and preservation expenses
have been
paid;
·
if
there has been physical loss or damage to the mortgaged property,
the
property has been restored to its physical condition, reasonable
wear and
tear excepted, at the time of issuance of the policy;
and
·
the
insured has acquired good and merchantable title to the mortgaged
property
free and clear of liens except certain permitted
encumbrances.
Upon
satisfaction of these conditions, the pool insurer will have the option
either
·
to
purchase the property securing the defaulted loan at a price equal
to the
loan’s principal balance plus accrued and unpaid interest at the loan
rate
to the date of purchase plus certain expenses incurred by the master
servicer on behalf of the trustee and securityholders, or
·
to
pay the amount by which the sum of the principal balance of the defaulted
loan plus accrued and unpaid interest at the loan rate to the date
of
payment of the claim and the aforementioned expenses exceeds the
proceeds
received from an approved sale of the mortgaged
property,
51
in
either
case net of amounts paid or assumed to have been paid under the related primary
mortgage insurance policy.
If
any
property securing a defaulted loan is damaged and proceeds, if any, from the
related hazard insurance policy or any applicable special hazard insurance
policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the pool insurance policy, the master
servicer will not be required to expend its own funds to restore the damaged
property unless it determines that
·
the
restoration will increase the proceeds to securityholders on liquidation
of the related loan after reimbursement to the master servicer of
its
expenses, and
·
the
master servicer will be able to recover its expenses from proceeds
of the
sale of the property or proceeds of the related pool insurance policy
or
any related primary mortgage insurance
policy.
Unless
otherwise specified in the related prospectus supplement, no pool insurance
policy will insure against losses sustained by reason of a default arising,
among other things, from
·
fraud
or negligence in the origination or servicing of a loan, including
misrepresentation by the borrower, the originator or persons involved
in
the origination of the loan, or
·
failure
to construct a mortgaged property in accordance with plans and
specifications.
Many
primary mortgage insurance policies also do not insure against these types
of
losses. Nevertheless, a failure of coverage attributable to one of the foregoing
events might result in a breach of the related seller’s representations and, in
that event, might give rise to an obligation on the part of the seller to
purchase the defaulted loan if the breach cannot be cured. No pool insurance
policy will cover a claim in respect of a defaulted loan that occurs when the
loan’s servicer, at the time of default or thereafter, was not approved by the
insurer. Many primary mortgage insurance policies also do not cover claims
in
this case.
Unless
otherwise specified in the related prospectus supplement, the original amount
of
coverage under the pool insurance policy will be reduced over the life of the
related securities by the aggregate dollar amount of claims paid, less the
aggregate of the net amounts realized by the pool insurer upon disposition
of
all foreclosed properties. The amount of claims paid will include certain
expenses incurred by the master servicer as well as accrued interest on
delinquent loans to the date of payment of the claim, unless otherwise specified
in the related prospectus supplement. Accordingly, if aggregate net claims
paid
under any pool insurance policy reach the original policy limit, coverage under
that pool insurance policy will be exhausted and any further losses will be
borne by the securityholders.
52
The
terms
of any pool insurance policy relating to a pool of Manufactured Housing
Contracts or Home Improvement Contracts will be described in the related
prospectus supplement.
FHA
Insurance; VA Guarantees
Single
Family Loans designated in the related prospectus supplement as insured by
the
FHA will be insured by the FHA as authorized under the United States Housing
Act
of 1937, as amended. These mortgage loans will be insured under various FHA
programs including the standard FHA 203(b) program to finance the acquisition
of
one- to four-family housing units and the FHA 245 graduated payment mortgage
program. These programs generally limit the principal amount and interest rates
of the mortgage loans insured. Single Family Loans insured by the FHA generally
require a minimum down payment of approximately 5% of the original principal
amount of the loan. No FHA-insured Single Family Loan relating to a series
may
have an interest rate or original principal amount exceeding the applicable
FHA
limits at the time the loan was originated.
The
insurance premiums for Single Family Loans insured by the FHA are collected
by
lenders approved by the Department of Housing and Urban Development (HUD),
or by
the master servicer or any sub-servicer, and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that
insurance benefits are payable either upon foreclosure (or other acquisition
of
possession) and conveyance of the mortgaged property to HUD or upon assignment
of the defaulted mortgage loan to HUD. With respect to a defaulted FHA-insured
Single Family Loan, the master servicer or any sub-servicer is limited in its
ability to initiate foreclosure proceedings. When it is determined by the master
servicer or sub-servicer or HUD that the default was caused by circumstances
beyond the mortgagor’s control, the master servicer or such sub-servicer is
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the mortgagor.
These plans may involve the reduction or suspension of regular mortgage payments
for a specified period, with such payments to be made up on or before the
maturity date of the mortgage, or the recasting of payments due under the
mortgage up to or beyond the maturity date. In addition, when this type of
default is accompanied by certain other criteria, HUD may provide relief by
making payments to the master servicer or sub-servicer in partial or full
satisfaction of amounts due under the mortgage loan or by accepting assignment
of the loan from the master servicer or sub-servicer. Any payments made by
HUD
are to be repaid by the mortgagor to HUD. With certain exceptions, at least
three full monthly installments must be due and unpaid under the mortgage loan,
and HUD must have rejected any request for relief from the mortgagor, before
the
master servicer or sub-servicer may initiate foreclosure
proceedings.
In
most
cases, HUD has the option to pay insurance claims in cash or in debentures
issued by HUD. Currently, claims are being paid in cash. Claims have not been
paid in debentures since 1965. HUD debentures issued in satisfaction of FHA
insurance claims bear interest at the applicable HUD debentures’ interest rate.
The master servicer or sub-servicer of each FHA-insured Single Family Loan
will
be obligated to purchase any HUD debenture issued in satisfaction of a mortgage
loan upon default for an amount equal to the debenture’s principal
amount.
53
The
amount of insurance benefits paid by the FHA generally is equal to the entire
unpaid principal amount of the defaulted mortgage loan adjusted to reimburse
the
master servicer or sub-servicer for certain costs and expenses and to deduct
certain amounts received or retained by the master servicer or sub-servicer
after default. When entitlement to insurance benefits results from foreclosure
(or other acquisition of possession) and conveyance of the mortgaged property
to
HUD, the master servicer or sub-servicer is compensated for no more than
two-thirds of its foreclosure costs, and is compensated for interest accrued
and
unpaid prior to the conveyance date generally only to the extent allowed
pursuant to the related forbearance plan approved by HUD. When entitlement
to
insurance benefits results from assignment of the mortgage loan to HUD, the
insurance payment includes full compensation for interest accrued and unpaid
to
the assignment date. The insurance payment itself, upon foreclosure of an
FHA-insured Single Family Loan, bears interest from the date which is 30 days
after the mortgagor’s first uncorrected failure to perform any obligation to
make any payment due under the mortgage loan and, upon assignment, from the
date
of assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate.
Single
Family Loans designated in the related prospectus supplement as guaranteed
by
the VA will be partially guaranteed by the VA under the Serviceman’s
Readjustment Act of 1944, as amended, which permits a veteran, the spouse of
a
veteran in certain cases, to obtain a mortgage loan guaranteed by the VA
covering financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years’ duration. However, no Single Family Loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guarantee for that mortgage loan.
The
maximum guarantee that may be issued by the VA under a VA-guaranteed mortgage
loan depends upon the original principal amount of the mortgage loan, as further
described in 38 U.S.C. Section 1803(a), as amended. As of November 1, 1998
the
maximum guarantee that may be issued by the VA under a VA-guaranteed mortgage
loan of more than $144,000 is the lesser of 25% of the original principal amount
of the mortgage loan and $50,570. The liability on the guarantee is reduced
or
increased, pro rata, with any reduction or increase in the amount of
indebtedness, but in no event will the amount payable under the guaranty exceed
the amount of the original guaranty. The VA may, at its option and without
regard to the guaranty, make full payment to a mortgage holder of unsatisfied
indebtedness on a mortgage loan upon the loan’s assignment to the
VA.
With
respect to a defaulted VA-guaranteed Single Family Loan, the master servicer
or
sub-servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim under the guaranty is submitted after liquidation of the
mortgaged property.
The
amount payable under the guaranty will be the percentage of the VA-guaranteed
Single Family Loan originally guaranteed applied to indebtedness outstanding
as
of the applicable date of computation specified in VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the loan,
interest accrued on the unpaid balance of the loan to the appropriate date
of
computation and limited expenses of the mortgagee, but in each case only to
the
extent that these amounts have not been recovered through liquidation of the
mortgaged property. The amount payable under the guaranty may in no event exceed
the amount of the original guaranty.
54
Special
Hazard Insurance Policies
If
specified in the related prospectus supplement, a separate special hazard
insurance policy will be obtained for the pool and will be issued by the special
hazard insurer named in the prospectus supplement. Subject to the limitations
described in the immediately following sentence, each special hazard insurance
policy will protect holders of the related securities from
·
loss
by reason of damage to mortgaged properties caused by certain hazards
-
including earthquakes and, to a limited extent, tidal waves and related
water damage or as otherwise specified in the prospectus supplement
- not
insured against under the standard form of hazard insurance policy
for the
respective states in which the mortgaged properties are located or
under a
flood insurance policy if the mortgaged property is located in a
federally
designated flood area, and
·
loss
caused by reason of the application of the coinsurance clause contained
in
hazard insurance policies.
See
“Operative
Agreements—Hazard Insurance” in this prospectus. No special hazard insurance
policy will cover losses occasioned by fraud or conversion by the trustee or
master servicer, war, insurrection, civil war, certain governmental action,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear or chemical reaction, flood (if the mortgaged property
is located in a federally designated flood area), nuclear or chemical
contamination and certain other risks. The amount of coverage under any special
hazard insurance policy will be specified in the related prospectus supplement.
Each special hazard insurance policy will provide that no claim may be paid
unless hazard insurance and, if applicable, flood insurance on the related
mortgaged property have been kept in force and other protection and preservation
expenses have been paid.
Subject
to the limitations set forth in the immediately preceding paragraph, and unless
otherwise specified in the related prospectus supplement, each special hazard
insurance policy will provide coverage where there has been damage to property
securing a foreclosed mortgage loan, and title to the mortgaged property has
been acquired by the insured, to the extent that the damage is not covered
by
the hazard insurance policy or flood insurance policy, if any, maintained by
the
borrower or the master servicer. In this circumstance, the special hazard
insurer will pay the lesser
of
·
the
cost to repair or replace the mortgaged property,
and
·
upon
transfer of the property to the special hazard insurer, the unpaid
principal balance of the loan at the time the property is acquired
by
foreclosure or deed in lieu of foreclosure, plus accrued interest
to the
date of claim settlement, together with certain expenses incurred
by the
master servicer with respect to the
property.
55
If
the
unpaid principal balance of a loan plus accrued interest and certain servicing
expenses are paid by the special hazard insurer, the amount of further coverage
under the related special hazard insurance policy will be reduced by that amount
less any net proceeds from the sale of the property. Any amount paid as the
cost
to repair the damaged property will also reduce coverage by such amount. So
long
as a pool insurance policy remains in effect, the payment by the special hazard
insurer to cover the unpaid principal balance of a loan plus accrued interest
and certain servicing expenses or to cover the cost to repair a mortgaged
property will not affect the total insurance proceeds paid to securityholders,
but will affect the relative amounts of coverage remaining under the special
hazard insurance policy and the pool insurance policy.
Since
each special hazard insurance policy will be designed to permit full recovery
under the mortgage pool insurance policy in circumstances in which recoveries
would otherwise be unavailable because mortgaged properties have been damaged
by
a cause not insured against by a standard hazard policy and thus would not
be
restored, each operative agreement will provide that, unless otherwise specified
in the related prospectus supplement, the master servicer will be under no
obligation to maintain the special hazard insurance policy once the related
pool
insurance policy has been terminated or been exhausted due to payment of
claims.
To
the
extent specified in the related prospectus supplement, the master servicer
may
deposit in a special trust account, cash, an irrevocable letter of credit or
any
other instrument acceptable to each rating agency named in the prospectus
supplement, in order to provide protection in lieu of or in addition to that
provided by a special hazard insurance policy. The amount of any special hazard
insurance policy or of the deposit to the special trust account relating to
securities may be reduced so long as the reduction will not result in a
downgrading of the rating of the securities by any rating agency named in the
prospectus supplement.
The
terms
of any special hazard insurance policy relating to a pool of Manufactured
Housing Contracts or Home Improvement Contracts will be described in the related
prospectus supplement.
Bankruptcy
Bonds
If
specified in the related prospectus supplement, a bankruptcy bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer
named
in the prospectus supplement. Each bankruptcy bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a loan or a reduction by the court of the principal
amount of a loan. The bankruptcy bond will also cover unpaid interest on the
amount of such a principal reduction from the date of the filing of a bankruptcy
petition. The required amount of coverage under any bankruptcy bond will be
set
forth in the related prospectus supplement. Coverage under a bankruptcy bond
may
be cancelled or reduced by the master servicer if the cancellation or reduction
would not adversely affect the then current rating of the securities by any
rating agency named in the prospectus supplement. See“Material
Legal Aspects of the Mortgage Loans—Anti-Deficiency Legislation and Other
Limitations on Lenders” in this prospectus.
To
the
extent specified in the related prospectus supplement, the master servicer
may
deposit in a special trust account, cash, an irrevocable letter of credit or
any
other instrument acceptable to each rating agency named in the prospectus
supplement, to provide protection in lieu of or in addition to that provided
by
a bankruptcy bond. The amount of any bankruptcy bond or of the deposit to the
special trust account relating to the securities may be reduced so long as
the
reduction would not result in a downgrading of the rating of the securities
by
any rating agency named in the prospectus supplement.
56
The
terms
of any bankruptcy bond relating to a pool of Manufactured Housing Contracts
or
Home Improvement Contracts will be described in the related prospectus
supplement.
FHA
Insurance on Multifamily Loans
There
are
two primary FHA insurance programs that are available for Multifamily Loans.
Sections 221(d)(3) and (d)(4) of the National Housing Act allow HUD to insure
mortgage loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of mortgage loans made under Sections 221(d)(3) and
(d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of a
mortgage loan may be up to 40 years and the ratio of loan amount to property
replacement cost can be up to 90%.
Section
223(f) of the National Housing Act allows HUD to insure mortgage loans made
for
the purchase or refinancing of existing apartment projects which are at least
three years old. Section 244 also provides for co-insurance of mortgage loans
made under Section 223(f). Under Section 223(f), the loan proceeds cannot be
used for substantial rehabilitation work but repairs may be made for, generally
up to the greater of 15% of the value of the project or a dollar amount per
apartment unit established from time to time by HUD. In general the loan term
may not exceed 35 years and a loan-to-value ratio of no more than 85% is
required for the purchase of a project and a loan-to-value ratio of no more
than
70% for the refinancing of a project.
FHA
insurance is generally payable in cash or, at the option of the mortgagee,
in
debentures. The insurance does not cover 100% of the mortgage loan but is
subject to certain deductions and certain losses of interest from the date
of
the default.
Reserve
Accounts
If
specified in the related prospectus supplement, credit support with respect
to a
series of securities may be provided by the establishment and maintenance of
one
or more reserve accounts for that series, in trust, with the related trustee.
The prospectus supplement will specify whether or not a reserve accounts will
be
included in the related trust fund.
The
reserve account for a series of securities will be funded in one of the
following ways:
·
by
a deposit of cash, U.S. Treasury securities, instruments evidencing
ownership of principal or interest payments on U.S. Treasury securities,
letters of credit, demand notes, securities of deposit or a combination
of
these, in the aggregate amount specified in the related prospectus
supplement;
57
·
by
deposit from time to time of amounts specified in the related prospectus
supplement to which the subordinated securityholders, if any, would
otherwise be entitled; or
·
in
such other manner as the prospectus supplement may
specify.
Any
amounts on deposit in the reserve account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in permitted
investments. Unless otherwise specified in the related prospectus supplement,
“permitted investments” will include obligations of the United States and
certain of its agencies, certificates of deposit, certain commercial paper,
time
deposits and bankers acceptances sold by eligible commercial banks and certain
repurchase agreements of United States government securities with eligible
commercial banks. If a letter of credit is deposited with the trustee, the
letter of credit will be irrevocable. Unless otherwise specified in the related
prospectus supplement, any instrument deposited in a reserve account will name
the trustee, in its capacity as trustee for the securityholders, as beneficiary
and will be issued by an entity acceptable to each rating agency named in the
prospectus supplement. Additional information with respect to instruments
deposited in the reserve account will be set forth in the related prospectus
supplement.
Any
amounts deposited, and payments on instruments deposited, in a reserve account
will be available for withdrawal from the reserve account for distribution
to
securityholders, for the purposes, in the manner and at the times specified
in
the related prospectus supplement.
Cross
Support
If
specified in the related prospectus supplement, the beneficial ownership of
separate groups of assets included in a trust fund may be evidenced by separate
classes of securities. In this case, credit support may be provided by a cross
support feature which requires that distributions be made with respect to
securities evidencing a beneficial ownership interest in, or secured by, other
asset groups within the same trust fund. The related prospectus supplement
for a
series which includes a cross support feature will describe the manner and
conditions for applying the cross support feature.
If
specified in the related prospectus supplement, the coverage provided by one
or
more forms of credit support may apply concurrently to two or more related
trust
funds. If applicable, the related prospectus supplement will identify the trust
funds to which the credit support relates and the manner of determining the
amount of the coverage provided and the application of the coverage to the
identified trust funds.
Other
Insurance, Surety Bonds, Guaranties, Letters of Credit and Similar Instruments
or Agreements
If
specified in the related prospectus supplement, a trust fund may also include
insurance, guaranties, surety bonds, letters of credit or similar arrangements
for the following purposes:
·
to
maintain timely payments or provide additional protection against
losses
on the assets included in the trust
fund,
58
·
to
pay administrative expenses, or
·
to
establish a minimum reinvestment rate on the payments made in respect
of
the assets included in the trust fund or principal payment rate on
the
assets.
These
arrangements may include agreements under which securityholders are entitled
to
receive amounts deposited in various accounts held by the trustee upon the
terms
specified in the prospectus supplement.
Financial
Instruments
If
specified in the related prospectus supplement, the trust fund may include
one
or more swap arrangements or other financial instruments that are intended
to
meet the following goals:
·
to
convert the payments on some or all of the assets from fixed to floating
payments, or from floating to fixed, or from floating based on a
particular index to floating based on another
index;
·
to
provide payments in the event that any index rises above or falls
below
specified levels; or
·
to
provide protection against interest rate changes, certain types of
losses,
including reduced market value, or other payment shortfalls to one
or more
classes of the related series.
If
a
trust fund includes financial instruments of this type, the instruments may
be
structured to be exempt from the registration requirements of the Securities
Act
of 1933, as amended.
The
related prospectus supplement will include, or incorporate by reference,
material financial and other information about the provider of the financial
instruments.
Yield
and Prepayment Considerations
The
yields to maturity and weighted average lives of the certificates will be
affected primarily by the amount and timing of principal payments received
on or
in respect of the assets included in the related trust fund. The original terms
to maturity of the loans in a given pool will vary depending upon the types
of
loans included. Each prospectus supplement will contain information with respect
to the types and maturities of the loans in the related pool. Unless otherwise
specified in the related prospectus supplement, loans may be prepaid, without
penalty, in full or in part at any time. Multifamily Loans may prohibit
prepayment for a specified period after origination, may prohibit partial
prepayments entirely, and may require the payment of a prepayment penalty upon
prepayment in full or in part. The prepayment experience of the loans in a
pool
will affect the life of the related series of securities.
The
rate
of prepayments on the loans cannot be predicted. A number of factors, including
homeowner mobility, economic conditions, the presence and enforceability of
due-on-sale clauses, mortgage market interest rates and the availability of
mortgage funds may affect the prepayment experience of loans. Some of these
factors, as well as other factors including limitations on prepayment and the
relative tax benefits associated with the ownership of income-producing real
property, may affect the prepayment experience of Multifamily
Loans.
59
Home
Equity Loans and Home Improvement Contracts have been originated in significant
volume only during the past few years and neither depositor is aware of any
publicly available studies or statistics on the rate of prepayment of these
types of loans. Generally, Home Equity Loans and Home Improvement Contracts
are
not viewed by borrowers as permanent financing. Accordingly, these loans may
experience a higher rate of prepayment than traditional first mortgage loans.
On
the other hand, because Home Equity Loans that are revolving credit line loans
generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgages. The prepayment
experience of the related trust fund may also be affected by the frequency
and
amount of any future draws on any revolving credit line loans. Other factors
that might be expected to affect the prepayment rate of a pool of Home Equity
Loans or Home Improvement Contracts include the amounts of, and interest rates
on, the underlying senior mortgage loans, and the use of first mortgage loans
as
long-term financing for home purchase and junior mortgage loans as shorter-term
financing for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as automobiles. Accordingly,
these types of loans may experience a higher rate of prepayment than traditional
fixed-rate mortgage loans. In addition, any future limitations on the right
of
borrowers to deduct interest payments on Home Equity Loans for federal income
tax purposes may further increase the rate of prepayments of these
loans.
Collections
on Home Equity Loans that are revolving credit line loans may vary because,
among other things, borrowers may
·
make
payments during any month as low as the minimum monthly payment for
that
month or, during the interest-only period for revolving credit line
loans
and, in more limited circumstances, closed-end loans, as to which
an
interest-only payment option has been selected, the interest and
the fees
and charges for that month; or
·
make
payments as high as the entire outstanding principal balance plus
accrued
interest and related fees and
charges.
It
is
possible that borrowers may fail to make the required periodic payments. In
addition, collection on these loans may vary due to seasonal purchasing and
the
payment habits of borrowers.
Unless
otherwise provided in the related prospectus supplement, all conventional loans
other than Multifamily Loans will contain due-on-sale provisions permitting
the
mortgagee or holder of the contract to accelerate the maturity of the related
loan upon the sale or certain other transfers of the related mortgaged property
by the borrower. As described in the related prospectus supplement, conventional
Multifamily Loans may contain due-on-sale provisions, due-on-encumbrance
provisions or both. Loans insured by the FHA, and loans partially guaranteed
by
the VA, are assumable with the consent of the FHA and the VA, respectively.
Thus, the rate of prepayments of these loans may be lower than that of
conventional mortgage loans bearing comparable interest rates. Unless otherwise
provided in the related prospectus supplement, the master servicer generally
will enforce any due-on-sale or due-on-encumbrance clause, to the extent it
has
knowledge of the conveyance or further encumbrance or the proposed conveyance
or
proposed further encumbrance of the mortgaged property and reasonably believes
that it is entitled to do so under applicable law. However, the master servicer
will not take any enforcement action that would impair or threaten to impair
any
recovery under any related insurance policy. See“Operative
Agreements—Collection Procedures” and “Material Legal Aspects of the Mortgage
Loans” in this prospectus for a description of certain provisions of each
operative agreement and certain legal matters that may affect the prepayment
experience of the loans.
60
The
rate
of prepayments of conventional mortgage loans has fluctuated significantly
in
recent years. In general, prepayment rates may be influenced by a variety of
economic, geographic, social and other factors, including changes in housing
needs, job transfers, unemployment and servicing decisions. In general, however,
if prevailing rates fall significantly below the loan rate borne by a loan,
that
loan is likely to be subject to a higher prepayment rate than would be the
case
if prevailing interest rates remain at or above its rate. Conversely, if
prevailing interest rates rise appreciably above the loan rate borne by a loan,
that loan is likely to experience a lower prepayment rate than would be the
case
if prevailing rates remain at or below its loan rate. However, there can be
no
assurance that these generalities will hold true in particular cases. The rate
of prepayment of Multifamily Loans may also be affected by other factors
including loan terms including the existence of lockout periods, due-on-sale
and
due-on-encumbrance clauses and prepayment changes, relative economic conditions
in the area where the mortgaged properties are located, the quality of
management of the mortgaged properties and possible changes in tax
laws.
When
a
loan is prepaid in full, the borrower is charged interest on the principal
amount of the loan only for the number of days in the month actually elapsed
up
to the date of the prepayment rather than for a full month. Unless otherwise
specified in the related prospectus supplement, the effect of a prepayment
in
full will be to reduce the amount of interest passed through in the following
month to securityholders, because interest on the principal balance of the
prepaid loan will be paid only to the date of prepayment. Partial prepayments
in
a given month may be applied to the outstanding principal balances of the
prepaid loans either on the first day of the month of receipt or of the month
following receipt. In the latter case, partial prepayments will not reduce
the
amount of interest passed through in that month. Unless otherwise specified
in
the related prospectus supplement, neither prepayments in full nor partial
prepayments will be passed through until the month following receipt. Prepayment
charges collected with respect to Multifamily Loans will be distributed to
securityholders, or to other persons entitled to them, as described in the
related prospectus supplement.
If
so
specified in the related prospectus supplement, the master servicer will be
required to remit to the trustee, with respect to each loan in the related
trust
as to which a principal prepayment in full or a principal payment which is
in
excess of the scheduled monthly payment and is not intended to cure a
delinquency was received during any due period, an amount, from and to the
extent of amounts otherwise payable to the master servicer as servicing
compensation, equal to the excess,
if any,
of
61
·
30
days’ interest on the principal balance of the related loan at the loan
rate net of the annual rate at which the master servicer’s servicing fee
accrues, over
·
the
amount of interest actually received on that loan during the due
period,
net of the master servicer’s servicing
fee.
If
the
rate at which interest is passed through to the holders of securities of a
series is calculated on a loan by loan basis, disproportionate principal
prepayments with respect to loans bearing different loan rates will affect
the
yield on the securities. In general, the effective yield to securityholders
will
be slightly lower than the yield otherwise produced by the applicable security
pass-through rate and purchase price because, while interest generally will
accrue on each loan from the first day of the month, the distribution of
interest generally will not be made earlier than the month following the month
of accrual.
Under
certain circumstances, the master servicer, the holders of the residual
interests in a REMIC or any other person named in the related prospectus
supplement may have the option to purchase the assets of a trust fund to effect
early retirement of the related series of securities. See“Operative
Agreements—Termination; Optional Termination; Optional Calls” in this
prospectus.
Factors
other than those identified in this prospectus and in the related prospectus
supplement could significantly affect principal prepayments at any time and
over
the lives of the securities. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of trust fund assets at any time or
over
the lives of the securities.
The
prospectus supplement relating to a series of securities will discuss in greater
detail the effect of the rate and timing of principal payments including
prepayments, delinquencies and losses on the yield, weighted average lives
and
maturities of the securities.
In
the
event that a receiver, bankruptcy trustee, debtor in possession or similar
entity (each, an “insolvency trustee”) is appointed with respect to a seller due
to its insolvency or a seller becomes a debtor under the federal Bankruptcy
Code
or any similar insolvency law, the insolvency trustee may attempt to
characterize the transfer of the related mortgage loans from the seller to
the
depositor as a pledge to secure a financing rather than as a sale. In the event
that this attempt were successful, the insolvency trustee might elect, among
other remedies, to accelerate payment of the related securities and liquidate
the related loans, with each securityholder being entitled to receive its
allocable share of the principal balance of the loans, together with its
allocable share of interest on the loans at the applicable pass-through rate,
or
weighted average “strip rate” as defined in the related prospectus supplement,
as the case may be, to the date of payment. In this event, the related
securityholders might incur reinvestment losses with respect to principal
received and investment losses attendant to the liquidation of the loans and
the
resulting early retirement of the related security. In addition, certain delays
in distributions might be experienced by the securityholders in connection
with
any such insolvency proceedings.
62
Operative
Agreements
Set
forth
below is a summary of the material provisions of each operative agreement that
are not described elsewhere in this prospectus. This summary does not purport
to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of each operative agreement applicable to a particular series
of
certificates. Where particular provisions or terms used in the operative
agreements are referred to, those provisions or terms are as specified in the
agreements. Except as otherwise specified, the operative agreements described
in
this prospectus contemplate a trust fund that is comprised of loans. Although
an
agreement governing a trust fund that consists of Agency Securities or Private
Label Securities may contain provisions that are similar to those described
below, they will be described more fully in the related prospectus
supplement.
Assignment
of Trust Fund Assets
Assignment
of the Trust Fund Loans.
When
the securities of a series are issued, the depositor named in the prospective
supplement will cause the loans comprising the related trust fund to be assigned
to the trustee, together with all principal and interest received by or on
behalf of the depositor with respect to those loans after the cut-off date,
other than principal and interest due on or before the cut-off date and other
than any retained interest specified in the related prospectus supplement.
Concurrently with this assignment, the trustee will deliver the securities
to
the depositor in exchange for the loans. Each loan will be identified in a
schedule appearing as an exhibit to the related agreement. The schedule will
include information as to the outstanding principal balance of each loan after
application of payments due on the cut-off date, as well as information
regarding the loan rate or APR, the current scheduled monthly payment of
principal and interest, the maturity of the loan, its loan-to-value ratio or
combined loan-to-value ratio at origination and certain other
information.
If
so
specified in the related prospectus supplement, and in accordance with the
rules
of membership of Merscorp, Inc. and/or Mortgage Electronic Registration Systems,
Inc. (MERS), assignments of the mortgages for some or all of the mortgage loans
in the related trust will be registered electronically through the MERS® System.
With respect to mortgage loans registered through the MERS® System, MERS shall
serve as mortgagee of record solely as a nominee in an administrative capacity
on behalf of the trustee and shall not have any interest in any of those
mortgage loans.
In
addition, the depositor will deliver to the trustee or a custodian the following
items in connection with each loan in the related trust fund:
·
the
original mortgage note or contract, endorsed without recourse in
blank or
to the order of the trustee;
·
in
the case of Single Family Loans, Home Equity Loans or Multifamily
Loans,
the mortgage, deed of trust or similar instrument (each, a “mortgage”)
with evidence of recording indicated on the mortgage; however, in
the case
of any mortgage not returned from the public recording office, the
depositor will deliver or cause to be delivered a copy of the mortgage
together with a certificate stating that the original mortgage was
delivered to the recording office;
63
·
in
the case of a contract, other than an unsecured contract, the security
interest in the mortgaged property securing the
contract;
·
an
assignment of the mortgage or contract to the trustee, which assignment
will be in recordable form in the case of a mortgage assignment or
evidence that the mortgage is held for the trustee through the MERS®
System; and
·
any
other security documents as may be specified in the related prospectus
supplement, including those relating to any senior lienholder interests
in
the related mortgaged property.
Unless
otherwise specified in the related prospectus supplement, the depositor will
promptly cause the assignments of any Single Family Loan, Home Equity Loan
and
Multifamily Loan (except for mortgages held under the MERS® System) to be
recorded in the appropriate public office for real property records, except
in
states in which, in the opinion of counsel acceptable to the trustee, recording
is not required to protect the trustee’s interest in the loans against the claim
of any subsequent transferee or any successor to, or creditor of, the depositor
or the originator of the loans. Unless otherwise specified in the related
prospectus supplement, the depositor will promptly make or cause to be made
an
appropriate filing of a UCC-1 financing statement in the appropriate states
to
give notice of the trustee’s ownership of the contracts.
With
respect to any loans which are cooperative loans, the depositor will deliver
the
following items to the trustee:
·
the
related original cooperative note endorsed, without recourse, in
blank or
to the order of the trustee,
·
the
original security agreement, the proprietary lease or occupancy
agreement,
·
the
recognition agreement,
·
an
executed financing agreement and the relevant stock
certificate,
·
related
blank stock powers, and
·
any
other document specified in the related prospectus
supplement.
The
depositor will cause to be filed in the appropriate office an assignment and
a
financing statement evidencing the trustee’s security interest in each
cooperative loan.
The
trustee or custodian will review the mortgage loan documents, upon receipt,
within the time period specified in the related prospectus supplement. The
trustee will hold the documents in trust for the benefit of the securityholders.
Unless otherwise specified in the related prospectus supplement, if any of
these
documents are found to be missing or defective in any material respect, the
trustee or custodian will notify the master servicer and the depositor, and
the
master servicer will notify the related seller. If the seller cannot cure the
omission or defect within a specified member of days after receipt of notice,
the seller will be obligated either to purchase the loan from the trustee or
to
substitute a qualified substitute loan for the defective loan. There can be
no
assurance that a seller will fulfill this obligation. Although the master
servicer may be obligated to enforce the seller’s obligation to the extent
described in this prospectus under “Mortgage Loan Program—Representations by
Sellers; Repurchases”, neither the master servicer nor the depositor will be
obligated to purchase the mortgage loan if the seller defaults on its
obligation, unless the breach also constitutes a breach of the representations
or warranties of the master servicer or the depositor, as the case may be.
Unless otherwise specified in the related prospectus supplement, the seller’s
obligation to cure, purchase or substitute constitutes the sole remedy available
to the securityholders or the trustee for the omission of, or a material defect
in, a constituent loan document.
64
The
trustee will be authorized to appoint a custodian pursuant to a custodial
agreement to maintain possession of and, if applicable, to review the documents
relating to the loans as agent of the trustee.
The
master servicer will make certain representations and warranties regarding
its
authority to enter into, and its ability to perform its obligations under,
the
agreement. Upon a breach of any representation of the master servicer which
materially and adversely affects the interests of the securityholders in a
loan,
the master servicer will be obligated either to cure the breach in all material
respects or to purchase the loan. Unless otherwise specified in the related
prospectus supplement, this obligation to cure, purchase or substitute
constitutes the sole remedy available to the securityholders or the trustee
for
a breach of representation by the master servicer.
Notwithstanding
the provisions of the foregoing two paragraphs, with respect to a trust fund
for
which a REMIC election is to be made, unless the related prospectus supplement
otherwise provides, no purchase or substitution of a loan will be made if the
purchase or substitution would result in a prohibited transaction tax under
the
Internal Revenue Code.
Assignment
of Agency Securities.
The
applicable depositor will cause any Agency Securities included in a trust fund
to be registered in the name of the trustee or its nominee, and the trustee
concurrently will execute, countersign and deliver the securities. Each Agency
Security will be identified in a schedule appearing as an exhibit to the related
pooling and servicing agreement, which will specify as to each Agency Security
its original principal amount, outstanding principal balance as of the cut-off
date, annual pass-through rate, if any, and the maturity date.
Assignment
of Private Label Securities.
The
applicable depositor will cause any Private Label Securities included in a
trust
fund to be registered in the name of the trustee. The trustee or custodian
will
have possession of any Private Label Securities that are in certificated form.
Unless otherwise specified in the related prospectus supplement, the trustee
will not be in possession, or be assignee of record, of any assets underlying
the Private Label Securities. See “The Trust Fund—Private Label Securities.” The
Private Label Securities will be identified in a schedule appearing as an
exhibit to the related agreement, which will specify the original principal
amount, the outstanding principal balance as of the cut-off date, the annual
pass-through rate or interest rate, the maturity date and other pertinent
information for the Private Label Securities conveyed to the
trustee.
65
Payments
on Loans; Deposits to Security Account
Each
sub-servicer servicing a loan pursuant to a sub-servicing agreement will
establish and maintain a sub-servicing account which meets the requirements
and
is otherwise acceptable to the master servicer. A sub-servicing account must
be
established with a Federal Home Loan Bank or with a depository institution
(including the sub-servicer if it is a depository institution), the accounts
in
which are insured by the Federal Deposit Insurance Corporation (FDIC). If a
sub-servicing account is maintained at an institution that is a Federal Home
Loan Bank or an FDIC-insured institution and, in either case, the amount on
deposit in the sub-servicing account exceeds the FDIC insurance coverage amount,
then such excess amount must be remitted to the master servicer within one
business day after receipt. In addition, the sub-servicer must maintain a
separate account for escrow and impound funds relating to the loans. Each
sub-servicer is required to deposit into its sub-servicing account on a daily
basis all amounts that it receives in respect of the loans described immediately
below under “—Sub-Servicing by Sellers”, less its servicing or other
compensation. On or before the date specified in the sub-servicing agreement,
the sub-servicer will remit to the master servicer or the trustee all funds
held
in the sub-servicing account with respect to the loans that are required to
be
remitted. The sub-servicer is also required to advance, on the scheduled
remittance date, an amount corresponding to any monthly installment of principal
and interest, less its servicing or other compensation, on any loan the payment
of which was not received from the borrower. Unless otherwise specified in
the
related prospectus supplement, this obligation of each sub-servicer to advance
continues up to and including the first of the month following the date on
which
the related mortgaged property is sold at a foreclosure sale or is acquired
on
behalf of the securityholders by deed in lieu of foreclosure, or until the
related loan is liquidated.
The
master servicer will establish and maintain with respect to the related trust
fund a security account which is a separate account or accounts for the
collection of payments on the assets in the trust fund. Unless otherwise
specified in the related prospectus supplement, each security account shall
meet
one of the requirements listed below.
·
It
must be maintained with a depository institution the debt obligations
of
which (or in the case of a depository institution that is the principal
subsidiary of a holding company, the obligations of which) are rated
in
one of the two highest rating categories by each rating agency rating(s)
named in the prospectus supplement.
·
It
must be an account the deposits in which are fully insured by the
FDIC.
·
It
must be an account or accounts the deposits in which are insured
by the
FDIC to its established limits and the uninsured deposits in which
are
otherwise secured such that, as evidenced by an opinion of counsel,
the
securityholders have a claim with respect to the funds in the security
account or a perfected first priority security interest against any
collateral securing those funds that is superior to the claims of
any
other depositors or general creditors of the depository institution
with
which the security account is
maintained.
66
·
It
must be an account otherwise acceptable to each rating agency named
in the
prospectus supplement.
The
collateral eligible to secure amounts in the security account is limited to
United States government securities and other high-quality permitted
investments. A security account may be maintained as an interest-bearing account
or the funds held in the account may be invested pending each succeeding
distribution date in permitted investments. Unless otherwise specified in the
related prospectus supplement, the master servicer or its designee will be
entitled to receive any interest or other income earned on funds in the security
account as additional compensation and will be obligated to deposit in the
security account the amount of any loss immediately as realized. The security
account may be maintained with the master servicer or with a depository
institution that is an affiliate of the master servicer, provided that the
master servicer or its affiliate, as applicable, meets the standards set forth
above.
On
a
daily basis, the master servicer will deposit in the certificate account for
each trust fund, to the extent applicable and unless otherwise specified in
the
related prospectus supplement and provided in the pooling and servicing
agreement, the following payments and collections received, or advances made,
by
the master servicer or on its behalf subsequent to the cut-off date, other
than
payments due on or before the cut-off date and exclusive of any amounts
representing a retained interest:
·
all
payments on account of principal, including principal prepayments
and, if
specified in the related prospectus supplement, prepayment penalties,
on
the loans;
·
all
payments on account of interest on the loans, net of applicable servicing
compensation;
·
Insurance
Proceeds;
·
Liquidation
Proceeds;
·
any
net proceeds received on a monthly basis with respect to any properties
acquired on behalf of the securityholders by foreclosure or deed
in lieu
of foreclosure;
·
all
proceeds of any loan or mortgaged property purchased by the master
servicer, the depositor, any sub-servicer or any seller as described
in
this prospectus under “Loan Program—Representations by Sellers;
Repurchases or Substitutions” or “— Assignment of Trust Fund Assets” above
and all proceeds of any loan repurchased as described in this prospectus
under “—Termination; Optional Termination”
below;
67
·
all
payments required to be deposited in the security account with respect
to
any deductible clause in any blanket insurance policy described in
this
prospectus under “—Hazard Insurance”
below;
·
any
amount required to be deposited by the master servicer in connection
with
losses realized on investments of funds held in the security account
made
for the benefit of the master servicer;
and
·
all
other amounts required to be deposited in the security account pursuant
to
the related agreement.
Pre-Funding
Account
If
so
provided in the related prospectus supplement, the master servicer will
establish and maintain a pre-funding account in the name of the trustee on
behalf of the related securityholders into which the applicable depositor will
deposit the pre-funded amount on the related closing date. The trustee will
use
the pre-funded amount to purchase subsequent loans from the depositor from
time
to time during the funding period which generally runs from the closing date
to
the date specified in the related prospectus supplement. At the end of the
funding period, any amounts remaining in the pre-funding account will be
distributed to the related securityholders in the manner and priority specified
in the related prospectus supplement as a prepayment of principal of the related
securities.
Sub-Servicing
of Loans
Each
seller of a loan or any other servicing entity may act as the sub-servicer
for
that loan pursuant to a sub-servicing agreement which will not contain any
terms
inconsistent with the related operative agreement. While each sub-servicing
agreement will be a contract solely between the master servicer and the related
sub-servicer, the operative agreement pursuant to which a series of securities
is issued will provide that, the trustee or any successor master servicer must
recognize the sub-servicer’s rights and obligations under the sub-servicing
agreement, if for any reason the master servicer for that series is no longer
the master servicer of the related loans.
With
the
approval of the master servicer, a sub-servicer may delegate its servicing
obligations to third-party servicers, but the sub-servicer will remain obligated
under its sub-servicing agreement. Each sub-servicer will be required to perform
the customary functions of a servicer of mortgage loans. These functions
generally include
·
collecting
payments from borrowers and remitting collections to the master
servicer;
·
maintaining
hazard insurance policies as described in this prospectus and in
any
related prospectus supplement, and filing and settling claims under
those
policies, subject in certain cases to the master servicer’s right to
approve settlements in advance;
68
·
maintaining
borrower escrow or impoundment accounts for payment of taxes, insurance
and other items required to be paid by the borrower under the related
loan;
·
processing
assumptions or substitutions, although, unless otherwise specified
in the
related prospectus supplement, the master servicer is generally required
to enforce due-on-sale clauses to the extent their enforcement is
permitted by law and would not adversely affect insurance
coverage;
·
attempting
to cure delinquencies;
·
supervising
foreclosures;
·
inspecting
and managing mortgaged properties under certain
circumstances;
·
maintaining
accounting records relating to the loans;
and
·
to
the extent specified in the related prospectus supplement, maintaining
additional insurance policies or credit support instruments and filing
and
settling claims under them.
A
sub-servicer will also be obligated to make advances in respect of delinquent
installments of principal and interest on loans, as described more fully in
this
prospectus under “—Payments on Loans; Deposits to Security Account” above, and
in respect of certain taxes and insurance premiums not paid on a timely basis
by
borrowers.
As
compensation for its servicing duties, each sub-servicer will be entitled to
a
monthly servicing fee, to the extent the scheduled payment on the related loan
has been collected, in the amount set forth in the related prospectus
supplement. Each sub-servicer is also entitled to collect and retain, as part
of
its servicing compensation, any prepayment or late charges provided in the
note
or related instruments. Each sub-servicer will be reimbursed by the master
servicer for certain expenditures which it makes, generally to the same extent
the master servicer would be reimbursed under the agreement. The master servicer
may purchase the servicing of loans if the sub-servicer elects to release the
servicing of the loans to the master servicer. See “— Servicing and Other
Compensation and Payment of Expenses” below.
Each
sub-servicer may be required to agree to indemnify the master servicer for
any
liability or obligation sustained by the master servicer in connection with
any
act or failure to act by the sub-servicer in its servicing capacity. Each
sub-servicer will be required to maintain a fidelity bond and an errors and
omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the master servicer.
Each
sub-servicer will be required to service each loan pursuant to the terms of
its
sub-servicing agreement for the entire term of the loan, unless the
sub-servicing agreement is earlier terminated by the master servicer or unless
servicing is released to the master servicer. The master servicer may terminate
a sub-servicing agreement without cause, upon written notice to the sub-servicer
in the manner specified in that sub-servicing agreement.
69
The
master servicer may agree with a sub-servicer to amend a sub-servicing agreement
or, upon termination of the sub-servicing agreement, the master servicer may
act
as servicer of the related loans or enter into new sub-servicing agreements
with
other sub-servicers. If the master servicer acts as servicer, it will not assume
liability for the representations and warranties of the sub-servicer which
it
replaces. Each sub-servicer must be a seller or meet the standards for becoming
a seller or have such servicing experience as to be otherwise satisfactory
to
the master servicer and the depositor. The master servicer will make reasonable
efforts to have the new sub-servicer assume liability for the representations
and warranties of the terminated sub-servicer, but no assurance can be given
that an assumption of liability will occur. In the event of an assumption of
liability, the master servicer may in the exercise of its business judgment,
release the terminated sub-servicer from liability in respect of such
representations and warranties. Any amendments to a sub-servicing agreement
or
new sub-servicing agreements may contain provisions different from those which
are in effect in the original sub-servicing agreement. However, each
sub-servicing agreement will provide that any amendment or new agreement may
not
be inconsistent with or violate the original sub-servicing
agreement.
Collection
Procedures
The
master servicer, directly or through one or more sub-servicers, will make
reasonable efforts to collect all payments called for under the loans and will,
consistent with each agreement and any mortgage pool insurance policy, primary
mortgage insurance policy, FHA insurance, VA guaranty and bankruptcy bond or
alternative arrangements, follow such collection procedures as are customary
with respect to loans that are comparable to the loans included in the related
trust fund. Consistent with the preceding sentence, the master servicer may,
in
its discretion,
·
waive
any assumption fee, late payment or other charge in connection with
a
loan; and
·
to
the extent not inconsistent with the coverage of the loan by a pool
insurance policy, primary mortgage insurance policy, FHA insurance,
VA
guaranty or bankruptcy bond or alternative arrangements, arrange
with the
borrower a schedule for the liquidation of delinquencies running
for no
more than 125 days after the applicable due date for each
payment.
Both
the
sub-servicer and the master servicer remain obligated to make advances during
any period when an arrangement of this type is in effect.
In
certain instances in which a mortgage loan is in default (or if default is
reasonably foreseeable), the master servicer may, acting in accordance with
procedures specified in the applicable pooling and servicing agreement, permit
certain modifications of the mortgage loan rather than proceeding with
foreclosure. Modifications of this type may have the effect of reducing the
mortgage rate, forgiving the payment of principal or interest or extending
the
final maturity date of the mortgage loan. Any such modified mortgage loan may
remain in the related trust fund, and the reduction in collections resulting
from the modification may result in reduced distributions of interest (or other
amounts) on, or may extend the final maturity of, one or more classes of the
related securities. If no satisfactory arrangement can be made for the
collection of such delinquent payments, the master servicer will continue to
follow procedures specified in the applicable pooling and servicing agreement.
These procedures could result, among other possible outcomes, in the sale of
the
delinquent mortgage loan by the master servicer on behalf of the related trust
fund.
70
Unless
otherwise specified in the related prospectus supplement, in any case in which
property securing a loan has been, or is about to be, conveyed by the borrower,
the master servicer will, to the extent it has knowledge of the conveyance
or
proposed conveyance, exercise its rights to accelerate the maturity of the
loan
under any applicable due-on-sale clause, but only if the exercise of its rights
is permitted by applicable law and will not impair or threaten to impair any
recovery under any primary mortgage insurance policy. If these conditions are
not met or if the master servicer reasonably believes it is unable under
applicable law to enforce the due-on-sale clause, or if the loan is insured
by
the FHA or partially guaranteed by the VA, the master servicer will enter into
an assumption and modification agreement with the person to whom such property
has been or is about to be conveyed. Pursuant to the assumption agreement,
the
transferee of the property becomes liable for repayment of the loan and, to
the
extent permitted by applicable law, the original borrower also remains liable
on
the loan. Any fee collected by or on behalf of the master servicer for entering
into an assumption agreement will be retained by or on behalf of the master
servicer as additional servicing compensation. In the case of Multifamily Loans
and unless otherwise specified in the related prospectus supplement, the master
servicer will agree to exercise any right it may have to accelerate the maturity
of a Multifamily Loan to the extent it has knowledge of any further encumbrance
of the related mortgaged property effected in violation of any applicable
due-on-encumbrance clause. See “Material Legal Aspects of the Mortgage
Loans—Due-on-Sale Clauses” in this prospectus. In connection with any
assumption, the terms of the original loan may not be changed.
With
respect to cooperative loans, any prospective purchaser of a cooperative unit
will generally have to obtain the approval of the board of directors of the
relevant cooperative before purchasing the shares and acquiring rights under
the
related proprietary lease or occupancy agreement. See“Material
Legal Aspects of the Loans” in this prospectus. This approval is usually based
on the purchaser’s income and net worth and numerous other factors. Although the
cooperative’s approval is unlikely to be unreasonably withheld or delayed, the
need to acquire approval could limit the number of potential purchasers for
those shares and otherwise limit the trust fund’s ability to sell and realize
the value of those shares.
In
general, a “tenant-stockholder,” as defined in Section 216(b)(2) of the Internal
Revenue Code, of a corporation that qualifies as a “cooperative housing
corporation” within the meaning of Section 216(b)(1) of the Code is allowed a
deduction for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and real
estate taxes allowable as a deduction under Section 216(a) of the Code to the
cooperative corporation under Sections 163 and 164 of the Code. In order for
a
corporation to qualify under Section 216(b)(1) of the Code for the taxable
year
in which these items are allowable as a deduction to the corporation, Section
216(b)(1) requires, among other things, that at least 80% of the gross income
of
the cooperative corporation be derived from its tenant-stockholders. By virtue
of this requirement, the status of a corporation for purposes of Section
216(b)(1) of the Code must be determined on a year-to-year basis. Consequently,
there can be no assurance that cooperatives relating to particular cooperative
loans will qualify under this section for any given year. In the event that
a
cooperative fail to qualify for one or more years, the value of the collateral
securing the related cooperative loan could be significantly impaired because
no
deduction would be allowable to tenant-stockholders under Section 216(a) of
the
Code with respect to those years. In view of the significance of the tax
benefits accorded tenant- stockholders of a corporation that qualifies under
Section 216(b)(1) of the Code, the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
71
Hazard
Insurance
The
master servicer will require each borrower to maintain a hazard insurance policy
providing for no less than the coverage of the standard form of fire insurance
policy with extended coverage customary for the type of mortgaged property
in
the state where the property is located. This coverage will be in an amount
not
less than the replacement value of the improvements or manufactured home
securing the loan or the principal balance owing on the loan, whichever is
less.
All amounts collected by the master servicer under any hazard policy will be
deposited in the related security account, except for amounts to be applied
to
the restoration or repair of the mortgaged property or released to the borrower
in accordance with the master servicer’s normal servicing procedures. In the
event that the master servicer maintains a blanket policy insuring against
hazard losses on all the loans comprising part of a trust fund, it will
conclusively be deemed to have satisfied its obligation to maintain hazard
insurance. A blanket policy may contain a deductible clause, in which case
the
master servicer will be required to deposit into the related security account
from its own funds the amounts which would have been deposited in the security
account but for the deductible clause. Any additional insurance coverage for
mortgaged properties with respect to a pool of Multifamily Loans will be
specified in the related prospectus supplement.
In
general, the standard form of fire and extended coverage policy covers physical
damage to or destruction of the improvements or manufactured home securing
a
loan by fire, lightning, explosion, smoke, windstorm and hail, riot, strike
and
civil commotion, subject to the conditions and exclusions particularized in
each
policy. Although the policies relating to the loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic policy terms are dictated by respective state laws. In addition,
most
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all-inclusive.
If
the mortgaged property securing a loan is located in a federally designated
special flood area at the time of origination, the master servicer will require
the borrower to obtain and maintain flood insurance.
The
hazard insurance policies covering mortgaged properties typically contain a
clause which have the effect of requiring the insured at all times to carry
insurance of a specified percentage - generally 80% to 90% - of the full
replacement value of the mortgaged property in order to recover the full amount
of any partial loss. If the insured’s coverage falls below this specified
percentage, then the insurer’s liability in the event of partial loss will not
exceed the larger of
72
·
the
actual cash value (generally defined as replacement cost at the time
and
place of loss, less physical depreciation) of the improvements damaged
or
destroyed, generally defined to equal replacement cost at the time
and
place of the loss less physical depreciation;
and
·
such
proportion of the loss as the amount of insurance carried bears to
the
specified percentage of the full replacement cost of the
improvements.
Since
the
amount of hazard insurance that the master servicer may cause to be maintained
on the improvements securing the loans will decline as the principal balances
owing on the loans decrease, and since improved real estate generally has
appreciated in value over time in the past, the effect of this requirement
may
be that, in the event of a partial loss, hazard insurance proceeds will be
insufficient to restore the damaged property fully. If specified in the related
prospectus supplement, a special hazard insurance policy will be obtained to
insure against certain of the uninsured risks described. See“Credit
Enhancement—Special Hazard Insurance Policies” in this prospectus.
The
master servicer will not require that a standard hazard or flood insurance
policy be maintained on the cooperative dwelling relating to any cooperative
loan. Generally, the cooperative itself is responsible for maintenance of hazard
insurance for the property owned by the cooperative and the tenant-stockholders
of that cooperative do not maintain individual hazard insurance policies. To
the
extent, however, that a cooperative and the related borrower on a cooperative
loan do not maintain such insurance or do not maintain adequate coverage or
any
insurance proceeds are not applied to the restoration of damaged property,
any
damage to the borrower’s cooperative dwelling or the cooperative’s building
could significantly reduce the value of the collateral securing the cooperative
loan to the extent not covered by other credit support.
Realization
upon Defaulted Mortgage Loans
Primary
Mortgage Insurance Policies.
To the
extent specified in the related prospectus supplement, the master servicer
will
maintain, or cause each sub-servicer to maintain, in full force and effect,
a
primary mortgage insurance policy with regard to each loan for which coverage
is
required. The master servicer will not cancel or refuse to renew any primary
mortgage insurance policy in effect at the time of the initial issuance of
a
series of securities that is required to be kept in force under the applicable
agreement unless the primary mortgage insurance policy that replaces the
cancelled or nonrenewed policy is maintained with an insurer whose claims-paying
ability is sufficient to maintain the current rating of the classes of
securities of that series by each rating agency named in the related prospectus
supplement.
Although
the terms and conditions of primary mortgage insurance vary, the amount of
a
claim for benefits under a primary mortgage insurance policy covering a loan
will consist of the insured percentage of the unpaid principal amount of the
covered loan, accrued and unpaid interest thereon and reimbursement of certain
expenses, less the following amounts:
73
·
all
rents or other payments collected or received by the insured other
than
the proceeds of hazard insurance that are derived from or in any
way
related to the mortgaged property,
·
hazard
insurance proceeds in excess of the amount required to restore the
mortgaged property and which have not been applied to the payment
of the
loan,
·
amounts
expended but not approved by the issuer of the related primary mortgage
insurance policy,
·
claim
payments previously made by the primary insurer,
and
·
unpaid
premiums.
Primary
mortgage insurance policies generally reimburse losses sustained by reason
of
defaults in payments by borrowers. Primary mortgage insurance policies do not
insure against, and exclude from coverage, a loss sustained by reason of a
default arising from or involving the following matters, among
others:
·
fraud
or negligence in origination or servicing of the loan, including
misrepresentation by the originator, borrower or other persons involved
in
the origination of the loan,
·
failure
to construct the related mortgaged property in accordance with specified
plans,
·
physical
damage to the mortgaged property
and
·
lack
of approval by the primary mortgage insurance policy insurer of the
master
servicer or sub-servicer to act as servicer of the
loan.
Recoveries
Under a Primary Mortgage Insurance Policy.
As
conditions precedent to the filing or payment of a claim under a primary
mortgage insurance policy covering a loan, the insured will be
required
·
to
advance or discharge all hazard insurance policy
premiums;
·
to
advance
·
real
estate property taxes,
·
all
expenses required to maintain the related mortgaged property in at
least
as good a condition as existed at the effective date of the policy,
ordinary wear and tear excepted,
·
mortgaged
property sales expenses,
·
any
outstanding liens on the mortgaged property (as defined in the policy)
and
74
·
foreclosure
costs, including court costs and reasonable attorneys’
fees,
·
in
each case as necessary and approved in advance by the primary mortgage
insurance policy insurer;
·
in
the event of any physical loss or damage to the mortgaged property,
to
have the mortgaged property restored and repaired to at least as
good a
condition as existed at the effective date of the policy, ordinary
wear
and tear excepted; and
·
to
tender to the primary mortgage insurance policy carrier good and
merchantable title to and possession of the mortgaged
property.
In
those
cases in which a loan is serviced by a sub-servicer, the sub-servicer, on behalf
of itself, the trustee and securityholders, will present claims to the primary
mortgage insurance policy carrier, and all collections under the policy will
be
deposited in the sub-servicing account. In all other cases, the master servicer,
on behalf of itself, the trustee and the securityholders, will present claims
to
the carrier of each primary mortgage insurance policy and will take such
reasonable steps as are necessary to receive payment or to permit recovery
under
the policy with respect to defaulted loans. As set forth above, all collections
by or on behalf of the master servicer under any primary mortgage insurance
policy and, when the mortgaged property has not been restored, the hazard
insurance policy are to be deposited in the security account, subject to
withdrawal as previously described.
If
the
mortgaged property securing a defaulted loan is damaged and any proceeds from
the related hazard insurance policy are insufficient to restore the damaged
property to a condition sufficient to permit recovery under any related primary
mortgage insurance policy, the master servicer is not required to expend its
own
funds to restore the damaged property unless it determines that
·
the
restoration will increase the proceeds to securityholders upon liquidation
of the loan after reimbursement of the master servicer for its expenses,
and
·
the
master servicer will be able to recover its expenses from related
Insurance Proceeds or Liquidation
Proceeds.
If
recovery on a defaulted loan is not available under the primary mortgage
insurance policy for the reasons set forth in the preceding paragraph, or if
the
defaulted loan is not covered by a primary mortgage insurance policy, the master
servicer will be obligated to follow such normal practices and procedures as
it
deems necessary or advisable to realize upon the defaulted loan. If the proceeds
of any liquidation of the related mortgaged property are less than the principal
balance of the loan plus accrued interest that is payable to securityholders,
the trust fund will realize a loss in the amount of that difference plus the
amount of expenses that it incurred in connection with the liquidation and
that
are reimbursable under the agreement. In the unlikely event that proceedings
result in a total recovery which, after reimbursement to the master servicer
of
its expenses, is in excess of the principal balance of the defaulted loan plus
accrued interest that is payable to securityholders, the master servicer will
be
entitled to withdraw or retain from the security account amounts representing
its normal servicing compensation with respect to that loan and, unless
otherwise specified in the related prospectus supplement, amounts representing
the balance of the excess amount, exclusive of any amount required by law to
be
forwarded to the related borrower , as additional servicing
compensation.
75
If
the
master servicer or its designee recovers Insurance Proceeds which, when added
to
any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the master servicer, exceed the principal balance of the related
loan plus accrued interest that is payable to securityholders, the master
servicer will be entitled to withdraw or retain from the security account
amounts representing its normal servicing compensation with respect to that
loan. In the event that the master servicer has expended its own funds to
restore the damaged mortgaged property and those funds have not been reimbursed
under the related hazard insurance policy, the master servicer will be entitled
to withdraw from the security account, out of related Liquidation Proceeds
or
Insurance Proceeds, an amount equal to the expenses that it incurred, in which
event the trust fund may realize a loss up to the amount of those expenses.
Since Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the master servicer, no payment or recovery will result in a
recovery to the trust fund that exceeds the principal balance of the defaulted
loan together with accrued interest. See“Credit
Enhancement” in this prospectus supplement.
Servicing
and Other Compensation and Payment of Expenses
The
master servicer’s primary servicing compensation with respect to a series of
securities will come from the payment to it each month, out of each interest
payment on a loan, of an amount equal to the annual percentage specified in
the
related prospectus supplement of the outstanding principal balance of that
loan.
Since the master servicer’s primary compensation is a percentage of the
outstanding principal balance of each mortgage loan, this amount will decrease
as the mortgage loans amortize. In addition to this primary servicing
compensation, the master servicer or the sub-servicers will be entitled to
retain all assumption fees and late payment charges to the extent collected
from
borrowers and, if so provided in the related prospectus supplement, any
prepayment charges and any interest or other income which may be earned on
funds
held in the security account or any sub-servicing account. Unless otherwise
specified in the related prospectus supplement, any sub-servicer will receive
a
portion of the master servicer’s primary compensation as its sub-servicing
compensation.
Unless
otherwise specified in the related prospectus supplement, the master servicer
will pay from its servicing compensation, in addition to amounts payable to
any
sub-servicer, certain expenses incurred in connection with its servicing of
the
loans, including, without limitation
·
payment
of any premium for any insurance policy, guaranty, surety or other
form of
credit enhancement as specified in the related prospectus
supplement;
·
payment
of the fees and disbursements of the trustee and independent
accountants;
·
payment
of expenses incurred in connection with distributions and reports
to
securityholders; and
76
·
payment
of any other expenses described in the related prospectus
supplement.
Evidence
as to Compliance
Each
operative agreement will provide that a firm of independent public accountants
will furnish a statement to the trustee, on or before a specified date in each
year, to the effect that, on the basis of the examination by the firm conducted
substantially in compliance with the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program for Mortgages Serviced for Freddie Mac, the
servicing by or on behalf of the master servicer of loans, the Agency Securities
or the Private Label Securities, under agreements substantially similar to
one
another (including the governing agreement), was conducted in compliance with
those agreements except for any significant exceptions or errors in records
that, in the opinion of the firm, the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program for Mortgages Serviced by Freddie Mac requires
it
to report. In rendering this statement the accounting firm may rely, as to
matters relating to the direct servicing of mortgage loans, Agency Securities
or
Private Label Securities by sub-servicers, upon comparable statements of firms
of independent public accountants rendered within one year with respect to
the
sub-servicers for examinations conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages Serviced for Freddie Mac.
Each
operative agreement will also provide for delivery to the related trustee,
on or
before a specified date in each year, of an annual statement signed by two
officers of the master servicer to the effect that the master servicer has
fulfilled its obligations under the agreement throughout the preceding
year.
Copies
of
the annual accountants’ statement and the statement of officers of the master
servicer may be obtained by securityholders of the related series without charge
upon written request to the master servicer at the address set forth in the
related prospectus supplement.
Certain
Matters Regarding the Master Servicer and the Depositors
The
master servicer under each operative agreement will be named in the related
prospectus supplement. The entity serving as master servicer may have normal
business relationships with the depositor or the depositor’s
affiliates.
Each
operative agreement will provide that the master servicer may not resign from
its obligations and duties under the agreement except (i) upon a determination
that it is no longer permissible to perform them under applicable law or (ii)
if
so provided in the related operative agreement, a determination by the master
servicer that it will no longer engage in the business of servicing mortgage
loans. In no event will the master servicer’s resignation become effective until
the trustee or a successor servicer has assumed the master servicer’s
obligations and duties under the agreement.
Each
operative agreement will further provide that none of the master servicer,
the
depositor or any director, officer, employee or agent of the master servicer
or
of the depositor will be under any liability to the related trust fund or the
securityholders for any action taken, or for refraining from the taking of
any
action, in good faith pursuant to the agreement, or for errors in judgment.
However, none of the master servicer, the depositor or any director, officer,
employee or agent of the master servicer or of the depositor will be protected
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of duties under the
agreement or by reason of reckless disregard of obligations and duties under
the
agreement. Each operative agreement will further provide that the master
servicer, the depositor and any director, officer, employee or agent of the
master servicer or of the depositor will be entitled to indemnification by
the
related trust fund and will be held harmless against any loss, liability or
expense incurred in connection with (i) any legal action relating to the
agreement or the securities or (ii) a breach of a representation or warranty
regarding the loan or loans, other than
77
·
any
loss, liability or expense related to any specific loan in the trust
fund
or the loans in general except for any loss, liability or expense
otherwise reimbursable under the agreement,
and
·
any
loss, liability or expense incurred by reason of willful misfeasance,
bad
faith or negligence in the performance of duties under the agreement
or by
reason of reckless disregard of obligations and duties under the
agreement.
In
addition to the foregoing, if so provided in the agreement, the master servicer,
the depositor and any director, officer, employee or agent of the master
servicer or of the depositor may be entitled to indemnification by the related
trust fund and may be held harmless against any loss, liability or expense
in
connection with any actions taken under the agreement.
In
addition, each operative agreement will provide that neither the master servicer
nor the depositor will be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its responsibilities under the
agreement and which, in its opinion, may involve it in any expense or liability.
However, the master servicer or the depositor may, in its discretion, undertake
any action which it may deem necessary or desirable with respect to the
agreement and the rights and duties of the parties and the interests of the
securityholders. In that event, the legal expenses and costs of the action
and
any resulting liability will be expenses, costs and liabilities of the trust
fund, and the master servicer or the depositor, as the case may be, will be
entitled to reimbursement from funds otherwise distributable to
securityholders.
Any
entity into which the master servicer may be merged or consolidated, or any
entity resulting from any merger or consolidation to which the master servicer
is a party, or any entity succeeding to the business of the master servicer,
will be the successor of the master servicer under each agreement, provided
that
the successor entity is qualified to sell loans to, and service loans on behalf
of, Fannie Mae or Freddie Mac and that the merger, consolidation or succession
does not adversely affect the then current rating of the securities rated by
each rating agency named in the related prospectus supplement.
Events
of Default; Rights upon Event of Default
Pooling
and Servicing Agreement; Servicing Agreement.
Unless
otherwise specified in the related prospectus supplement, the following will
be
deemed “events of default” under each agreement:
78
·
any
failure by the master servicer to distribute to security holders
of any
class any required payment - other than an advance - which failure
continues unremedied for five business days after the giving of written
notice to the master servicer by the trustee or the depositor, or
to the
master servicer, the depositor and the trustee by the holders of
securities of that class evidencing not less than 25% of the aggregate
percentage interests evidenced by that
class;
·
any
failure by the master servicer to make an advance as required under
the
agreement, unless cured as specified in the
agreement;
·
any
failure by the master servicer duly to observe or perform in any
material
respect any of its other covenants or agreements in the agreement,
which
failure continues unremedied for a specified number of days after
the
giving of written notice of the failure to the master servicer by
the
trustee or the depositor, or to the master servicer, the depositor
and the
trustee by the holders of securities of any class evidencing not
less than
25% of the aggregate percentage interests constituting that class;
and
·
events
of insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings and certain actions by or on behalf of the
master
servicer indicating its insolvency, reorganization or inability to
pay its
obligations.
If
specified in the related prospectus supplement, the agreement will permit the
trustee to sell the assets of the trust fund in the event that payments are
insufficient to make the payments required under the agreement. The assets
of
the trust fund will be sold only under the circumstances and in the manner
specified in the related prospectus supplement.
So
long
as an event of default under the related agreement remains unremedied, the
depositor or the trustee may, and, at the direction of holders of securities
of
any class evidencing not less than 51% of the aggregate percentage interests
constituting that class and under such other circumstances as may be specified
in the agreement, the trustee shall, terminate all of the rights and obligations
of the master servicer relating to the trust fund and in and to the related
loans. Thereupon the trustee will succeed to all of the responsibilities, duties
and liabilities of the master servicer under the agreement, including, if
specified in the related prospectus supplement, the obligation to make advances,
and the trustee will be entitled to similar compensation arrangements. In the
event that the trustee is unwilling or unable to act in this way, it may
appoint, or petition a court of competent jurisdiction to appoint, a loan
servicing institution with a net worth of at least $10,000,000 to act as
successor to the master servicer under the agreement. Pending the appointment,
the trustee is obligated to act in this capacity. The trustee and any successor
master servicer may agree upon the servicing compensation to be paid, which
in
no event may be greater than the compensation payable to the master servicer
under the agreement.
No
securityholder, solely by virtue of its status as a securityholder, will have
any right under any agreement to institute any proceeding with respect to that
agreement, unless
·
the
holder has previously given to the trustee written notice of
default;
79
·
the
holders of securities of any class evidencing not less than 25% of
the
aggregate percentage interests constituting that class have made
written
request upon the trustee to institute the proceeding in its own name
as
trustee and have offered a reasonable indemnity to the trustee;
and
·
the
trustee for 60 days has neglected or refused to institute any such
proceeding.
Indenture.
Unless
otherwise specified in the related prospectus supplement, the following will
be
deemed “events of default” under the indenture for each series of
notes:
·
failure
to pay for five days or more any principal or interest on any note
of that
series;
·
failure
by the depositor or the trust to perform any other covenant in the
indenture, which failure continues unremedied for 30 days after notice
is
given in accordance with the procedures described in the related
prospectus supplement;
·
the
material breach of any representation or warranty made by the depositor
or
the trust in the indenture or in any document delivered under the
indenture, which breach continues uncured for 30 days after notice
is
given in accordance with the procedures described in the related
prospectus supplement;
·
events
of bankruptcy insolvency, receivership or liquidation of the depositor
in
the trust; or
·
any
other event of default specified in the
indenture.
If
an
event of default with respect to the notes of a series (other than principal
only notes) occurs and is continuing, either the trustee or the holders of
a
majority of the then aggregate outstanding amount of the notes of that series
may declare the principal amount of all the notes of that series to be due
and
payable immediately. In the case of principal only notes, the portion of the
principal amount necessary to make such a declaration will be specified in
the
related prospective supplement. This declaration may, under certain
circumstances, be rescinded and annulled by the holders of more than 50% of
the
percentage ownership interest of the notes of that series.
If,
following an event of default with respect to any series of notes, the notes
of
that series have been declared to be due and payable, the trustee may, in its
discretion, notwithstanding the acceleration, elect to maintain possession
of
the collateral securing the notes of that series and to continue to apply
distributions on the collateral as if there had been no declaration of
acceleration so long as the collateral continues to provide sufficient funds
for
the payment of principal and interest on the notes as they would have become
due
if there had not been a declaration. In addition, the trustee may not sell
or
otherwise liquidate the collateral securing the notes of a series following
an
event of default, unless one of the following conditions precedent has
occurred:
80
·
the
holders of 100% of the percentage ownership interest in the related
notes
consent to the sale or liquidation;
·
the
proceeds of the sale or liquidation are sufficient to pay the full
amount
of principal and accrued interest, due and unpaid, on the related
notes at
the date of the sale or liquidation;
or
·
the
trustee determines that the collateral would not be sufficient on
an
ongoing basis to make all payments on the related notes as they would
have
become due if the notes had not been declared due and payable, and
the
trustee obtains the consent of the holders of 66% of the percentage
ownership interest of each class of the related
notes.
Unless
otherwise specified in the related prospectus supplement, in the event the
principal of the notes of a series is declared due and payable as described
above, the holders of any of those notes issued at a discount from par may
be
entitled to receive no more than an amount equal to the unpaid principal amount
of those notes less the amount of the unamortized discount.
Subject
to the provisions of the indenture relating to the duties of the trustee, in
case an event of default shall occur and be continuing with respect to a series
of notes, the trustee shall be under no obligation to exercise any of the rights
or powers under the indenture at the request or direction of any of the holder
of the related notes, unless the holders offer to the trustee satisfactory
security or indemnity against the trustee’s costs, expenses and liabilities
which might be incurred in complying with their request or direction. Subject
to
the indemnification provisions and certain limitations contained in the
indenture, the holders of a majority of the then aggregate outstanding amount
of
the related notes of the series shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the trustee
or exercising any trust or power conferred on the trustee with respect to the
related notes, and holders of a majority of the then aggregate outstanding
amount of the related notes may, in certain cases, waive any default other
than
a default in the payment of principal or interest or a default in respect of
a
covenant or provision of the indenture that cannot be modified without the
waiver or consent of all the holders of the affected notes.
Amendment
Unless
otherwise specified in the related prospectus supplement, each operative
agreement may be amended by the depositor, the master servicer and the trustee,
without the consent of any of the securityholders, for the following
purposes:
·
to
cure any ambiguity,
·
to
correct or supplement any provision in the agreement which may be
defective or inconsistent with any other provision,
or
·
to
make any other revisions with respect to matters or questions arising
under the agreement which are not inconsistent with its other
provisions.
81
In
no
event, however, shall any amendment adversely affect in any material respect
the
interests of any securityholder as evidenced by either (i) an opinion of counsel
or (ii) confirmation by the rating agencies that such amendment will not result
in the downgrading of the securities. No amendment shall be deemed to adversely
affect in any material respect the interests of any securityholder who shall
have consented thereto, and no opinion of counsel or written notice from the
rating agencies shall be required to address the effect of any such amendment
on
any such consenting securityholder. In addition, an agreement may be amended
without the consent of any of the securityholders to change the manner in which
the security account is maintained, so long as the amendment does not adversely
affect the then current ratings of the securities rated by each rating agency
named in the prospectus supplement. In addition, if a REMIC election is made
with respect to a trust fund, the related agreement may be amended to modify,
eliminate or add to any of its provisions to such extent as may be necessary
to
maintain the qualification of the trust fund as a REMIC, but the trustee shall
have first received an opinion of counsel to the effect that the action is
necessary or helpful to maintain the REMIC qualification.
Unless
otherwise specified in the related prospectus supplement, each operative
agreement may also be amended by the depositor, the master servicer and the
trustee with consent of holders of securities evidencing not less than 66%
of
the aggregate percentage ownership interests of each affected class for the
purpose of adding any provisions to, or changing in any manner or eliminating
any of the provisions of, the agreement or of modifying in any manner the rights
of the holders of the related securities. In no event, however, shall any
amendment
·
reduce
in any manner the amount of, or delay the timing of, payments received
on
loans which are required to be distributed on any security without
the
consent of the holder of that security,
or
·
reduce
the percentage of the securities of any class the holders of which
are
required to consent to any amendment without the consent of the holders
of
all securities of that class then
outstanding.
If
a
REMIC election is made with respect to a trust fund, the trustee will not be
entitled to consent to an amendment to the agreement without having first
received an opinion of counsel to the effect that the amendment will not cause
the trust fund to fail to qualify as a REMIC.
Termination;
Optional Termination; Calls
Pooling
and Servicing Agreement; Trust Agreement.
Unless
otherwise specified in the related prospectus supplement, the obligations
created by the pooling and servicing agreement and trust agreement for the
related series of securities will terminate upon the payment to the
securityholders of all amounts held in the security account or held by the
master servicer, and required to be paid to the securityholders under the
agreement, following the later to occur of the following:
82
·
the
final payment or other liquidation of the last of the assets of the
trust
fund subject to the agreement or the disposition of all property
acquired
upon foreclosure of any assets remaining in the trust fund,
and
·
the
purchase from the trust fund by the master servicer, or such other
party
as may be specified in the related prospectus supplement, of all
of the
remaining trust fund assets and all property acquired in respect
of those
assets.
See“Material
Federal Income Tax Consequences” in this prospectus.
Unless
otherwise specified in the related prospectus supplement, any purchase of trust
fund assets and property acquired in respect of trust fund assets will be made
at the option of the related master servicer or, if applicable, another
designated party, at a price, and in accordance with the procedures, specified
in the related prospectus supplement. The exercise of this right will effect
early retirement of the securities of that series. However, this right can
be
exercised only at the times and upon the conditions specified in the related
prospectus supplement. If a REMIC election has been made with respect to the
trust fund, any repurchase pursuant to the second bullet point in the
immediately preceding paragraph will be made only in connection with a
“qualified liquidation” of the REMIC within the meaning of Section 860F(a)(4) of
the Internal Revenue Code.
Indenture.
The
indenture will be discharged with respect to a series of notes (except with
respect to certain continuing rights specified in the indenture) upon the
delivery to the trustee for cancellation of all the notes of that series or,
with certain limitations, upon deposit with the trustee of funds sufficient
for
the payment in full of all of the notes of that series.
If
specified for the notes of any series, the indenture will provide that the
related trust fund will be discharged from any and all obligations in respect
of
the notes of that series (except for certain obligations relating to temporary
notes and exchange of notes, registering the transfer or exchange notes,
replacing stolen, lost or mutilated notes, maintaining paying agencies and
holding monies for payment in trust) upon the deposit with the trustee, in
trust, of money and/or direct obligations of or obligations guaranteed by the
United States which, through the payment of interest and principal in accordance
with their terms, will provide money in an amount sufficient to pay the
principal and each installment of interest on the related notes on the last
scheduled distribution date for the notes and any installment of interest on
the
notes in accordance with the terms of the indenture and the notes of that
series. In the event of any such defeasance and discharge of a series of notes,
holders of the related notes would be able to look only to such money and/or
direct obligations for payment of principal and interest, if any, on their
notes
until maturity.
Calls.
One or
more classes of securities may be subject to a mandatory or optional call at
the
times and subject to the conditions specified in the related prospectus
supplement. In the case of a mandatory call or in the event an optional call
is
exercised with respect to one or more classes of securities, holders of each
affected class of securities will receive the outstanding principal balance
of
their securities together with accrued and unpaid interest at the applicable
pass-through rate, subject to the terms specified in the related prospectus
supplement.
83
The
Trustee
The
trustee under each agreement will be named in the related prospectus supplement.
The commercial bank or trust company serving as trustee may have normal banking
relationships with the depositor, the master servicer and any of their
respective affiliates.
Material
Legal Aspects of the Loans
The
following discussion contains general summaries of material legal matters
relating to the loans. Because the legal matters are determined primarily by
applicable state law and because state laws may differ substantially, the
summaries do not purport to be complete, to reflect the laws of any particular
state or to encompass the laws of all states in which security for the loans
may
be situated. The summaries are qualified in their entirety by reference to
the
applicable laws of the states in which loans may be originated.
General
Single
Family Loans, Multifamily Loans and Home Equity Loans.
The
loans may be secured by deeds of trust, mortgages, security deeds or deeds
to
secure debt, depending upon the prevailing practice in the state in which the
property subject to the loan is located. A mortgage creates a lien upon the
real
property encumbered by the mortgage. The mortgage lien generally is not prior
to
the lien for real estate taxes and assessments. Priority between mortgages
depends on their terms and generally on the order of recording with a state
or
county office. There are two parties to a mortgage: the mortgagor, who is the
borrower and owner of the mortgaged property, and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee
a
note or bond and the mortgage. Although a deed of trust is similar to a
mortgage, a deed of trust formally has three parties: the borrower-property
owner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until
the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. A security deed and a deed to secure debt are special
types of deeds which indicate on their face that they are granted to secure
an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys to the grantee title to, as opposed to merely creating a lien
upon, the subject property until such time as the underlying debt is repaid.
The
trustee’s authority under a deed of trust, the mortgagee’s authority under a
mortgage and the grantee’s authority under a security deed or deed to secure
debt are governed by law and, with respect to some deeds of trust, the
directions of the beneficiary.
Cooperative
Loans.
Certain
of the loans may be cooperative loans. The cooperative owns all the real
property that comprises the related project, including the land, separate
dwelling units and all common areas. The cooperative is directly responsible
for
project management and, in most cases, payment of real estate taxes and hazard
and liability insurance. If, as is generally the case, there is a blanket
mortgage on the cooperative and/or underlying land, the cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with the
construction or purchase of the cooperative’s apartment building. The interest
of the occupant under proprietary leases or occupancy agreements to which the
cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate
all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative
to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a trust fund including cooperative loans,
the collateral securing the cooperative loans.
84
A
cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific units.
Generally, a tenant-stockholder of a cooperative must make a monthly payment
to
the cooperative representing such tenant-stockholder’s pro rata share of the
cooperative’s payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and the accompanying rights are financed through
a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share certificate and
a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender’s interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue
for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or against the
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and
the
pledge of cooperative shares.
Manufactured
Housing Contracts.
Each
Manufactured Housing Contract evidences both
·
the
obligation of the borrower to repay the loan it represents,
and
·
the
grant of a security interest in a manufactured home to secure repayment
of
the loan.
The
Manufactured Housing Contracts generally are “chattel paper” as defined in the
Uniform Commercial Code in effect in the states in which the manufactured homes
initially were registered. Pursuant to the UCC, the rules governing the sale
of
chattel paper are similar to those governing the perfection of a security
interest in chattel paper. Under the related pooling and servicing agreement,
the depositor will transfer physical possession of the Manufactured Housing
Contracts to the trustee or its custodian. In addition the depositor will file
UCC-1 financing statements in the appropriate states to give notice of the
trustee’s ownership of the Manufactured Housing Contracts. Under the laws of
most states, manufactured housing constitutes personal property and is subject
to the motor vehicle registration laws of the state or other jurisdiction in
which the unit is located. In a few states, where certificates of title are
not
required for manufactured homes, security interests are perfected by the filing
of a financing statement under Article 9 of the UCC which has been adopted
by
all states. The certificate of title laws adopted by the majority of states
provide that ownership of motor vehicles and manufactured housing shall be
evidenced by a certificate of title generally issued by the motor vehicles
department of the state. In states which have enacted certificate of title
laws,
a security interest in a unit of manufactured housing, so long as it is not
attached to land in so permanent a fashion as to become a fixture, is generally
perfected by the recording of the interest on the certificate of title to the
unit in the appropriate motor vehicle registration office or by delivery of
the
required documents and payment of a fee to that office, depending on state
law.
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Unless
otherwise specified in the related prospectus supplement, the master servicer
will be required to effect such notation or delivery of the required documents
and fees and to obtain possession of the certificate of title, as appropriate
under the laws of the state in which any manufactured home is registered. If
the
master servicer fails to effect such notation or delivery, due to clerical
errors or otherwise, or files the security interest under the wrong law (for
example, under a motor vehicle title statute rather than under the UCC, in
a few
states), the trustee may not have a first priority security interest in the
manufactured home securing the affected Manufactured Housing Contract. As
manufactured homes have become larger and have often been attached to their
sites without any apparent intention to move them, courts in many states have
held that manufactured homes may, under certain circumstances, become subject
to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate
law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a “fixture filing”
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the manufactured home is located. These filings must
be
made in the real estate records office of the county where the manufactured
home
is located. Generally, Manufactured Housing Contracts will contain provisions
prohibiting the borrower from permanently attaching the manufactured home to
its
site. So long as the borrower does not violate this agreement, a security
interest in the manufactured home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate
of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the manufactured home. If, however,
a
manufactured home is permanently attached to its site, other parties could
obtain an interest in the manufactured home which is prior to the security
interest originally retained by the seller and transferred to the
depositor.
The
depositor will assign to the trustee, on behalf of the securityholders, a
security interest in the manufactured homes. Unless otherwise specified in
the
related prospectus supplement, none of the depositor, the master servicer or
the
trustee will amend the certificates of title to identify the trustee, on behalf
of the securityholders, as the new secured party and, accordingly, the depositor
or the seller will continue to be named as the secured party on the certificates
of title relating to the manufactured homes. In most states, the assignment
is
an effective conveyance of the security interest without amendment of any lien
noted on the related certificate of title and the new secured party succeeds
to
the depositor’s rights as the secured party. However, in some states there
exists a risk that, in the absence of an amendment to the certificate of title,
assignment of the security interest might not be held effective against
creditors of the depositor or seller.
86
In
the
absence of fraud, forgery or permanent affixation of the manufactured home
to
its site by the home owner, or administrative error by state recording
officials, the notation of the lien of the trustee on the certificate of title
or delivery of the required documents and fees will be sufficient to protect
the
trustee against the rights of subsequent purchasers of the manufactured home
or
subsequent lenders who take a security interest in the manufactured home. In
the
case of any manufactured home as to which the security interest assigned to
the
depositor and the trustee is not perfected, the security interest would be
subordinate to, among others, subsequent purchasers for value of the
manufactured home and holders of perfected security interests in the home.
There
also exists a risk that, in not identifying the trustee, on behalf of the
securityholders, as the new secured party on the certificate of title, the
security interest of the trustee could be released through fraud or
negligence.
If
the
owner of a manufactured home moves it to a state other than the state in which
it initially is registered, the perfected security interest in the manufactured
home under the laws of most states would continue for four months after
relocation and thereafter until the owner re-registers the manufactured home
in
the new state. If the owner were to relocate a manufactured home to another
state and re-register the manufactured home in the new state, and if steps
are
not taken to re-perfect the trustee’s security interest in the new state, the
security interest in the manufactured home would cease to be perfected. A
majority of states generally require surrender of a certificate of title to
re-register a manufactured home. Accordingly, the trustee must surrender
possession if it holds the certificate of title to the manufactured home or,
in
the case of manufactured homes registered in states which provide for notation
of lien, the master servicer would receive notice of surrender if the security
interest in the manufactured home is noted on the certificate of title.
Accordingly, the trustee would have the opportunity to re-perfect its security
interest in the manufactured home in the new state. In states which do not
require a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. Similarly, when a borrower under a
Manufactured Housing Contract sells a manufactured home, the lender must
surrender possession of the certificate of title or it will receive notice
as a
result of its lien noted thereon and accordingly will have an opportunity to
require satisfaction of the related Manufactured Housing Contract before the
lien is released. The master servicer will be obligated, at its own expense,
to
take all steps necessary to maintain perfection of security interests in the
manufactured homes.
Under
the
laws of most states, liens for repairs performed on a manufactured home take
priority even over a perfected security interest. The depositor will obtain
the
representation of the seller that it has no knowledge of any repair liens with
respect to any manufactured home securing a Manufactured Housing Contract.
However, repair liens could arise at any time during the term of a Manufactured
Housing Contract. No notice will be given to the trustee or securityholders
in
the event a repair lien arises.
Foreclosure
Single
Family Loans, Multifamily Loans and Home Equity Loans.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale
under a specific provision in the deed of trust which authorizes the trustee
to
sell the mortgaged property at public auction upon any default by the borrower
under the terms of the note or deed of trust. In some states, such as
California, the trustee must record a notice of default and send a copy to
the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. Before such non-judicial sale takes place, typically a notice
of
sale must be posted in a public place and published during a specific period
of
time in one or more newspapers, posted on the property and sent to parties
having an interest of record in the property.
87
Foreclosure
of a mortgage is generally accomplished by judicial action. The action is
initiated by the service of legal pleadings upon all parties having an interest
in the mortgaged property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. Judicial
foreclosure proceedings are often not contested by any of the parties. When
the
mortgagee’s right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure
and
appoints a referee or other court officer to conduct the sale of the property.
In general, the borrower, or any other person having a junior encumbrance on
the
real estate, may, during a statutorily prescribed reinstatement period, cure
a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorneys’
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full
to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated,
a notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some
state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Although
foreclosure sales are typically public sales, frequently no third-party
purchaser bids in excess of the lender’s lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier’s
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary
to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker’s commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender’s investment in
the property.
When
the
beneficiary under a junior mortgage or deed of trust cures the default on the
related senior mortgage or reinstates or redeems the senior mortgage by paying
it in full, the amount paid by the beneficiary to cure, reinstate or redeem
the
senior mortgage becomes part of the indebtedness secured by the junior mortgage
or deed of trust. See “—Junior Mortgages, Rights of Senior Mortgages”
below.
88
Cooperative
Loans.
Cooperative shares owned by a tenant-stockholder and pledged to a lender are,
in
almost all cases, subject to restrictions on transfer as set forth in the
cooperative’s articles of incorporation and by-laws, as well as in the
proprietary lease or occupancy agreement, and may be cancelled by the
cooperative if the tenant-stockholder fails to pay rent or other obligations
or
charges owed, including mechanics’ liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance
of
covenants required thereunder. Typically, the lender and the cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by
the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender
and
the tenant-stockholder.
The
recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides, that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize
the
lender’s lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative’s right to sums due under the proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid
interest.
Recognition
agreements also provide that, in the event of a foreclosure on a cooperative
loan, the lender must obtain the approval or consent of the cooperative as
required by the proprietary lease before transferring the cooperative shares
or
assigning the proprietary lease. Generally, lenders are not limited in any
rights they may have to dispossess tenant-stockholders.
In
some
states, foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale
be
conducted in a “commercially reasonable” manner. Whether a foreclosure sale has
been conducted in a “commercially reasonable” manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure.
Article
9
of the UCC provides that the proceeds of the sale will be applied first to
pay
the costs and expenses of the sale and then to satisfy the indebtedness secured
by the lender’s security interest. The recognition agreement, however, generally
provides that the lender’s right to reimbursement is subject to the right of the
cooperative to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account for the
surplus to subordinate lenders or the tenant-stockholder as provided in the
UCC.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See“—Anti-Deficiency
Legislation and Other Limitations on Lenders” below.
89
In
the
case of foreclosure on a building which was converted from a rental building
to
a building owned by a cooperative under a non-eviction plan, some states require
that a purchaser at a foreclosure sale take the property subject to rent control
and rent stabilization laws which apply to certain tenants who elected to remain
in the building but who did not purchase shares in the cooperative when the
building was so converted.
Repossession
of Manufactured Homes
Repossession
of manufactured housing is governed by state law. A number of states have
enacted legislation that requires that the debtor be given an opportunity to
cure a monetary default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become
attached to real estate in such way that it may be treated as a part of the
real
estate under applicable state law, repossession in the event of a default by
the
obligor will generally be governed by the UCC. Article 9 of the UCC provides
the
statutory framework for the repossession of manufactured housing. While the
UCC
as adopted by the various states may vary in certain particulars, the general
repossession procedure is discussed below.
Because
manufactured homes generally depreciate in value, it is unlikely that
repossession and resale of a manufactured home will result in the full recovery
of the outstanding principal and unpaid interest on the related defaulted
Manufactured Housing Contract.
Except
in
those states where the debtor must receive notice of the right to cure a
default, repossession can commence immediately upon default without prior
notice. Repossession may be effected either through self-help (peaceable
retaking without court order), voluntary repossession or through judicial
process (repossession pursuant to court-issued writ of replevin). The self-help
and/or voluntary repossession methods, which are more commonly employed, are
accomplished simply by retaking possession of the manufactured home. In cases
in
which the debtor objects or raises a defense to repossession, a court order
must
be obtained from the appropriate state court, and the manufactured home must
then be repossessed in accordance with that order. Whether the method employed
is self-help, voluntary repossession or judicial repossession, the repossession
can be accomplished either by an actual physical removal of the manufactured
home to a secure location for refurbishment and resale or by removing the
occupants and their belongings from the manufactured home and maintaining
possession of the manufactured home on the location where the occupants were
residing. Various factors may affect whether the manufactured home is physically
removed or left on location, such as the nature and term of the lease of the
site on which it is located and the condition of the unit. In many cases,
leaving the manufactured home on location is preferable, in the event that
the
home is already set up, because the expenses of retaking and redelivery will
be
saved. However, in those cases where the home is left on location, expenses
for
site rentals will usually be incurred.
Once
repossession has been achieved, preparation for the subsequent disposition
of
the manufactured home can commence. The disposition may be by public or private
sale provided the method, manner, time, place and other terms of the sale are
commercially reasonable.
90
Sale
proceeds are to be applied first to reasonable repossession expenses (expenses
incurred in retaking, storage, preparing for sale to include refurbishing costs
and selling) and then to satisfaction of the indebtedness. While some states
impose prohibitions or limitations on deficiency judgments if the net proceeds
from resale do not cover the full amount of the indebtedness, the remainder
may
be sought from the debtor in the form of a deficiency judgment in those states
that do not prohibit or limit such judgments. The deficiency judgment is a
personal judgment against the debtor for the shortfall. Occasionally, after
resale of a manufactured home and payment of all expenses and indebtedness,
there is a surplus of funds. In that case, the UCC requires the party suing
for
the deficiency judgment to remit the surplus to the subordinate creditors or
the
debtor, as provided in the UCC. Because the defaulting owner of a manufactured
home generally has very little capital or income available following
repossession, a deficiency judgment may not be sought in many cases or, if
obtained, will be settled at a significant discount in light of the defaulting
owner’s strained financial condition.
Any
contract secured by a manufactured home located in Louisiana will be governed
by
Louisiana Revised Statutes in addition to Article 9 of the UCC. Louisiana law
provides similar mechanisms for perfection and enforcement of a security
interest in manufactured housing used as collateral for an installment sale
contract or installment loan agreement.
Under
Louisiana law, a manufactured home that has been permanently affixed to real
estate will nevertheless remain subject to the motor vehicle registration laws
unless the obligor and any holder of a security interest in the property execute
and file in the real estate records for the parish in which the property is
located a document converting the unit into real property. A manufactured home
that is converted into real property but is then removed from its site can
be
converted back to personal property governed by the motor vehicle registration
laws if the obligor executes and files various documents in the appropriate
real
estate records and all mortgagees under real estate mortgages on the property
and the land to which it was affixed file releases with the motor vehicle
commission.
So
long
as a manufactured home remains subject to the Louisiana motor vehicle laws,
liens are recorded on the certificate of title by the motor vehicle commissioner
and repossession can be accomplished only after the obligor’s abandonment or
with the obligor’s consent given after or in contemplation of default, or
pursuant to judicial process and seizure by the sheriff.
Rights
of Redemption
Single
Family Loans, Multifamily Loans and Home Equity Loans.
In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the
borrower and foreclosed junior lienors are given a statutory period in which
to
redeem the mortgaged property from the foreclosure sale. In some states,
redemption may occur only upon payment of the entire principal balance of the
loan plus accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of
the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a
deed
of trust. Consequently, the practical effect of the redemption right is to
force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.
91
Manufactured
Housing Contracts.
While
state laws do not usually require notice to be given debtors prior to
repossession, many states do require delivery of a notice of default and of
the
debtor’s right to cure defaults before repossession. The law in most states also
requires that the debtor be given notice of sale prior to the resale of a
manufactured home so that the owner may redeem at or before resale. In addition,
the sale generally must comply with the requirements of the UCC.
Equitable
Limitations on Remedies
In
connection with lenders’ attempts to realize upon their security, courts have
invoked general equitable principles. The equitable principles are generally
designed to relieve the borrower from the legal effect of defaults under the
loan documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes of the borrower’s default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, courts
have
substituted their judgment for the lender’s judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of a lender to realize upon its security if the
default under the security agreement is not monetary, such as the borrower’s
failure to maintain the property adequately or the borrower’s execution of
secondary financing affecting the property. Finally, some courts have been
faced
with the issue of whether or not federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers
under
security agreements receive notices in addition to the statutorily prescribed
minimums. For the most part, these cases have upheld the notice provisions
as
being reasonable or have found that, in some cases involving the sale by a
trustee under a deed of trust or by a mortgagee under a mortgage having a power
of sale, there is insufficient state action to afford constitutional protections
to the borrower.
Anti-Deficiency
Legislation and Other Limitations on Lenders
Generally,
Article 9 of the UCC governs foreclosure on cooperative shares and the related
proprietary lease or occupancy agreement. Certain states, including California,
have adopted statutory prohibitions restricting the right of the beneficiary
or
mortgagee to obtain a deficiency judgment against borrowers financing the
purchase of their residence or following sale under a deed of trust or certain
other foreclosure proceedings. A deficiency judgment is a personal judgment
against the borrower equal in most cases to the difference between the amount
due to the lender and the fair market value of the real property sold at the
foreclosure sale. As a result of these prohibitions, it is anticipated that
in
many instances the master servicer will not seek deficiency judgments against
defaulting borrowers. Under the laws applicable in most states, a creditor
is
entitled to obtain a deficiency judgment for any deficiency following possession
and resale of a manufactured home. However, some states impose prohibitions
or
limitations on deficiency judgments in these cases.
In
addition to anti-deficiency and related legislation, numerous other federal
and
state statutory provisions, including the Bankruptcy Code, the federal
Servicemembers Civil Relief Act and state laws affording relief to debtors,
may
interfere with or affect the ability of the secured mortgage lender to realize
upon its security. For example, in a proceeding under the Bankruptcy Code,
a
lender may not foreclose on the mortgaged property without the permission of
the
bankruptcy court. If the mortgaged property is not the debtor’s principal
residence and the bankruptcy court determines that the value of the mortgaged
property is less than the principal balance of the mortgage loan, the
rehabilitation plan proposed by the debtor may
92
·
reduce
the secured indebtedness to the value of the mortgaged property as
of the
date of the commencement of the bankruptcy hereby rendering the lender
a
general unsecured creditor for the
difference,
·
reduce
the monthly payments due under the mortgage
loan,
·
change
the rate of interest of the mortgage loan,
and
·
alter
the mortgage loan repayment
schedule.
The
effect of proceedings under the Bankruptcy Code, including but not limited
to
any automatic stay, could result in delays in receiving payments on the mortgage
loans underlying a series of certificates and possible reductions in the
aggregate amount of payments.
The
federal tax laws provide priority to certain tax liens over the lien of a
mortgage or secured party. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing
of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, or TILA, as implemented
by
Regulation Z, Real Estate Settlement Procedures Act, as implemented by
Regulation Z, Real Estate Settlement Procedures Act, as implemented by
Regulation X, Equal Credit Opportunity Act, as implemented by Regulation B,
Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans. In particular,
an originator’s failure to comply with certain requirements of the federal TILA,
as implemented by Regulation Z, could subject both originators and assignees
of
such obligations to monetary penalties and could result in borrowers’ rescinding
the mortgage loans either against the originators or assignees. Further, the
failure of the originator to use the correct form of notice of right to cancel
in connection with non-purchase money transactions could subject the originator
and assignees to extended borrower rescission rights.
Homeownership
Act and Similar State Laws
Some
of
the mortgage loans, known as High Cost Loans, may be subject to the Home
Ownership and Equity Protection Act of 1994, or Homeownership Act, which amended
TILA to provide new requirements applicable to loans not made to finance the
purchase of a mortgaged property that exceed certain interest rate and/or points
and fees thresholds. The Homeownership Act requires certain additional
disclosures, specifies when those disclosures are to be made and limits or
prohibits inclusion of certain features in High Cost Loans. Purchasers or
assignees of any High Cost Loan, including any trust, could be liable under
federal law for all claims and be subject to all defenses that the borrower
could assert against the originator of the High Cost Loan under TILA or any
other law, unless the purchaser or assignee did not know, and could not with
reasonable diligence have determined, that the loan was subject to the
Homeownership Act. Remedies available to the borrower include monetary penalties
as well as rescission rights, if the appropriate disclosures were not given
as
required or if the particular loan includes features prohibited by the
Homeownership Act. The maximum damages that may be recovered from an assignee,
including the related trust, is the remaining amount of indebtedness plus the
total amount paid by the borrower in connection with the mortgage
loan.
93
In
addition to the Homeownership Act, a number of legislative proposals have been
introduced at both the federal and state levels that are designed to discourage
predatory lending practices. Some states have enacted, and other state or local
governments may enact, laws that impose requirements and restrictions greater
than those in the Homeownership Act. These laws prohibit inclusion of certain
features in mortgage loans that have interests rates or origination costs in
excess of prescribed levels, and require that borrowers be given certain
disclosures prior to the consummation of the mortgage loans. Purchasers or
assignees of a mortgage loan, including the related trust, could be exposed
to
all claims and defenses that the borrower could assert against the originator
of
the mortgage loan for a violation of state law. Claims and defenses available
to
the borrower could include actual, statutory and punitive damages, costs and
attorneys’ fees, rescission rights, defenses to foreclosure action or an action
to collect, and other equitable remedies.
Unless
otherwise specified in the accompanying prospectus supplement, the depositor
will represent and warrant that all of the mortgage loans in the related pool
complied in all material respects with all applicable local, state and federal
laws at the time of origination. Although the depositor will be obligated to
repurchase any mortgage loan as to which a breach of its representation and
warranty has occurred (so long as the breach is materially adverse to the
interests of the securityholders), the repurchase price of those mortgage loans
could be less than the monetary damages and/or any equitable remedies imposed
pursuant to various state laws.
Lawsuits
have been brought in various states making claims against assignees of High
Cost
Loans for violations of federal and state law allegedly committed by the
originator. Named defendants in these cases include numerous participants within
the secondary mortgage market, including some securitization trusts. Under
the
anti-predatory lending laws of some states, the borrower is required to meet
a
net tangible benefits test in connection with the origination of the related
mortgage loan. This test may be highly subjective and open to interpretation.
As
a result, a court may determine that a mortgage loan does not meet the test
even
if the originator reasonably believed that the test was satisfied. Any
determination by a court that the mortgage loan does not meet the test will
result in a violation of the state anti-predatory lending law, in which case
the
related seller will be required to purchase that mortgage loan from the
trust.
The
so-called Holder-in-Due-Course Rule of the Federal Trade Commission has the
effect of subjecting a seller and certain related creditors and their assignees
in a consumer credit transaction, and any assignee of the creditor, to all
claims and defenses which the debtor in the transaction could assert against
the
seller of the goods. Liability under this FTC Rule is limited to the amounts
paid by a debtor on a Manufactured Housing Contract, and the holder of the
Manufactured Housing Contract may also be unable to collect amounts still due
under the Manufactured Housing Contract.
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Most
of
the Manufactured Housing Contracts in a pool will be subject to the requirements
of this FTC Rule. Accordingly, the trustee, as holder of the Manufactured
Housing Contracts, will be subject to any claims or defenses that the purchaser
of the related manufactured home may assert against the seller of the
manufactured home, or that the purchaser of the home improvements may assert
against the contractor, subject to a maximum liability equal to the amounts
paid
by the obligor on the Manufactured Housing Contract. If an obligor is successful
in asserting any such claim or defense, and if the seller had or should have
had
knowledge of such claim or defense, the master servicer will have the right
to
require the seller to repurchase the Manufactured Housing Contract because
of a
breach of its representation and warranty that no claims or defenses exist
which
would affect the borrower’s obligation to make the required payments under the
Manufactured Housing Contract.
A
number
of lawsuits are pending in the United States alleging personal injury from
exposure to the chemical formaldehyde, which is present in many building
materials including such manufactured housing components as plywood flooring
and
wall paneling. Some of these lawsuits are pending against manufacturers of
manufactured housing, suppliers of component parts and others in the
distribution process. Plaintiffs have won judgments in some of these
lawsuits.
Under
the
FTC Rule discussed above, the holder of a Manufactured Housing Contract secured
by a manufactured home with respect to which a formaldehyde claim has been
asserted successfully may be liable to the borrower for the amount paid by
the
borrower on that Manufactured Housing Contract and may be unable to collect
amounts still due under that Manufactured Housing Contract. Because the
successful assertion of this type of claim would constitute the breach of a
representation or warranty of the seller, the related securityholders would
suffer a loss only to the extent that
·
the
seller fails to perform its obligation to repurchase that Manufactured
Housing Contract, and
·
the
seller, the applicable depositor or the trustee is unsuccessful in
asserting a claim of contribution or subrogation on behalf of the
securityholders against the manufacturer or other who are directly
liable
to the plaintiff for damages.
Typical
product liability insurance policies held by manufacturers and component
suppliers of manufactured homes may not cover liabilities from the presence
of
formaldehyde in manufactured housing. As a result, recoveries from manufacturers
and component suppliers may be limited to their corporate assets without the
benefit of insurance.
Due-on-Sale
Clauses
Unless
otherwise provided in the related prospectus supplement, each conventional
loan
will contain a due-on-sale clause which will generally provide that, if the
mortgagor or obligor sells, transfers or conveys the mortgaged property, the
loan may be accelerated by the mortgagee or secured party. Unless otherwise
provided in the related prospectus supplement, the master servicer will, to
the
extent it has knowledge of the sale, transfer or conveyance, exercise its rights
to accelerate the maturity of the related loans through enforcement of the
due-on-sale clauses, subject to applicable state law. Section
341(b)
of the
Garn-St. Germain Depository Institutions Act of 1982 (Garn-St. Germain) permits
a lender, subject to certain conditions, to “enter into or enforce a contract
containing a due-on-sale clause with respect to a real property loan,”
notwithstanding any contrary state law. Garn-St. Germain gave states that
previously had enacted “due-on-sale” restrictions a three-year window to reenact
the previous restrictions or enact new restrictions. Only six states acted
within this window period: Arizona, Florida, Michigan, Minnesota, New Mexico
and
Utah. Consequently, due-on-sale provisions in documents governed by the laws
of
those state are
not
preempted by federal law. With respect to loans secured by an owner-occupied
residence including a manufactured home, the Garn-St Germain Act sets forth
nine
specific instances in which a mortgagee covered by the act may not exercise
its
rights under a due-on-sale clause, notwithstanding the fact that a transfer
of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the mortgaged property to an uncreditworthy person,
which could increase the likelihood of default, or may result in a mortgage
bearing an interest rate below the current market rate being assumed by a new
home buyer, which may affect the average life of the loans and the number of
loans which may extend to maturity.
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In
addition, under the federal Bankruptcy Code, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and under certain circumstances may be
eliminated in a resulting loan modification.
Prepayment
Charges; Late Fees
Under
certain state laws, prepayment charges with respect to prepayments on loans
secured by liens encumbering owner-occupied residential properties may not
be
imposed after a certain period of time following the origination of a loan.
Since many of the mortgaged properties will be owner-occupied, it is anticipated
that prepayment charges may not be imposed with respect to many of the loans.
The absence of this type of a restraint on prepayment, particularly with respect
to fixed rate loans having higher loan rates or APRs, may increase the
likelihood of refinancing or other early retirement of the loans. Legal
restrictions, if any, on prepayment of Multifamily Loans will be described
in
the related prospectus supplement.
Loans
may
also contain provisions obligating the borrower to pay a late fee if payments
are not timely made. In some states there may be specific limitations on the
late charges that a lender may collect from the borrower for delinquent
payments. Unless otherwise specified in the related prospectus supplement,
late
fees will be retained by the applicable servicer as additional servicing
compensation.
Some
state laws restrict the imposition of prepayment charges and late fees even
when
the loans expressly provide for the collection of those charges. Although the
Alternative Mortgage Transaction Parity Act 1982, or the Parity Act, permits
the
collection of prepayment charges and late fees in connection with some types
of
eligible loans preempting any contrary state law prohibitions, some states
may
not recognize the preemptive authority of the Parity Act or have formally opted
out of the Parity Act. As a result, it is possible that prepayment charges
may
not be collected even on loans that provide for the payment of those charges
unless otherwise specified in the accompanying prospectus supplement. The master
servicer or any entity identified in the accompanying prospectus supplement
will
be entitled to all prepayment charges and late payment charges received on
the
loans and these amounts will not be available for payment on the securities.
The
Office of Thrift Supervision or OTS, the agency that administers the Parity
Act
for unregulated housing creditors, has withdrawn its favorable Parity Act
regulations and chief counsel opinions that authorized lenders to charge
prepayment charges and late fees in certain circumstances notwithstanding
contrary state law, effective July 1, 2003. However, the OTS’s ruling does not
have retroactive effect on loans originated before July 1, 2003.
96
Applicability
of Usury Laws
Title
V
of the Depository Institutions Deregulation and Monetary Control Act of 1980
provides that state usury limitations shall not apply to certain types of
residential first mortgage loans originated by certain lenders after March
31,
1980. The Office of Thrift Supervision, as successor to the Federal Home Loan
Bank Board, is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized
any
state to reimpose limitations on interest rates and finance charges by adopting
before April 1, 1983 a law or constitutional provision which expressly rejects
application of the federal law. Fifteen states adopted such a law prior to
the
April 1, 1983 deadline. In addition, even where Title V was not rejected, any
state is authorized to adopt a provision limiting discount points or other
charges on loans covered by Title V. No Manufactured Housing Contract secured
by
a manufactured home located in any state in which application of Title V was
expressly rejected or a provision limiting discount points or other charges
has
been adopted will be included in any trust fund if the Manufactured Housing
Contract imposes finance charges or provides for discount points or charges
in
excess of permitted levels.
Title
V
also provides that state usury limitations will not apply to any loan which
is
secured by a first lien on certain kinds of manufactured housing provided that
certain conditions are satisfied. These conditions relate to the terms of any
prepayment, balloon payment, late charges and deferral fees and the requirement
of a 30-day notice period prior to instituting any action leading to
repossession of or foreclosure with respect to the related unit.
Servicemembers
Civil Relief Act
Generally,
under the terms of the Servicemembers Civil Relief Act (referred to herein
as
the Relief Act), borrowers who enter military service after the origination
of
their mortgage loan may not be charged interest above an annual rate of 6%
during the period of active duty status. In addition to adjusting the interest,
the lender must forgive any such interest in excess of the annual 6% rate,
unless a court or administrative agency of the United States or of any state
orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Air Force, Army, Marines, Navy or Coast Guard,
and officers of the U.S. Public Health Service or the National Oceanic and
Atmospheric Administration assigned to duty with the military. The Relief Act
also applies to borrowers who are members of the National Guard or are on
reserve status at the time their mortgage is originated and are later called
to
active duty. It is possible that the interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the master
servicer to collect full amounts of interest on affected mortgage loans. Unless
otherwise provided in the related prospectus supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the related securityholders. In addition, the Relief Act
imposes limitations which would impair the ability of the master servicer to
foreclose on an affected mortgage loan during the borrower’s period of active
duty status. Thus, in the event that a mortgage loan goes into default, the
application of the Relief Act could cause delays and losses occasioned by the
lender’s inability to realize upon the mortgaged property in a timely
fashion.
97
Environmental
Risks
Real
property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien
of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), the United States Environmental Protection Agency (EPA) may impose
a
lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under
the
laws of some states and under CERCLA, there is a possibility that a lender
may
be held liable as an “owner” or “operator” for costs of addressing releases or
threatened releases of hazardous substances at a property, regardless of whether
or not the environmental damage or threat was caused by a current or prior
owner
or operator. CERCLA imposes liability for such costs on any and all “responsible
parties,” including owners or operators of the property who did not cause or
contribute to the contamination. Furthermore, liability under CERCLA is not
limited to the original or outstanding balance of a loan or to the value of
the
related mortgaged property. Lenders may be held liable under CERCLA as owners
or
operators unless they qualify for the secured creditor exemption to CERCLA.
This
exemption exempts from the definition of “owner” or “operator” those who,
without participating in the management of a facility, hold indicia of ownership
primarily to protect a security interest in the facility. Thus, if a lender’s
activities begin to encroach on the actual management of a contaminated facility
or property, the lender may incur liability as an “owner” or “operator” under
CERCLA. Similarly, if a lender forecloses and takes title to a contaminated
facility or property, the lender may incur CERCLA liability in various
circumstances, including, but not limited to, when it holds the facility or
property as an investment, including leasing the facility or property to a
third
party, or fails to market the property in a timely fashion.
The
Asset
Conservation, Lender Liability and Deposit Insurance Act of 1996, or
Conservation Act, amended, among other things, the provisions of CERCLA with
respect to lender liability and the secured creditor exemption. The Conservation
Act offers substantial protection to lenders by defining the activities which
a
lender can engage in without losing the benefit of the secured creditor
exemption. For a lender to be deemed to have participated in the management
of a
mortgaged property, the lender must actually participate in the management
or
operational affairs of the mortgaged property. The Conservation Act provides
that “merely having the capacity to influence, or the unexercised right to
control” operations does not constitute participation in management. A lender
will lose the protection of the secured creditor exemption only if it (1)
exercises decision-making control over the borrower’s environmental compliance
and hazardous substance handling or disposal practices for the mortgaged
property, or (2) assumes responsibility for the overall management of the
mortgaged property, including day-to-day decision-making for environmental
compliance, or (3) assumes management of substantially all operational functions
of the mortgaged property. The Conservation Act also provides that a lender
will
continue to have the benefit of the secured creditor exemption even in the
event
that it forecloses on a mortgaged property, purchases it at a foreclosure sale
or accepts a deed-in-lieu of foreclosure so long as the lender seeks to sell
the
mortgaged property at the earliest practicable commercially reasonable time
on
commercially reasonable terms.
98
CERCLA
does not apply to petroleum products, and the secured creditor exclusion does
not govern liability for cleanup costs under federal laws other than CERCLA,
in
particular Subtitle I of the federal Resource Conservation and Recovery Act,
which regulates underground petroleum storage tanks other than heating oil
tanks. The EPA has adopted a lender liability rule for underground storage
tanks
under Subtitle I of the Resource Conservation Act. Under this rule, a holder
of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. Moreover, under the Conservation Act, the protections accorded to
lenders under CERCLA are also accorded to holders of security interests in
underground petroleum storage tanks. It should be noted, however, that liability
for cleanup of petroleum contamination may be governed by state law, which
may
not provide for any specific protection for secured creditors.
The
Conservation Act specifically addresses the potential liability under CERCLA
of
lenders that hold mortgages or similar conventional security interests in real
property, as the trust fund generally does in connection with the loans.
However, the Conservation Act does not clearly address the potential liability
of lenders who retain legal title to a property and enter into an agreement
with
the purchaser for the payment of the purchase price and interest over the term
of the contract as is the case with the installment contracts.
If
a
lender (including a lender under an installment contract) is or becomes liable
under CERCLA, it may be authorized to bring a statutory action for contribution
against any other “responsible parties”, including a previous owner or operator.
However, these persons or entities may be bankrupt or otherwise judgment proof,
and the costs associated with environmental cleanup and related actions may
be
substantial. Moreover, some state laws imposing liability for addressing
hazardous substances do not contain exemptions from liability for lenders.
Whether the costs of addressing contamination at a property pledged as
collateral for one of the loans (or at a property subject to an installment
contract), would be imposed on the trust fund, and thus occasion a loss to
the
securityholders, depends on the specific factual and legal circumstances at
issue.
Except
as
otherwise specified in the applicable prospectus supplement, at the time the
mortgage loans were originated, no environmental assessment or a very limited
environment assessment of the mortgage properties was conducted.
Traditionally,
many residential mortgage lenders have not taken steps to determine whether
contaminants are present on a mortgaged property prior to the origination of
a
single family mortgage loan or prior to foreclosure or accepting a deed-in-lieu
of foreclosure. Except as otherwise specified in the applicable prospectus
supplement, neither the depositor nor any master servicer will be required
by
any agreement to undertake any of these evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. The depositor does not make any
representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any mortgaged property or any casualty
resulting from the presence or effect of contaminants. However, the master
servicer will not be obligated to foreclose on any mortgaged property or accept
a deed-in-lieu of foreclosure if it knows or reasonably believes that there
are
material contaminated conditions on the property. A failure so to foreclose
may
reduce the amounts otherwise available to securityholders of the related
series.
99
The
pooling and servicing agreement will provide that the master servicer, acting
on
behalf of the trust fund, may not acquire title to a multifamily residential
property or mixed-use property underlying a loan or take over its operation
unless the master servicer has previously determined, based upon a report
prepared by a person who regularly conducts environmental audits, that the
mortgaged property is in compliance with applicable environmental laws and
regulations or that the acquisition would not be more detrimental than
beneficial to the value of the mortgaged property and the interests of the
related securityholders.
The
Home Improvement Contracts
General.
The
Home Improvement Contracts, other than those that are unsecured or secured
by
mortgages on real estate, generally are “chattel paper” or constitute “purchase
money security interests” each as defined in the UCC. Under the UCC, the sale of
chattel paper is treated in a manner similar to perfection of a security
interest in chattel paper. Under the related agreement, the depositor will
transfer physical possession of these contracts to the trustee or a designated
custodian or may retain possession of them as custodian for the trustee. In
addition, the depositor will file a UCC-1 financing statement in the appropriate
states to give notice of the trustee’s ownership of the contracts. Unless
otherwise specified in the related prospectus supplement, the contracts will
not
be stamped or otherwise marked to reflect their assignment from the depositor
to
the trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the trustee’s interest in the contracts could be
defeated.
Security
Interests in Home Improvements.
The
Home Improvement Contracts that are secured by the related home improvements
grant to the originator a purchase money security interest in the home
improvements to secure all or part of the purchase price of the home
improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods and the purchase money security interests are assignable. In general,
a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and
the
proceeds of the collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the holder’s interest in the home improvement must
generally be perfected by a timely fixture filing. In general, a security
interest does not exist under the UCC in ordinary building material incorporated
into an improvement on land. Home Improvement Contracts that finance lumber,
bricks, other types of ordinary building material or other goods that are deemed
to lose such characterization upon incorporation of such materials into the
related property, will not be secured by a purchase money security interest
in
the home improvement being financed.
100
Enforcement
of Security Interest in Home Improvements.
So long
as the home improvement has not become subject to the real estate law, a
creditor can repossess a home improvement securing a contract by voluntary
surrender, by “self-help” repossession that is “peaceful” (i.e., without breach
of the peace) or, in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
contract must give the debtor a number of days’ notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession.
The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states
also
requires that the debtor be given notice of any sale prior to resale of the
unit
that the debtor may redeem at or before the resale.
Under
the
laws applicable in most states, a creditor is entitled to obtain a deficiency
judgment from a debtor for any deficiency on repossession and resale of the
property securing the debtor’s loan. However, some states impose prohibitions or
limitations on deficiency judgments, and in many cases the defaulting borrower
would have no assets with which to pay a judgment.
Certain
other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Installment
Contracts
Under
an
installment contract the seller retains legal title to the property and enters
into an agreement with the purchaser/borrower for the payment of the purchase
price, plus interest, over the term of the contract. Only after full performance
by the borrower of the contract is the lender obligated to convey title to
the
property to the purchaser. As with mortgage or deed of trust financing, during
the effective period of the installment contract, the borrower is generally
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
The
method of enforcing the rights of the lender under an installment contract
varies on a state-by-state basis depending upon the extent to which state courts
are willing, or able pursuant to state statute, to enforce the contract strictly
according to the terms. The terms of installment contracts generally provide
that upon a default by the borrower, the borrower loses his or her right to
occupy the property, the entire indebtedness is accelerated, and the buyer’s
equitable interest in the property is forfeited. The lender in such a situation
does not have to foreclose in order to obtain title to the property, although
in
some cases a quiet title action is in order if the borrower has filed the
installment contract in local land records and an ejectment action may be
necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest
in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during
which
the installment contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an installment contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender’s procedures for obtaining
possession and clear title under an installment contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
101
Junior
Mortgages; Rights of Senior Mortgagees
To
the
extent that the loans comprising the trust fund for a series are secured by
mortgages which are junior to other mortgages held by other lenders or
institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause
the
property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee’s lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required
to
be given to a junior mortgagee.
The
standard form of the mortgage used by most institutional lenders confers on
the
mortgagee the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right
to
collect any insurance proceeds payable under a hazard insurance policy and
any
award of damages in connection with the condemnation and to apply the same
to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another
provision sometimes found in the form of the mortgage or deed of trust used
by
institutional lenders obligates the mortgagor to pay before delinquency all
taxes and assessments on the property and, when due, all encumbrances, charges
and liens on the property which appear prior to the mortgage or deed of trust,
to provide and maintain fire insurance on the property, to maintain and repair
the property and not to commit or permit any waste, and to appear in and defend
any action or proceeding purporting to affect the property or the rights of
the
mortgagee under the mortgage. Upon a failure of the mortgagor to perform any
of
these obligations, the mortgagee is given the right under certain mortgages
to
perform the obligation itself, at its election, with the mortgagor agreeing
to
reimburse the mortgagee for any sums expended by the mortgagee on behalf of
the
mortgagor. All sums so expended by the mortgagee become part of the indebtedness
secured by the mortgage.
102
The
form
of credit line trust deed or mortgage generally used by most institutional
lenders which make revolving credit line loans typically contains a “future
advance” clause, which provides, in essence, that additional amounts advanced to
or on behalf of the borrower by the beneficiary or lender are to be secured
by
the deed of trust or mortgage. Any amounts so advanced after the cut-off date
with respect to any mortgage will not be included in the trust fund. The
priority of the lien securing any advance made under the clause may depend
in
most states on whether the deed of trust or mortgage is called and recorded
as a
credit line deed of trust or mortgage. If the beneficiary or lender advances
additional amounts, the advance is entitled to receive the same priority as
amounts initially advanced under the trust deed or mortgage, notwithstanding
the
fact that there may be junior trust deeds or mortgages and other liens which
intervene between the date of recording of the trust deed or mortgage and the
date of the future advance, and notwithstanding that the beneficiary or lender
had actual knowledge of such intervening junior trust deeds or mortgages and
other liens at the time of the advance. In most states, the trust deed or
mortgage lien securing mortgage loans of the type which includes home equity
credit lines applies retroactively to the date of the original recording of
the
trust deed or mortgage, provided that the total amount of advances under the
home equity credit line does not exceed the maximum specified principal amount
of the recorded trust deed or mortgage, except as to advances made after receipt
by the lender of a written notice of lien from a judgment lien creditor of
the
trustor.
The
Title I Program
General.
Certain
of the loans contained in a trust fund may be loans insured under the FHA Title
I Insurance program created pursuant to Sections 1 and 2(a) of the National
Housing Act of 1934. Under the Title I Program, the FHA is authorized and
empowered to insure qualified lending institutions against losses on eligible
loans. The Title I Program operates as a coinsurance program in which the FHA
insures up to 90% of certain losses incurred on an individual insured loan,
including the unpaid principal balance of the loan, but only to the extent
of
the insurance coverage available in the lender’s FHA insurance coverage reserve
account. The owner of the loan bears the uninsured loss on each
loan.
Title
I
loan means a loan made to finance actions or items that substantially protect
or
improve the basic livability or utility of a one- to four-family residential
property.
There
are
two basic methods of lending or originating such loans which include a “direct
loan” or a “dealer loan”. With respect to a direct loan, the borrower makes
application directly to a lender without any assistance from a dealer, which
application may be filled out by the borrower or by a person acting at the
direction of the borrower who does not have a financial interest in the loan
transaction, and the lender may disburse the loan proceeds solely to the
borrower or jointly to the borrower and other parties to the transaction. With
respect to a dealer loan, the dealer, who has a direct or indirect financial
interest in the loan transaction, assists the borrower in preparing the loan
application or otherwise assists the borrower in obtaining the loan from the
lender. The lender may disburse proceeds solely to the dealer or the borrower
or
jointly to the borrower and the dealer or other parties to the transaction.
With
respect to a dealer Title I loan, a dealer may include a seller, a contractor
or
supplier of goods or services.
103
Loans
insured under the Title I Program are required to have fixed interest rates
and
generally provide for equal installment payments due weekly, biweekly,
semi-monthly or monthly, except that a loan may be payable quarterly or
semi-annually where a borrower has an irregular flow of income. The first or
last payments (or both) may vary in amount but may not exceed 150% of the
regular installment payment, and the first payment may be due no later than
two
months from the date of the loan. The note must contain a provision permitting
full or partial prepayment of the loan. The interest rate must be negotiated
and
agreed to by the borrower and the lender and must be fixed for the term of
the
loan and recited in the note. Interest on an insured loan must accrue from
the
date of the loan and be calculated according to the actuarial method. The lender
must assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each
insured lender is required to use prudent lending standards in underwriting
individual loans and to satisfy the applicable loan underwriting requirements
under the Title I Program prior to its approval of the loan and disbursement
of
loan proceeds. Generally, the lender must exercise prudence and diligence to
determine whether the borrower and any co-maker is solvent and an acceptable
credit risk, with a reasonable ability to make payments on the loan obligation.
The lender’s credit application and review must determine whether the borrower’s
income will be adequate to meet the periodic payments required by the loan,
as
well as the borrower’s other housing and recurring expenses, which determination
must be made in accordance with the expense-to-income ratios published by the
Secretary of HUD unless the lender determines and documents in the loan file
the
existence of compensating factors concerning the borrower’s creditworthiness
which support approval of the loan.
Under
the
Title I Program, the FHA does not review or approve for qualification for
insurance the individual loans insured thereunder at the time of approval by
the
lending institution (as is typically the case with other federal loan programs).
If, after a loan has been made and reported for insurance under the Title I
Program, the lender discovers any material misstatement of fact or that the
loan
proceeds have been misused by the borrower, dealer or any other party, it shall
promptly report this to the FHA. In such case, provided that the validity of
any
lien on the property has not been impaired, the insurance of the loan under
the
Title I Program will not be affected unless such material misstatements of
fact
or misuse of loan proceeds was caused by (or was knowingly sanctioned by) the
lender or its employees.
Requirements
for Title I Loans.
The
maximum principal amount for Title I loans must not exceed the actual cost
of
the project plus any applicable fees and charges allowed under the Title I
Program; provided that such maximum amount does not exceed $25,000 (or the
current applicable amount) for a single family property improvement loan.
Generally, the term of a Title I loan may not be less than six months nor
greater than 20 years and 32 days. A borrower may obtain multiple Title I loans
with respect to multiple properties, and a borrower may obtain more than one
Title I loan with respect to a single property, in each case as long as the
total outstanding balance of all Title I loans in the same property does not
exceed the maximum loan amount for the type of Title I loan thereon having
the
highest permissible loan amount.
Borrower
eligibility for a Title I loan requires that the borrower have at least a
one-half interest in either fee simple title to the real property, a lease
thereof for a term expiring at least six months after the final maturity of
the
Title I loan or a recorded land installment contract for the purchase of the
real property. In the case of a Title I loan with a total principal balance
in
excess of $15,000, if the property is not occupied by the owner, the borrower
must have equity in the property being improved at least equal to the principal
amount of the loan, as demonstrated by a current appraisal. Any Title I loan
in
excess of $7,500 must be secured by a recorded lien on the improved property
which is evidenced by a mortgage or deed of trust executed by the borrower
and
all other owners in fee simple.
104
The
proceeds from a Title I loan may be used only to finance property improvements
which substantially protect or improve the basic livability or utility of the
property as disclosed in the loan application. The Secretary of HUD has
published a list of items and activities which cannot be financed with proceeds
from any Title I loan and from time to time the Secretary of HUD may amend
such
list of items and activities. With respect to any dealer Title I loan, before
the lender may disburse funds, the lender must have in its possession a
completion certificate on a HUD approved form, signed by the borrower and the
dealer. With respect to any direct Title I loan, the lender is required to
obtain, promptly upon completion of the improvements but not later than 6 months
after disbursement of the loan proceeds with one 6 month extension if necessary,
a completion certificate, signed by the borrower. The lender is required to
conduct an on-site inspection on any Title I loan where the principal obligation
is $7,500 or more, and on any direct Title I loan where the borrower fails
to
submit a completion certificate.
FHA
Insurance Coverage.
Under
the Title I Program, the FHA establishes an insurance coverage reserve account
for each lender which has been granted a Title I contract of insurance. The
amount of insurance coverage in this account is a maximum of 10% of the amount
disbursed, advanced or expended by the lender in originating or purchasing
eligible loans registered with the FHA for Title I insurance, with certain
adjustments. The balance in the insurance coverage reserve account is the
maximum amount of insurance claims the FHA is required to pay to the Title
I
lender. Loans to be insured under the Title I Program will be registered for
insurance by the FHA and the insurance coverage attributable to such loans
will
be included in the insurance coverage reserve account for the originating or
purchasing lender following the receipt and acknowledgment by the FHA of a
loan
report on the prescribed form pursuant to the Title I regulations. For each
eligible loan reported and acknowledged for insurance, the FHA charges a
premium. For loans having a maturity of 25 months or less, the FHA bills the
lender for the entire premium in an amount equal to the product of 0.50% of
the
original loan amount and the loan term. For home improvement loans with a
maturity greater than 25 months, each year that a loan is outstanding the FHA
bills the lender for a premium in an amount equal to 0.50% of the original
loan
amount. If a loan is prepaid during the year, the FHA will not refund or abate
the premium paid for that year.
Under
the
Title I Program the FHA will reduce the insurance coverage available in the
lender’s FHA insurance coverage reserve account with respect to loans insured
under the lender’s contract of insurance by (i) the amount of the FHA insurance
claims approved for payment relating to such insured loans and (ii) the amount
of insurance coverage attributable to insured loans sold by the lender, and
such
insurance coverage may be reduced for any FHA insurance claims rejected by
the
FHA. The balance of the lender’s FHA insurance coverage reserve account will be
further adjusted as required under Title I or by the FHA, and the insurance
coverage therein may be earmarked with respect to each or any eligible loans
insured thereunder, if a determination is made by the Secretary of HUD that
it
is in its interest to do so.
105
Originations
and acquisitions of new eligible loans will continue to increase a lender’s
insurance coverage reserve account balance by 10% of the amount disbursed,
advanced or expended in originating or acquiring such eligible loans registered
with the FHA for insurance under the Title I Program. The Secretary of HUD
may
transfer insurance coverage between insurance coverage reserve accounts with
earmarking with respect to a particular insured loan or group of insured loans
when a determination is made that it is in the Secretary’s interest to do
so.
The
lender may transfer (except as collateral in a bona fide transaction) insured
loans and loans reported for insurance only to another qualified lender under
a
valid Title I contract of insurance. Unless an insured loan is transferred
with
recourse or with a guaranty or repurchase agreement, the FHA, upon receipt
of
written notification of the transfer of such loan in accordance with the Title
I
regulations, will transfer from the transferor’s insurance coverage reserve
account to the transferee’s insurance coverage reserve account an amount, if
available, equal to 10% of the actual purchase price or the net unpaid principal
balance of such loan (whichever is less). However, under the Title I Program
not
more than $5,000 in insurance coverage shall be transferred to or from a
lender’s insurance coverage reserve account during any October 1 to September 30
period without the prior approval of the Secretary of HUD. Amounts which may
be
recovered by the Secretary of HUD after payment of an insurance claim are not
added to the amount of insurance coverage in the related lender’s insurance
coverage reserve account.
Claims
Procedures Under Title I.
Under
the Title I Program the lender may accelerate an insured loan following a
default on such loan only after the lender or its agent has contacted the
borrower in a face-to-face meeting or by telephone to discuss the reasons for
the default and to seek its cure. If the borrower does not cure the default
or
agree to a modification agreement or repayment plan, the lender will notify
the
borrower in writing that, unless within 30 days the default is cured or the
borrower enters into a modification agreement or repayment plan, the loan will
be accelerated and that, if the default persists, the lender will report the
default to an appropriate credit agency. The lender may rescind the acceleration
of maturity after full payment is due and reinstate the loan only if the
borrower brings the loan current, executes a modification agreement or agrees
to
an acceptable repayment plan.
Following
acceleration of maturity upon a secured Title I loan, the lender may either
(a)
proceed against the property under any security instrument, or (b) make a claim
under the lender’s contract of insurance. If the lender chooses to proceed
against the property under a security instrument (or if it accepts a voluntary
conveyance or surrender of the property), the lender may file an insurance
claim
only with the prior approval of the Secretary of HUD.
When
a
lender files an insurance claim with the FHA under the Title I Program, the
FHA
reviews the claim, the complete loan file and documentation of the lender’s
efforts to obtain recourse against any dealer who has agreed thereto,
certification of compliance with applicable state and local laws in carrying
out
any foreclosure or repossession, and evidence that the lender has properly
filed
proofs of claims, where the borrower is bankrupt or deceased. Generally, a
claim
for reimbursement for loss on any Title I loan must be filed with the FHA no
later than 9 months after the date of default of the loan. Concurrently with
filing the insurance claim, the lender shall assign to the United States of
America the lender’s entire interest in the loan note (or a judgment in lien of
the note), in any security held and in any claim filed in any legal proceedings.
If, at the time the note is assigned to the United States, the Secretary has
reason to believe that the note is not valid or enforceable against the
borrower, the FHA may deny the claim and reassign the note to the lender. If
either such defect is discovered after the FHA has paid a claim, the FHA may
require the lender to repurchase the paid claim and to accept a reassignment
of
the loan note. If the lender subsequently obtains a valid and enforceable
judgment against the borrower, the lender may resubmit a new insurance claim
with an assignment of the judgment. Although the FHA may contest any insurance
claim and make a demand for repurchase of the loan at any time up to two years
from the date the claim was certified for payment and may do so thereafter
in
the event of fraud or misrepresentation on the part of the lender, the FHA
has
expressed an intention to limit the period of time within which it will take
such action to one year from the date the claim was certified for
payment.
106
Under
the
Title I Program the amount of an FHA insurance claim payment, when made, is
equal to the claimable amount, up to the amount of insurance coverage in the
lender’s insurance coverage reserve account. The “claimable amount” means an
amount equal to 90% of the sum of:
·
the
unpaid loan obligation (net unpaid principal and the uncollected
interest
earned to the date of default) with adjustments thereto if the lender
has
proceeded against property securing the
loan;
·
the
interest on the unpaid amount of the loan obligation from the date
of
default to the date of the claim’s initial submission for payment plus 15
calendar days (but not to exceed 9 months from the date of default),
calculated at the rate of 7% per
year;
·
the
uncollected court costs;
·
the
attorney’s fees not to exceed $500;
and
·
the
expenses for recording the assignment of the security to the nited
States.
The
Secretary of HUD may deny a claim for insurance in whole or in part for any
violations of the regulations governing the Title I Program; however, the
Secretary of HUD may waive such violations if it determines that enforcement
of
the regulations would impose an injustice upon a lender which has substantially
complied with the regulations in good faith.
Material
Federal Income Tax Consequences
The
following summary of the material federal income tax consequences of the
purchase, ownership and disposition of certificates is based on the opinion
of
tax counsel to the depositor, either Sidley Austin Brown & Wood LLP
or
Thacher Proffitt & Wood LLP,
as
specified in the related prospectus supplement. This summary is based on the
provisions of the Internal Revenue Code of 1986, as amended, and the
regulations, including the REMIC Regulations, rulings and decisions promulgated
thereunder and, where applicable, proposed regulations, all of which are subject
to change either prospectively or retroactively. This summary does not address
the material federal income tax consequences of an investment in securities
applicable to certain financial institutions, banks, insurance companies, tax
exempt organizations, dealers in options, currency or securities, traders in
securities that elect to mark to market, or persons who hold positions other
than securities such that the securities are treated as part of a hedging
transaction, straddle, conversion or other integrated transaction which are
subject to special rules. Because of the complexity of the tax issues involved,
we strongly suggest that prospective investors consult their tax advisors
regarding the federal, state, local and any other tax consequences to them
of
the purchase, ownership and disposition of securities.
107
General
The
federal income tax consequences to securityholders will vary depending on
whether an election is made to treat the trust fund relating to a particular
series of securities as a REMIC under the Code. The prospectus supplement for
each series of securities will specify whether a REMIC election will be made.
In
the discussion that follows, all references to a “section” or “sections” shall
be understood to refer, unless otherwise specifically indicated, to a section
or
sections of the Code.
If
a
REMIC election is not made, in the opinion of tax counsel the trust fund will
not be classified as a publicly traded partnership, a taxable mortgage pool,
or
an association taxable as a corporation. A trust fund that qualifies as a
“grantor trust” for federal income tax purposes also will receive an opinion of
tax counsel to the effect that:
·
the
trust fund will be classified as a grantor trust under subpart E,
part I
of subchapter J of the Code; and
·
owners
of certificates will be treated for federal income tax purposes as
owners
of a portion of the trust fund’s assets as described
below.
A
trust
fund that issues notes may also receive an opinion of tax counsel regarding
the
characterization of the notes as debt instruments for federal income tax
purposes.
With
respect to each trust fund that elects REMIC status, in the opinion of tax
counsel, assuming compliance with all provisions of the related agreement,
the
trust fund will qualify as a REMIC and the related certificates will be
considered to be regular interests or residual interests in the REMIC. The
related prospectus supplement for each series of securities will indicate
whether the trust fund will make a REMIC election and whether a class of
securities will be treated as a regular or residual interest in the
REMIC.
Each
opinion is an expression of an opinion only, is not a guarantee of results
and
is not binding on the Internal Revenue Service or any third party.
If,
contrary to the opinion of tax counsel, the IRS successfully were to assert
that
a class of notes did not represent debt instruments for federal income tax
purposes, that class of notes would be treated as equity interests in the
related trust fund. The trust fund would then be treated as a partnership and
could be a publicly traded partnership. If the trust fund were classified as
a
publicly traded partnership, it would not be subject to taxation as a
corporation because its income would constitute “qualifying income” not derived
in the conduct of a financial business. Nevertheless, if the trust fund were
classified as a partnership, treatment of a class of notes as equity interests
in such a partnership could have adverse tax consequences to certain holders.
For example, income to foreign holders of such a class generally would be
subject to U.S. tax and withholding requirements, and individual holders of
such
a class would be allocated their proportionate share of the trust’s income but
might be subject to certain limitations on their ability to deduct their share
of the trust’s expenses.
108
Taxation
of Debt Securities
Status
as Real Property Loans.
Except
to the extent otherwise provided in the related prospectus supplement, if the
securities are regular interests in a REMIC or represent interests in a grantor
trust, in the opinion of tax counsel:
·
securities
held by a domestic building and loan association will constitute
“loans...
secured by an interest in real property” within the meaning of section
7701(a)(19)(C)(v) of the Code; and
·
securities
held by a real estate investment trust will constitute “real estate
assets” within the meaning of section 856(c)(4)(A) of the Code and
interest on securities will be considered” interest on obligations secured
by mortgages on real property or on interests in real property” within the
meaning of section 856(c)(3)(B) of the
Code.
Interest
and Acquisition Discount.
In the
opinion of tax counsel, securities that are REMIC regular interests are
generally taxable to holders in the same manner as evidences of indebtedness
issued by the REMIC. Stated interest on the securities that are REMIC regular
interests will be taxable as ordinary income and taken into account using the
accrual method of accounting, regardless of the holder’s normal accounting
method. Interest (other than original issue discount) on securities (other
than
securities that are REMIC regular interests) which are characterized as
indebtedness for federal income tax purposes will be includible in income by
their holders in accordance with their usual methods of accounting. When we
refer to “debt securities” in this section, we mean securities characterized as
debt for federal income tax purposes and securities that are REMIC regular
interests.
In
the
opinion of tax counsel, “compound interest securities” (i.e.,
debt
securities that permit all interest to accrue for more than one year before
payments of interest are scheduled to begin) will, and certain of the other
debt
securities issued at a discount may, be issued with “original issue discount” or
OID. The following discussion is based in part on the OID Regulations. A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the debt
securities.
In
general, OID, if any, will equal the difference between the stated redemption
price at maturity of a debt security and its issue price. In the opinion of
tax
counsel, a holder of a debt security must include OID in gross income as
ordinary interest income as it accrues under a method taking into account an
economic accrual of the discount. In general, OID must be included in income
in
advance of the receipt of the cash representing that income. The amount of
OID
on a debt security will be considered to be zero if it is less than a de minimis
amount determined under the Code.
109
The
issue
price of a debt security is the first price at which a substantial amount of
debt securities of that class are sold to the public (excluding bond houses,
brokers, underwriters or wholesalers). If less than a substantial amount of
a
particular class of debt securities is sold for cash on or prior to the closing
date, the issue price for that class will be treated as the fair market value
of
that class on the closing date. The issue price of a debt security also includes
the amount paid by an initial debt security holder for accrued interest that
relates to a period prior to the issue date of the debt security. The stated
redemption price at maturity of a debt security includes the original principal
amount of the debt security, but generally will not include distributions of
interest if the distributions constitute “qualified stated
interest.”
Under
the
OID Regulations, qualified stated interest generally means interest payable
at a
single fixed rate or qualified variable rate (as described below), provided
that
the interest payments are unconditionally payable at intervals of one year
or
less during the entire term of the debt security. The OID Regulations state
that
interest payments are unconditionally payable only if a late payment or
nonpayment is expected to be penalized or reasonable remedies exist to compel
payment. Debt securities may provide for default remedies in the event of late
payment or nonpayment of interest. Although the matter is not free from doubt,
the trustee intends to treat interest on such debt securities as unconditionally
payable and as constituting qualified stated interest, not OID. However, absent
clarification of the OID Regulations, where debt securities do not provide
for
default remedies, the interest payments will be included in the debt security’s
stated redemption price at maturity and taxed as OID. Interest is payable at
a
single fixed rate only if the rate appropriately takes into account the length
of the interval between payments. Distributions of interest on debt securities
with respect to which deferred interest will accrue, will not constitute
qualified stated interest payments, in which case the stated redemption price
at
maturity of such debt securities includes all distributions of interest as
well
as principal thereon. Where the interval between the issue date and the first
distribution date on a debt security is longer than the interval between
subsequent distribution dates, the greater of (i) the interest foregone and
(ii)
the excess of the stated principal amount over the issue price will be included
in the stated redemption price at maturity and tested under the de
minimis
rule
described below. Where the interval between the issue date and the first
distribution date on a debt security is shorter than the interval between
subsequent distribution dates, all of the additional interest will be included
in the stated redemption price at maturity and tested under the de
minimis
rule
described below. In the case of a debt security with a long first period that
has non-de
minimis
OID,
all stated interest in excess of interest payable at the effective interest
rate
for the long first period will be included in the stated redemption price at
maturity and the debt security will generally have OID. Holders of debt
securities should consult their own tax advisors to determine the issue price
and stated redemption price at maturity of a debt security.
Under
the
de
minimis
rule,
OID on a debt security will be considered to be zero if the OID is less than
0.25% of the stated redemption price at maturity of the debt security multiplied
by the weighted average maturity of the debt security. For this purpose, the
weighted average maturity of the debt security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by
a
fraction, the numerator of which is the amount of each distribution included
in
the stated redemption price at maturity of the debt security and the denominator
of which is the stated redemption price at maturity of the debt security.
Holders generally must report de
minimis
OID pro
rata as principal payments are received, and such income will be capital gain
if
the debt security is held as a capital asset. However, accrual method holders
may elect to accrue all de
minimis
OID as
well as market discount under a constant interest method.
110
Debt
securities may provide for interest based on a qualified variable rate. Under
the OID Regulations, interest is generally treated as payable at a qualified
variable rate and not as contingent interest if
·
the
interest is unconditionally payable at least
annually,
·
the
issue price of the debt instrument does not exceed the total noncontingent
principal payments, and
·
interest
is based on a “qualified floating rate,” an “objective rate,” or a
combination of “qualified floating rates” that do not operate in a manner
that significantly accelerates or defers interest payments on the
debt
security.
In
the
case of compound interest securities, certain interest weighted securities,
and
certain of the other debt securities, none of the payments under the instrument
will be considered qualified stated interest, and thus the aggregate amount
of
all payments will be included in the stated redemption price at
maturity.
The
Internal Revenue Service issued contingent payment regulations governing the
calculation of OID on instruments having contingent interest payments. These
contingent payment regulations represent the only guidance regarding the views
of the IRS with respect to contingent interest instruments and specifically
do
not apply for purposes of calculating OID on debt instruments subject to section
1272(a)(6) of the Code, such as the debt securities.
Additionally,
the OID Regulations do not contain provisions specifically interpreting section
1272(a)(6) of the Code. Until the Treasury issues guidance to the contrary,
the
trustee intends to base its computation on section 1272(a)(6) and the OID
Regulations as described in this prospectus. However, because no regulatory
guidance currently exists under section 1272(a)(6) of the Code, there can be
no
assurance that such methodology represents the correct manner of calculating
OID.
The
holder of a debt security issued with OID must include in gross income, for
all
days during its taxable year on which it holds the debt security, the sum of
the
“daily portions” of OID. The amount of OID includible in income by a holder will
be computed by allocating to each day during a taxable year a pro rata portion
of the original issue discount that accrued during the relevant accrual period.
In the case of a debt security that is not a Regular Interest Security and
the
principal payments on which are not subject to acceleration resulting from
prepayments on the loans, the amount of OID includible in income of a holder
for
an accrual period (generally the period over which interest accrues on the
debt
instrument) will equal the product of the yield to maturity of the debt security
and the adjusted issue price of the debt security, reduced by any payments
of
qualified stated interest. The adjusted issue price is the sum of its issue
price plus prior accruals of OID, reduced by the total payments made with
respect to the debt security in all prior periods, other than qualified stated
interest payments.
111
Certain
classes of the debt securities may be “pay-through securities,” which are debt
instruments that are subject to acceleration due to prepayments on other debt
obligations securing those instruments. The amount of OID to be included in
the
income of a pay-through security is computed by taking into account the
prepayment rate assumed in pricing the debt instrument. The amount of OID that
will accrue during an accrual period on a pay-through security is the
excess,
if any,
of the
·
sum
of
·
the
present value of all payments remaining to be made on the pay-through
security as of the close of the accrual period
and
·
the
payments during the accrual period of amounts included in the stated
redemption price of the pay-through
security,
112
over
·
the
adjusted issue price of the pay-through security at the beginning
of the
accrual period.
The
present value of the remaining payments is to be determined on the basis of
three factors:
·
the
original yield to maturity of the pay-through security (determined
on the
basis of compounding at the end of each accrual period and properly
adjusted for the length of the accrual
period),
·
events
that have occurred before the end of the accrual period,
and
·
the
assumption that the remaining payments will be made in ccordance
with the
original prepayment assumption.
The
effect of this method is to increase the portions of OID required to be included
in income by a holder to take into account prepayments with respect to the
loans
at a rate that exceeds the prepayment assumption, and to decrease (but not
below
zero for any period) the portions of OID required to be included in income
by a
holder of a pay-through security to take into account prepayments with respect
to the loans at a rate that is slower than the prepayment assumption. Although
OID will be reported to holders of pay-through securities based on the
prepayment assumption, no representation is made to holders that loans will
be
prepaid at that rate or at any other rate.
The
depositor may adjust the accrual of OID on a class of securities that are
regular REMIC interests (or other regular interests in a REMIC) in a manner
that
it believes to be appropriate, to take account of realized losses on the loans,
although the OID Regulations do not provide for such adjustments. If the IRS
were to require that OID be accrued without such adjustments, the rate of
accrual of OID for a class of securities that are regular REMIC interests could
increase.
Certain
classes of securities that are regular REMIC interests may represent more than
one class of REMIC regular interests. Unless otherwise provided in the related
prospectus supplement, the applicable trustee intends, based on the OID
Regulations, to calculate OID on such securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt
instrument.
A
subsequent holder of a debt security will also be required to include OID in
gross income, but the holder who purchases the debt security for an amount
that
exceeds its adjusted issue price will be entitled (as will an initial holder
who
pays more than a debt security’s issue price) to offset such OID by comparable
economic accruals of portions of the excess.
Effects
of Defaults and Delinquencies.
In the
opinion of tax counsel, holders will be required to report income with respect
to the related securities under an accrual method without giving effect to
delays and reductions in distributions attributable to a default or delinquency
on the loans, except possibly to the extent that it can be established that
such
amounts are uncollectible. As a result, the amount of income (including OID)
reported by a holder of a security in any period could significantly exceed
the
amount of cash distributed to the holder in that period. The holder will
eventually be allowed a loss (or will be allowed to report a lesser amount
of
income) to the extent that the aggregate amount of distributions on the
securities is reduced as a result of a loan default. However, the timing and
character of losses or reductions in income are uncertain and, accordingly,
holders of securities should consult their own tax advisors on this
point.
113
Interest
Weighted Securities.
An
“interest weighted security” is a security that is a REMIC regular interest or a
“stripped” security (as discussed under “—Tax Status as a Grantor Trust;
General” below) the payments on which consist solely or primarily of a specified
portion of the interest payments on qualified mortgages held by the REMIC or
on
loans underlying pass-through securities. It is not clear how income should
be
accrued with respect to interest weighted securities. The trustee intends to
take the position that all of the income derived from an interest weighted
security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the interest weighted security as
a
compound interest security. However, in the case of interest weighted securities
that are entitled to some payments of principal and are REMIC regular interests,
the IRS could assert that income derived from the interest weighted security
should be calculated as if the security were a security purchased at a premium
equal to the excess of the price paid by the holder for the Security over its
stated principal amount, if any. Under this approach, a holder would be entitled
to amortize such premium only if it has in effect an election under section
171
of the Code with respect to all taxable debt instruments held by such holder,
as
described below. Alternatively, the IRS could assert that an interest weighted
security should be taxable under the rules governing bonds issued with
contingent payments. This treatment may be more likely in the case of interest
weighted securities that are stripped securities as described below.
See“—Non-REMIC
Certificates—B. Multiple Classes of Senior Certificates—Stripped
Bonds and Stripped Coupons”
below.
Variable
Rate Debt Securities.
In the
opinion of tax counsel, in the case of debt securities bearing interest at
a
rate that varies directly, according to a fixed formula, with an objective
index, it appears that the yield to maturity of the debt securities and in
the
case of pay-through securities, the present value of all payments remaining
to
be made on the debt securities, should be calculated as if the interest index
remained at its value as of the issue date of the securities. Because the proper
method of adjusting accruals of OID on a variable rate debt security is
uncertain, holders of variable rate debt securities should consult their own
tax
advisers regarding the appropriate treatment of such securities for federal
income tax purposes.
Market
Discount.
In the
opinion of tax counsel, a purchaser of a security may be subject to the market
discount rules of sections 1276 through 1278 of the Code. A holder that acquires
a debt security with more than a prescribed de minimis amount of “market
discount” (generally, the excess of the principal amount of the debt security
over the purchaser’s purchase price) will be required to include accrued market
discount in income as ordinary income in each month, but limited to an amount
not exceeding the principal payments on the debt security received in that
month
and, if the securities are sold, the gain realized. This market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, market discount would in general accrue
either
114
·
on
the basis of a constant yield (in the case of a pay-through security,
taking into account a prepayment assumption)
or
·
in
the ratio of (a) in the case of securities (or in the case of a
pass-through security, as set forth below, the loans underlying the
security) not originally issued with OID, stated interest payable
in the
relevant period to total stated interest remaining to be paid at
the
beginning of the period or (b) in the case of securities (or, in
the case
of a pass-through security, as described below, the loans underlying
the
security) originally issued at a discount, OID in the relevant period
to
total OID remaining to be paid.
Section
1277 of the Code provides that, regardless of the origination date of the debt
security (or, in the case of a pass-through security, the loans), the excess
of
interest paid or accrued to purchase or carry the security (or, in the case
of a
pass-through security, as described below, the underlying loans) with market
discount over interest received on the security is allowed as a current
deduction only to the extent such excess is greater than the market discount
that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon
the
sale, disposition, or repayment of the security (or in the case of a
pass-through security, an underlying loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not
apply.
Premium.
In the
opinion of tax counsel, a holder who purchases a debt security (other than
an
interest weighted security to the extent described above) at a cost greater
than
its stated redemption price at maturity, generally will be considered to have
purchased the security at a premium, which it may elect to amortize as an offset
to interest income on the security (and not as a separate deduction item) on
a
constant yield method. Although no regulations addressing the computation of
premium accrual on comparable securities have been issued, the legislative
history of the 1986 Act indicates that premium is to be accrued in the same
manner as market discount. Accordingly, it appears that the accrual of premium
on a class of pay-through securities will be calculated using the prepayment
assumption used in pricing the class. If a holder makes an election to amortize
premium on a debt security, the election will apply to all taxable debt
instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter
by
the holder, and will be irrevocable without the consent of the IRS. Purchasers
who pay a premium for the securities should consult their tax advisers regarding
the election to amortize premium and the method to be employed.
On
December 30, 1997, the IRS issued final amortizable bond premium regulations
dealing with amortizable bond premium. The regulations specifically do not
apply
to prepayable debt instruments subject to section 1272(a)(6) of the Code. Absent
further guidance from the IRS, the trustee intends to account for amortizable
bond premium in the manner described above. Prospective purchasers of the debt
securities should consult their tax advisors regarding the possible application
of the amortizable bond premium regulations.
115
Election
to Treat All Interest as Original Issue Discount.
The OID
Regulations permit the holder of a debt security to elect to accrue all
interest, discount (including de minimis market discount or OID) and premium
income as interest, based on a constant yield method for Debt securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a debt security with market discount, the holder of the debt security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount
that
such holder of the debt security acquires during the year of the election or
thereafter. Similarly, the holder of a debt security that makes this election
for a debt security that is acquired at a premium will be deemed to have made
an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect
to
a debt security is irrevocable.
Sale
or Exchange of a Debt Security.
Sale or
exchange of a debt security prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount received and the seller’s
adjusted basis in the debt security. Such adjusted basis generally will equal
the seller’s purchase price for the debt security, increased by the OID and
market discount included in the seller’s gross income with respect to the debt
security, and reduced by principal payments on the debt security previously
received by the seller and any premium amortized by the seller. Such gain or
loss will be capital gain or loss to a seller for which a debt security is
a
“capital asset” within the meaning of section 1221 of the Code except to the
extent of any accrued but unrecognized market discount, and will be long-term
or
short-term depending on whether the debt security has been owned for the
long-term capital gain holding period (currently more than one
year).
Non-corporate
taxpayers are subject to reduced maximum rates on long-term capital gains and
are generally subject to tax at ordinary income rates on short-term capital
gains. The deductibility of capital losses is subject to certain limitations.
Prospective investors should consult their own tax advisors concerning these
tax
law provisions.
It
is
possible that capital gain realized by holders of debt securities could be
considered gain realized upon the disposition of property that was part of
a
“conversion transaction.” A sale of a debt security will be part of a conversion
transaction if substantially all of the holder’s expected return is attributable
to the time value of the holder’s net investment, and at least one of the
following conditions is met:
·
the
holder entered the contract to sell the debt security substantially
contemporaneously with acquiring the debt
security;
·
the
debt security is part of a
straddle;
·
the
debt security is marketed or sold as producing capital gain;
or
·
other
transactions to be specified in Treasury regulations that have not
yet
been issued occur.
116
If
the
sale or other disposition of a debt security is part of a conversion
transaction, all or any portion of the gain realized upon the sale or other
disposition would be treated as ordinary income instead of capital
gain.
Non-U.S.
Persons.
Generally, to the extent that a debt security evidences ownership in mortgage
loans that are issued on or before July 18, 1984, interest or OID paid by the
person required to withhold tax under section 1441 or 1442 of the Code to (i)
an
owner that is not a U.S. Person or (ii) a debt securityholder holding on behalf
of an owner that is not a U.S. Person, will be subject to federal income tax,
collected by withholding, at a rate of 30% (or such lower rate as may be
provided for interest by an applicable tax treaty). Accrued OID recognized
by
the owner on the sale or exchange of such a debt security also will be subject
to federal income tax at the same rate. Generally, such payments would not
be
subject to withholding to the extent that a debt security evidences ownership
in
mortgage loans issued after July 18, 1984, if
·
the
debt securityholder does not actually or constructively own 10% or
more of
the combined voting power of all classes of equity in the issuer
(which
for purposes of this discussion may be defined as the trust
fund);
·
the
debt securityholder is not a controlled foreign corporation within
the
meaning of section 957 of the Code related to the issuer;
and
·
the
debt securityholder complies with certain identification requirements,
including delivery of a statement, signed by the debt securityholder
under
penalties of perjury, certifying that it is not a U.S. Person and
providing its name and address.
Information
Reporting and Backup Withholding.
The
master servicer will furnish or make available, within a reasonable time after
the end of each calendar year, to each holder of a debt security at any time
during the year, such information as may be deemed necessary or desirable to
assist securityholders in preparing their federal income tax returns, or to
enable holders to make the information available to owners or other financial
intermediaries of holders that hold the debt securities as nominees. If a
holder, owner or other recipient of a payment on behalf of an owner fails to
supply a certified taxpayer identification number or if the Secretary of the
Treasury determines that such person has not reported all interest and dividend
income required to be shown on its federal income tax return, backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against the
recipient’s federal income tax liability.
Non-REMIC
Certificates
Single
Class of Senior Certificates
Characterization.
The
trust fund may be created with one class of senior certificates and one class
of
subordinated certificates. In this case, each senior certificateholder will
be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the trust fund represented by that senior certificate
and
will be considered the equitable owner of a pro rata undivided interest in
each
of the mortgage loans in the related mortgage pool. Any amounts received by
a
senior certificateholder in lieu of amounts due with respect to any mortgage
loan because of a default or delinquency in payment will be treated for federal
income tax purposes as having the same character as the payments they
replace.
117
Each
holder of a senior certificate will be required to report on its federal income
tax return its pro rata share of the entire income from the mortgage loans
in
the trust fund represented by that senior certificate, including interest,
original issue discount, if any, prepayment fees, assumption fees, any gain
recognized upon an assumption and late payment charges received by the master
servicer in accordance with the senior certificateholder’s method of accounting.
Under section 162 or 212 of the Code, each senior certificateholder will be
entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment charges
retained by the master servicer, provided that these amounts are reasonable
compensation for services rendered to the trust fund. A senior certificateholder
that is an individual, estate or trust will be entitled to deduct its share
of
expenses only to the extent such expenses, plus all other section 212 expenses,
exceed 2% of that senior certificateholder’s adjusted gross income. A senior
certificateholder using the cash method of accounting must take into account
its
pro rata share of income and deductions as and when collected by or paid to
the
master servicer. A senior certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions
as
they become due or are paid to the master servicer, whichever is earlier. If
the
servicing fees paid to the master servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess could be considered as a
retained ownership interest by the master servicer, or any person to whom the
master servicer assigned for value all or a portion of the servicing fees,
in a
portion of the interest payments on the mortgage loans. The mortgage loans
might
then be subject to the “coupon stripping” rules of the Code discussed
below.
Unless
otherwise specified in the related prospectus supplement, tax counsel will
deliver its opinion to the depositor with respect to each series of certificates
that:
·
a
senior certificate owned by a “domestic building and loan association”
within the meaning of section 7701(a)(19) of the Code representing
principal and interest payments on mortgage loans will be considered
to
represent “loans . . . secured by an interest in real property which is .
. . residential property” within the meaning of section 7701(a)(19)(C)(v)
of the Code to the extent that the mortgage loans represented by
that
senior certificate are of a type described in the section;
·
a
senior certificate owned by a real estate investment trust representing
an
interest in mortgage loans will be considered to represent “real estate
assets” within the meaning of section 856(c)(4)(A) of the Code and
interest income on the mortgage loans will be considered “interest on
obligations secured by mortgages on real property” within the meaning of
section 856(c)(3)(B) of the Code to the extent that the mortgage
loans
represented by that senior certificate are of a type described in
the
section; and
·
a
senior certificate owned by a REMIC will be an “obligation . . . which is
principally secured by an interest in real property” within the meaning of
section 860G(a)(3)(A) of the Code.
118
The
Small
Business Job Protection Act of 1996, as part of the repeal of the bad debt
reserve method for thrift institutions, repealed the application of section
593(d) of the Code to any taxable year beginning after December 31,1995.
The
assets constituting certain trust funds may include “buydown” mortgage loans.
The characterization of any investment in “buydown” mortgage loans will depend
upon the precise terms of the related buydown agreement, but to the extent
that
such “buydown” mortgage loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. There are no directly applicable
precedents with respect to the federal income tax treatment or the
characterization of investments in “buydown” mortgage loans. Accordingly,
holders of senior certificates should consult their own tax advisors with
respect to characterization of investments in senior certificates representing
an interest in a trust fund that includes “buydown” mortgage loans.
Premium.
The
price paid for a senior certificate by a holder will be allocated to the
holder’s undivided interest in each mortgage loan based on each mortgage loan’s
relative fair market value, so that the holder’s undivided interest in each
mortgage loan will have its own tax basis. A senior certificateholder that
acquires an interest in mortgage loans at a premium may elect to amortize the
premium under a constant interest method, provided that the mortgage loan was
originated after September 27, 1985. Premium allocable to a mortgage loan
originated on or before September 27, 1985 should be allocated among the
principal payments on the mortgage loan and allowed as an ordinary deduction
as
principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on a senior certificate. The basis for a senior
certificate will be reduced to the extent that amortizable premium is applied
to
offset interest payments.
It
is not
clear whether a reasonable prepayment assumption should be used in computing
amortization of premium allowable under section 171 of the Code. A
certificateholder that makes this election for a certificate that is acquired
at
a premium will be deemed to have made an election to amortize bond premium
with
respect to all debt instruments having amortizable bond premium that the
certificateholder acquires during the year of the election or
thereafter.
If
a
premium is not subject to amortization using a reasonable prepayment assumption,
the holder of a senior certificate acquired at a premium should recognize a
loss, if a mortgage loan prepays in full, equal to the difference between the
portion of the prepaid principal amount of the mortgage loan that is allocable
to the senior certificate and the portion of the adjusted basis of the senior
certificate that is allocable to the mortgage loan. If a reasonable prepayment
assumption is used to amortize the premium, it appears that a loss would be
available, if at all, only if prepayments have occurred at a rate faster than
the reasonable assumed prepayment rate. It is not clear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
On
December 30, 1997, the Internal Revenue Service issued final amortizable bond
premium regulations. These regulations, which generally are effective for bonds
issued or acquired on or after March 2, 1998 (or, for holders making an election
for the taxable year that included March 2, 1998 or any subsequent taxable
year,
shall apply to bonds held on or after the first day of the taxable year of
the
election). The amortizable bond premium regulations specifically do not apply
to
prepayable debt instruments or any pool of debt instruments, such as the trust
fund, the yield on which may be affected by prepayments which are subject to
section 1272(a)(6) of the Code. Absent further guidance from the IRS and unless
otherwise specified in the related prospectus supplement, the trustee will
account for amortizable bond premium in the manner described above. Prospective
purchasers should consult their tax advisors regarding amortizable bond premium
and the amortizable bond premium regulations.
119
Original
Issue Discount.
The IRS
has stated in published rulings that, in circumstances similar to those
described herein, the special rules of the Code (currently sections 1271 through
1273 and section 1275) relating to original issue discount (OID) will be
applicable to a senior certificateholder’s interest in those mortgage loans
meeting the conditions necessary for these sections to apply. Accordingly,
the
following discussion is based in part on the Treasury’s OID Regulations issued
on February 2, 1994 under sections 1271 through 1273 and section 1275 of the
Code. Certificateholders should be aware, however, that the OID Regulations
do
not adequately address certain issues relevant to prepayable securities, such
as
the certificates. Rules regarding periodic inclusion of OID income are
applicable to mortgages of corporations originated after May 27, 1969, mortgages
of noncorporate mortgagors (other than individuals) originated after July 1,
1982, and mortgages of individuals originated after March 2, 1984. OID could
arise by the financing of points or other charges by the originator of the
mortgages in an amount greater than a statutory de
minimis
exception to the extent that the points are not currently deductible under
applicable provisions of the Code or are not for services provided by the
lender. OID generally must be reported as ordinary gross income as it accrues
under a constant interest method. See “—B. Multiple Classes of Senior
Certificates—Senior
Certificates Representing Interests in Loans Other than ARM
Loans—Accrual
of Original Issue Discount”
below.
Market
Discount.
A
senior certificateholder that acquires an undivided interest in mortgage loans
may be subject to the market discount rules of sections 1276 through 1278 to
the
extent an undivided interest in a mortgage loan is considered to have been
purchased at a “market discount”. Generally, the excess of the portion of the
principal amount of a mortgage loan allocable to the holder’s undivided interest
over the holder’s tax basis in such interest. Market discount with respect to a
senior certificate will be considered to be zero if the amount allocable to
the
senior certificate is less than 0.25% of the senior certificate’s stated
redemption price at maturity multiplied by the weighted average maturity
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and
the
advisability of making any of the elections allowed under sections 1276 through
1278 of the Code.
The
Code
provides that any principal payment, whether a scheduled payment or a
prepayment, or any gain on disposition of a market discount bond acquired by
the
taxpayer after October 22, 1986 shall be treated as ordinary income to the
extent that it does not exceed the accrued market discount at the time of such
payment. The amount of accrued market discount for purposes of determining
the
tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary
income.
120
The
Code
also grants to the Department of the Treasury authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. Although the
Treasury has not yet issued regulations, rules described in the relevant
legislative history will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest rate or according to one of the following methods. If a senior
certificate is issued with OID, the amount of market discount that accrues
during any accrual period is equal to the product of
·
the
total remaining market discount
times
·
a
fraction, the numerator of which is the original issue discount accruing
during the period and the denominator of which is the total remaining
original issue discount at the beginning of the accrual
period.
For
senior certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of
·
the
total remaining market discount
times
·
a
fraction, the numerator of which is the amount of stated interest
paid
during the accrual period and the denominator of which is the total
amount
of stated interest remaining to be paid at the beginning of the accrual
period.
For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the senior certificates) which provide for payments
which may be accelerated by reason of prepayments of other obligations securing
such instruments, the same prepayment assumption applicable to calculating
the
accrual of original issue discount will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a senior certificate purchased
at
a discount or premium in the secondary market.
A
holder
who acquires a senior certificate at a market discount also may be required
to
defer, until the maturity date of the senior certificate or its earlier
disposition in a taxable transaction, the deduction of a portion of the amount
of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the senior certificate
in excess of the aggregate amount of interest (including OID) includible in
such
holder’s gross income for the taxable year with respect to the senior
certificate. The amount of such net interest expense deferred in a taxable
year
may not exceed the amount of market discount accrued on the senior certificate
for the days during the taxable year on which the holder held the senior
certificate and, in general, would be deductible when such market discount
is
includible in income. The amount of any remaining deferred deduction is to
be
taken into account in the taxable year in which the senior certificate matures
or is disposed of in a taxable transaction. In the case of a disposition in
which gain or loss is not recognized in whole or in part, any remaining deferred
deduction will be allowed to the extent of gain recognized on the disposition.
This deferral rule does not apply if the senior certificateholder elects to
include such market discount in income currently as it accrues on all market
discount obligations acquired by the senior certificateholder in that taxable
year or thereafter.
121
Election
to Treat All Interest as Original Issue Discount.
The OID
Regulations permit a certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method for certificates acquired on
or
after April 4, 1994. If such an election is made with respect to a mortgage
loan
with market discount, the certificateholder will be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that such certificateholder
acquires during the year of the election or thereafter. Similarly, a
certificateholder that makes this election for a certificate that is acquired
at
a premium will be deemed to have made an election to amortize bond premium
with
respect to all debt instruments having amortizable bond premium that such
certificateholder owns or acquires. See“—Regular
Certificates—Original
Issue Discount and Premium”
below.
The election to accrue interest, discount and premium on a constant yield method
with respect to a certificate is irrevocable.
Anti-abuse
Rule.
The IRS
is permitted to apply or depart from the rules contained in the OID Regulations
as necessary or appropriate to achieve a reasonable result where a principal
purpose in structuring a mortgage asset, mortgage loan or senior certificate,
or
the effect of applying the otherwise applicable rules, is to achieve a result
that is unreasonable in light of the purposes of the applicable statutes (which
generally are intended to achieve the clear reflection of income for both
issuers and holders of debt instruments).
Multiple
Classes of Senior Certificates
Stripped
Bonds and Stripped Coupons
General.
Pursuant to section 1286 of the Code, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from ownership
of the right to receive some or all of the principal payments results in the
creation of “stripped bonds” with respect to principal payments and “stripped
coupons” with respect to interest payments. For purposes of sections 1271
through 1288 of the Code, section 1286 treats a stripped bond or a stripped
coupon as an obligation issued on the date that such stripped interest is
created. If a trust fund is created with two classes of senior certificates,
one
class of senior certificates will represent the right to principal and interest,
or principal only, on all or a portion of the mortgage loans (“stripped bond
certificates”), while the second class of senior certificates will represent the
right to some or all of the interest on such portion (“stripped coupon
certificates”).
Servicing
fees in excess of reasonable servicing fees will be treated under the stripped
bond rules. If such excess servicing fee is less than 100 basis points (i.e.,
1%
interest on the mortgage loan principal balance) or the certificates are
initially sold with a de
minimis
discount
(assuming no prepayment assumption is required), any non-de
minimis
discount
arising from a subsequent transfer of the certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees
be
calculated on a mortgage loan by mortgage loan basis, which could result in
some
mortgage loans being treated as having more than 100 basis points of interest
stripped off.
122
Although
not entirely clear, a stripped bond certificate generally should be treated
as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Generally, if the discount on a
stripped bond certificate is larger than a de minimis
amount
(as calculated for purposes of the original issue discount rules), a purchaser
of such a certificate will be required to accrue the discount under the original
issue discount rules of the Code. See“—Single
Class of Senior Certificates—Original
Issue Discount”
above.
However, a purchaser of a stripped bond certificate will be required to account
for any discount on the certificate as market discount rather than original
issue discount if either
·
the
amount of OID with respect to the certificate was treated as zero
under
the OID de minimis
rule when the certificate was stripped,
or
·
no
more than 100 basis points (including any amount of servicing in
excess of
reasonable servicing) are stripped off the trust fund’s mortgage
loans.
Pursuant
to Revenue Procedure 91-49 issued on August 8, 1991, purchasers of stripped
bond
certificates using an inconsistent method of accounting must change their method
of accounting and request the consent of the IRS to the change in their
accounting method on a statement attached to their first timely tax return
filed
after August 8, 1991.
The
precise tax treatment of stripped coupon certificates is substantially
uncertain. The Code could be read literally to require that original issue
discount computations be made on a mortgage loan by mortgagee loan basis.
However, based on recent IRS guidance, it appears that a stripped coupon
certificate should be treated as a single installment obligation subject to
the
original issue discount rules of the Code. As a result, all payments on a
stripped coupon certificate would be included in the certificate’s stated
redemption price at maturity for purposes of calculating income on such
certificate under the original issue discount rules of the Code.
It
is
unclear under what circumstances, if any, the prepayment of mortgage loans
will
give rise to a loss to the holder of a stripped bond certificate purchased
at a
premium or a stripped coupon certificate. If a senior certificate is treated
as
a single instrument (rather than an interest in discrete mortgage loans) and
the
effect of prepayments is taken into account in computing yield with respect
to
the senior certificate, it appears that no loss may be available as a result
of
any particular prepayment unless prepayments occur at a rate faster than the
assumed prepayment rate. However, if the senior certificate is treated as an
interest in discrete mortgage loans or if no prepayment assumption is used,
then, when a mortgage loan is prepaid, the holder of the certificate should
be
able to recognize a loss equal to the portion of the adjusted issue price of
the
certificate that is allocable to the mortgage loan.
Because
of the complexity of these issues, we strongly suggest that holders of stripped
bond certificates and stripped coupon certificates consult with their own tax
advisors regarding the proper treatment of these certificates for federal income
tax purposes.
123
Treatment
of Certain Owners.
Several
sections of the Code provide beneficial treatment to certain taxpayers that
invest in mortgage loans of the type that make up the trust fund. With respect
to these sections, no specific legal authority exists regarding whether the
character of the senior certificates, for federal income tax purposes, will
be
the same as that of the underlying mortgage loans. While section 1286 treats
a
stripped obligation as a separate obligation for purposes of the provisions
of
the Code addressing original issue discount, it is not clear whether such
characterization would apply with regard to these other sections. Although
the
issue is not free from doubt, in the opinion of tax counsel, based on policy
considerations, each class of senior certificates should be considered to
represent “real estate assets” within the meaning of section 856(c)(4)(A) of the
Code and “loans . . . secured by, an interest in real property which is . . .
residential real property” within the meaning of section 7701(a)(19)(C)(v) of
the Code, and interest income attributable to senior certificates should be
considered to represent “interest on obligations secured by mortgages on real
property” within the meaning of section 856(c)(3)(B) of the Code, provided that
in each case the underlying mortgage loans and interest on such mortgage loans
qualify for such treatment. Prospective purchasers to which such
characterization of an investment in senior certificates is material should
consult their own tax advisors regarding the characterization of the senior
certificates and related income. Senior certificates will be “obligations
(including any participation or certificate of beneficial ownership therein)
which are principally secured by an interest in real property” within the
meaning of section 860G(a)(3)(A) of the Code.
Senior
Certificates Representing Interests in Loans Other Than ARM
Loans
General.
The OID
rules of sections 1271 through 1275 of the Code will be applicable to a senior
certificateholder’s interest in those mortgage loans as to which the conditions
for the application of those sections are met. Rules regarding periodic
inclusion of original issue discount in income are applicable to mortgages
of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Under the OID Regulations, OID
could
arise by the charging of points by the originator of the mortgage in an amount
greater than the statutory de
minimis
exception, including a payment of points that is currently deductible by the
borrower under applicable provisions of the Code, or, under certain
circumstances, by the presence of “teaser” rates on the mortgage loans. OID on
each senior certificate must be included in the owner’s ordinary income for
federal income tax purposes as it accrues, in accordance with a constant
interest method that takes into account the compounding of interest, in advance
of receipt of the cash attributable to such income. The amount of OID required
to be included in an owner’s income in any taxable year with respect to a senior
certificate representing an interest in mortgage loans other than mortgage
loans
with interest rates that adjust periodically (ARM loans) likely will be computed
as described under “—Accrual
of Original Issue Discount”
below.
The following discussion is based in part on the OID Regulations and in part
on
the provisions of the Tax Reform Act of 1986, as amended. The OID Regulations
generally are effective for debt instruments issued on or after April 4, 1994,
but may be relied upon as authority with respect to debt instruments such as
the
senior certificates issued after December 21, 1992. Alternatively, proposed
Treasury regulations issued December 21, 1992 may be treated as authority for
debt instruments issued after December 21, 1992 and prior to April 4, 1994,
and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority for instruments issued before December 21, 1992. In applying these
dates, the issue date of the mortgage loans should be used or, in the case
of
stripped bond certificates or stripped coupon certificates, the date when these
certificates are acquired. The holder of a senior certificate should be aware,
however, that neither the proposed OID Regulations nor the OID Regulations
adequately address certain issues relevant to prepayable
securities.
124
Under
the
Code, the mortgage loans underlying each senior certificate will be treated
as
having been issued on the date they were originated with an amount of OID equal
to the excess of such mortgage loan’s stated redemption price at maturity over
its issue price. The issue price of a mortgage loan is generally the amount
lent
to the mortgagee, which may be adjusted to take into account certain loan
origination fees. The stated redemption price at maturity of a mortgage loan
is
the sum of all payments to be made on such mortgage loan other than payments
that are treated as qualified stated interest payments. The accrual of this
OID,
as described under “— Accrual
of Original Issue Discount”
below,
will, unless otherwise specified in the related prospectus supplement, utilize
the original yield to maturity of the senior certificate calculated based on
a
reasonable assumed prepayment rate for the mortgage loans underlying the senior
certificates and will take into account events that occur during the calculation
period. This prepayment assumption will be determined in the manner prescribed
by regulations that have not yet been issued. The legislative history of the
Tax
Reform Act provides, however, that the regulations will require that this
prepayment assumption be the prepayment assumption that is used in determining
the offering price of the certificate. No representation is made that any
certificate will prepay at the prepayment assumption or at any other rate.
The
prepayment assumption contained in the Code literally only applies to debt
instruments collateralized by other debt instruments that are subject to
prepayment rather than direct ownership interests in such debt instruments,
such
as the certificates represent. However, no other legal authority provides
guidance with regard to the proper method for accruing OID on obligations that
are subject to prepayment, and, until further guidance is issued, the master
servicer intends to calculate and report OID under the method described
below.
Accrual
of Original Issue Discount.
Generally, the owner of a senior certificate must include in gross income the
sum of the “daily portions”, as defined below, of the OID on that senior
certificate for each day on which it owns the senior certificate, including
the
date of purchase but excluding the date of disposition. In the case of an
original owner, the daily portions of original issue discount with respect
to
each component generally will be determined as follows under the Amendments.
A
calculation will be made by the master servicer or such other entity specified
in the related prospectus supplement of the portion of original issue discount
that accrues during each successive monthly accrual period (or shorter period
from the date of original issue) that ends on the day in the calendar year
corresponding to each of the distribution dates on the senior certificate (or
the day prior to each such date). This will be done, in the case of each full
month accrual period, by adding
·
the
present value at the end of the accrual period (determined by using
as a
discount factor the original yield to maturity of the respective
component, under the Prepayment Assumption) of all remaining payments
to
be received under the Prepayment Assumption on the respective component,
and
125
·
any
payments received during such accrual period (other than a payment
of
qualified stated interest), and subtracting from that total the “adjusted
issue price” of the respective component at the beginning of such accrual
period.
The
“adjusted issue price” of a senior certificate at the beginning of the first
accrual period is its issue price; the “adjusted issue price” of a senior
certificate at the beginning of a subsequent accrual period is the “adjusted
issue price” at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period reduced by the amount of
any
payment (other than a payment of qualified stated interest) made at the end
of
or during that accrual period. The OID during the accrual period will then
be
divided by the number of days in the period to determine the daily portion
of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of original
issue
discount must be determined according to an appropriate allocation under any
reasonable method.
OID
generally must be reported as ordinary gross income as it accrues under a
constant interest method that takes into account the compounding of interest
as
it accrues rather than when received. However, the amount of OID includible
in
the income of a holder of an obligation is reduced when the obligation is
acquired after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued OID, less prior payments of
principal. Accordingly, if mortgage loans acquired by a certificateholder are
purchased at a price equal to the then unpaid principal amount of such mortgage
loan, no original issue discount attributable to the difference between the
issue price and the original principal amount of such mortgage loan
(i.e.,
points)
will be includible by such holder. Other OID on the mortgage loans (e.g.,
that
arising from a “teaser” rate) would still need to be accrued.
Senior
Certificates Representing Interests in ARM Loans
The
OID
Regulations do not address the treatment of instruments, such as the senior
certificates (if the related trust fund includes ARM loans), which represent
interests in ARM loans. Additionally, the IRS has not issued guidance under
the
coupon stripping rules of the Code with respect to these instruments. In the
absence of any authority, the master servicer will report OID on senior
certificates attributable to ARM loans (“stripped ARM obligations”) to holders
in a manner it believes to be consistent with the rules described under the
heading “— Senior
Certificates Representing Interests in Loans Other Than ARM
Loans”
above
and with the OID Regulations. In general, application of these rules may require
inclusion of income on a stripped ARM obligation in advance of the receipt
of
cash attributable to such income. Further, the addition of deferred interest
resulting from negative amortization to the principal balance of an ARM loan
may
require the inclusion of such amount in the income of the senior
certificateholder when the amount accrues. Furthermore, the addition of deferred
interest to the senior certificate’s principal balance will result in additional
income (including possibly OID income) to the senior certificateholder over
the
remaining life of the senior certificates.
Because
the treatment of stripped ARM obligations is uncertain, investors are urged
to
consult their tax advisors regarding how income will be includible with respect
to these certificates.
126
Possible
Application of Contingent Payment Regulations to Certain Non-REMIC
Certificates
Final
regulations issued on June 11, 1996 with respect to OID under section 1275
include “contingent payment regulations” covering obligations that provide for
one or more contingent payments. Rights to interest payments on a mortgage
loan
might be considered to be contingent within the meaning of the contingent
payment regulations if the interest would not be paid if the borrower exercised
its right to prepay the mortgage loan. However, in the case of an investor
having a right to shares of the interest and principal payments on a mortgage
loan when the share of interest is not substantially greater than the share
of
principal, the possibility of prepayment should not be considered to
characterize otherwise noncontingent interest payments as contingent payments.
The absence of interest payments following a prepayment would be the normal
consequence of the return of the investor’s capital in the form of a principal
payment. On the other hand, a right to interest on such a mortgage loan is
more
likely to be regarded as contingent if held by an investor that does not also
hold a right to the related principal. Such an investor would not recover its
capital through receipt of a principal payment at the time of the prepayment
of
the mortgage loan.
Applying
these principles to the senior certificates, because the mortgage loans are
subject to prepayment at any time, payments on a class of senior certificates
representing a right to interest on the mortgage loans could be considered
to be
contingent within the meaning of the contingent payment regulations, at least
if
the senior certificate was issued at a premium. The likelihood that such
payments will be considered contingent increases the greater the amount of
such
premium.
In
the
event that payments on a senior certificate in respect of interest on the
mortgage loans are considered contingent, then the holder would generally report
income or loss as described under the heading “—Stripped
Bonds and Stripped Coupons”
above;
provided,
however,
that
the yield that would be used in calculating interest income would not be the
actual yield but would instead equal the “applicable Federal rate” (AFR), in
effect at the time of purchase of the senior certificate by the holder. The
AFR
generally is an average of current yields on Treasury securities computed and
published monthly by the IRS. In addition, once the holder’s adjusted basis in
the senior certificate has been reduced (by prior distributions or losses)
to an
amount equal to the aggregate amount of the remaining noncontingent payments
of
the mortgage loans that are allocable to the senior certificate (or to zero
if
the senior certificate does not share in principal payments), then the holder
would recognize income in each subsequent month equal to the full amount of
interest on the mortgage loans that accrues in that month and is allocable
to
the senior certificate. It is uncertain whether, under the contingent payment
regulations, any other adjustments would be made to take account of prepayments
of the mortgage loans.
Sale
or Exchange of a Senior Certificate
Sale
or
exchange of a senior certificate prior to its maturity will result in gain
or
loss equal to the difference, if any, between the amount received and the
seller’s adjusted basis in the senior certificate. Such adjusted basis generally
will equal the seller’s purchase price for the senior certificate, increased by
the OID and market discount included in the seller’s gross income with respect
to the senior certificate, and reduced by principal payments on the senior
certificate previously received by the seller and any premium amortized by
the
seller. Such gain or loss will be capital gain or loss to a seller for which
a
senior certificate is a “capital asset” within the meaning of section 1221 of
the Code except to the extent of any accrued but unrecognized market discount,
and will be long-term or short-term depending on whether the senior certificate
has been owned for the long-term capital gain holding period (currently more
than one year).
127
Non-corporate
taxpayers are subject to reduced maximum rates on long-term capital gains and
are generally subject to tax at ordinary income rates on short-term capital
gains. The deductibility of capital losses is subject to certain limitations.
Prospective investors should consult their own tax advisors concerning these
tax
law provisions.
It
is
possible that capital gain realized by holders of the senior certificates could
be considered gain realized upon the disposition of property that was part
of a
“conversion transaction”. A sale of a senior certificate will be part of a
conversion transaction if substantially all of the holder’s expected return is
attributable to the time value of the holder’s net investment, and at least one
of the following conditions is met:
·
the
holder entered the contract to sell the senior certificate substantially
contemporaneously with acquiring the senior
certificate;
·
the
senior certificate is part of a
straddle;
·
the
senior certificate is marketed or sold as producing capital gain;
or
·
other
transactions to be specified in Treasury regulations that have not
yet
been issued occur.
If
the
sale or other disposition of a senior certificate is part of a conversion
transaction, all or any portion of the gain realized upon the sale or other
disposition would be treated as ordinary income instead of capital
gain.
Senior
certificates will be “evidences of indebtedness” within the meaning of section
582(c)(1) of the Code, so that gain or loss recognized from the sale of a senior
certificate by a bank or a thrift institution to which such section applies
will
be ordinary income or loss.
Non-U.S.
Persons
Generally,
to the extent that a senior certificate evidences ownership in mortgage loans
that are issued on or before July 18, 1984, interest or OID paid by the person
required to withhold tax under section 1441 or 1442 to (i) an owner that is
not
a U.S. Person or (ii) a senior certificate holder holding on behalf of an owner
that is not a U.S. Person, will be subject to federal income tax, collected
by
withholding, at a rate of 30% or such lower rate as may be provided for interest
by an applicable tax treaty. Accrued OID recognized by the owner on the sale
or
exchange of such a senior certificate also will be subject to federal income
tax
at the same rate. Generally, such payments would not be subject to withholding
to the extent that a senior certificate evidences ownership in mortgage loans
issued after July 18, 1984, if
128
·
the
senior certificate holder does not actually or constructively own
10% or
more of the combined voting power of all classes of equity in the
issuer
(which for purposes of this discussion may be defined as the trust
fund);
·
the
senior certificate holder is not a controlled foreign corporation
within
the meaning of section 957 of the Code related to the issuer;
and
·
the
senior certificate holder complies with certain identification
requirements, including delivery of a statement, signed by the senior
certificate holder under penalties of perjury, certifying that it
is not a
U.S. Person and providing its name and
address.
Information
Reporting and Backup Withholding
The
master servicer will furnish or make available, within a reasonable time after
the end of each calendar year, to each certificate holder at any time during
the
year, such information as may be deemed necessary or desirable to assist
security holders in preparing their federal income tax returns, or to enable
holders to make the information available to owners or other financial
intermediaries of holders that hold the certificates as nominees. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply
a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, backup withholding may
be
required with respect to any payments. Any amounts deducted and withheld from
a
distribution to a recipient would be allowed as a credit against the recipient’s
federal income tax liability.
REMIC
Certificates
General
The
trust
fund relating to a series of certificates may elect to be treated as a REMIC.
Qualification as a REMIC requires ongoing compliance with certain conditions.
Although a REMIC is not generally subject to federal income tax (see,
however, “—Prohibited Transactions and Other Taxes”) below, if a trust fund with
respect to which a REMIC election is made fails to comply with one or more
of
the ongoing requirements of the Code for REMIC status during any taxable year
(including the implementation of restrictions on the purchase and transfer
of
the residual interest in a REMIC as described under “—Residual Certificates”
below), the Code provides that a trust fund will not be treated as a REMIC
for
such year and thereafter. In that event, such entity may be taxable as a
separate corporation, and the related REMIC certificates may not be accorded
the
status or given the tax treatment described below. While the Code authorizes
the
Treasury to issue regulations providing relief in the event of an inadvertent
termination of status as a REMIC, no such regulations have been issued.
Moreover, any relief may be accompanied by sanctions such as the imposition
of a
corporate tax on all or a portion of the REMIC’s income for the period in which
the requirements for such status are not satisfied. With respect to each trust
fund that elects REMIC status, in the opinion of tax counsel, assuming
compliance with all provisions of the related Agreement, the trust fund will
qualify as a REMIC and the related certificates will be considered to be regular
interests (“regular certificates”) or residual interests (“residual
certificates”) in the REMIC. The related prospectus supplement for each series
of certificates will indicate whether the trust fund will make a REMIC election
and whether a class of certificates will be treated as a regular or residual
interest in the REMIC.
129
In
general, with respect to each series of certificates for which a REMIC election
is made,
·
certificates
held by a thrift institution taxed as a “domestic building and loan
association” will constitute assets described in section 7701(a)(19)(C) of
the Code;
·
certificates
held by a real estate investment trust will constitute “real estate
assets” within the meaning of section 856(c)(4)(A) of the Code; and
·
interest
on certificates held by a real estate investment trust will be considered
“interest on obligations secured by mortgages on real property” within the
meaning of section 856(c)(3)(B) of the
Code.
If
less
than 95% of the REMIC’s assets are assets qualifying under any of the foregoing
sections, the certificates will be qualifying assets only to the extent that
the
REMIC’s assets are qualifying assets. In addition, payments on mortgage loans
held pending distribution on the REMIC certificates will be considered to be
qualifying assets under the foregoing sections.
In
some
instances, the mortgage loans may not be treated entirely as assets described
in
the foregoing sections. See, in this regard, the discussion of “buy down”
mortgage loans contained in “—Non-REMIC
Certificates—Single Class of Senior Certificates”
above.
REMIC certificates held by a real estate investment trust will not constitute
“Government Securities” within the meaning of section 856(c)(4)(A) of the Code
and REMIC certificates held by a regulated investment company will not
constitute “Government Securities” within the meaning of section
851(b)(4)(A)(ii) of the Code. REMIC certificates held by certain financial
institutions will constitute “evidences of indebtedness” within the meaning of
section 582(c)(1) of the Code.
A
“qualified mortgage” for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within
a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) which are
“single family residences” under section 25(e)(10) of the Code will qualify as
real property without regard to state law classifications. Under section
25(e)(10), a single family residence includes any manufactured home which has
a
minimum of 400 square feet of living space and a minimum width in excess of
102
inches and which is of a kind customarily used at a fixed location.
Tiered
REMIC Structures
For
certain series of certificates, two separate elections may be made to treat
designated portions of the related trust fund as REMICs (respectively, the
“subsidiary REMIC” and the “master REMIC”) for federal income tax purposes. Upon
the issuance of any such series of certificates, tax counsel will deliver its
opinion generally to the effect that, assuming compliance with all provisions
of
the related pooling and servicing agreement, the master REMIC as well as any
subsidiary REMIC will each qualify as a REMIC and the REMIC certificates issued
by the master REMIC and the subsidiary REMIC, respectively, will be considered
to evidence ownership of regular certificates or residual certificates in the
related REMIC within the meaning of the REMIC provisions.
130
Only
REMIC certificates issued by the master REMIC will be offered under this
prospectus. The subsidiary REMIC and the master REMIC will be treated as one
REMIC solely for purposes of determining
·
whether
the REMIC certificates will be (i) “real estate assets” within the meaning
of section 856(c)(4)(A) of the Code or (ii) “loans secured by an interest
in real property” under section 7701(a)(19)(C) of the Code;
and
·
whether
the income on the certificates is interest described in section
856(c)(3)(B) of the Code.
Regular
Certificates
General.
Except
as otherwise stated in this discussion, regular certificates will be treated
for
federal income tax purposes as debt instruments issued by the REMIC and not
as
ownership interests in the REMIC or its assets. Moreover, holders of regular
certificates that otherwise report income under a cash method of accounting
will
be required to report income with respect to regular certificates under an
accrual method.
Original
Issue Discount and Premium.
The
regular certificates may be issued with OID within the meaning of section
1273(a) of the Code. Generally, the amount of OID, if any, will equal the
difference between the “stated redemption price at maturity” of a regular
certificate and its “issue price”. Holders of any class of certificates issued
with OID will be required to include such OID in gross income for federal income
tax purposes as it accrues, in accordance with a constant interest method based
on the compounding of interest, in advance of receipt of the cash attributable
to such income. The following discussion is based in part on the OID Regulations
and in part on the provisions of the Tax Reform Act. Holders of regular
certificates should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities such as
the
regular certificates.
Rules
governing OID are set forth in sections 1271 through 1273 and section 1275
of
the Code. These rules require that the amount and rate of accrual of OID be
calculated based on a Prepayment Assumption and prescribe a method for adjusting
the amount and rate of accrual of such discount where the actual prepayment
rate
differs from the Prepayment Assumption. Under the Code, the Prepayment
Assumption must be determined in the manner prescribed by regulations which
have
not yet been issued. The Legislative History provides, however, that Congress
intended the regulations to require that the Prepayment Assumption be the
prepayment assumption that is used in determining the initial offering price
of
the regular certificates. The prospectus supplement for each series of regular
certificates will specify the prepayment assumption to be used for the purpose
of determining the amount and rate of accrual of OID. No representation is
made
that the regular certificates will prepay at the prepayment assumption or at
any
other rate.
131
In
general, each regular certificate will be treated as a single installment
obligation issued with an amount of OID equal to the excess of its “stated
redemption price at maturity” over its “issue price”. The issue price of a
regular certificate is the first price at which a substantial amount of regular
certificates of that class are sold to the public (excluding bond houses,
brokers, underwriters or wholesalers). If less than a substantial amount of
a
particular class of regular certificates is sold for cash on or prior to the
date of their initial issuance, the issue price for that class will be treated
as the fair market value of that class on the initial issue date. The issue
price of a regular certificate also includes the amount paid by an initial
regular certificate holder for accrued interest that relates to a period prior
to the initial issue date of the regular certificate. The stated redemption
price at maturity of a regular certificate includes the original principal
amount of the regular certificate, but generally will not include distributions
of interest if such distributions constitute “qualified stated interest”.
Qualified stated interest generally means interest payable at a single fixed
rate or qualified variable rate (as described below) provided that the interest
payments are unconditionally payable at intervals of one year or less during
the
entire term of the regular certificate. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on regular certificates
with respect to which deferred interest will accrue will not constitute
qualified stated interest payments, in which case the stated redemption price
at
maturity of the regular certificates includes all distributions of interest
as
well as principal thereon.
Where
the
interval between the initial issue date and the first distribution date on
a
regular certificate is longer than the interval between subsequent distribution
dates, the greater of any OID (disregarding the rate in the first period) and
any interest foregone during the first period is treated as the amount by which
the stated redemption price at maturity of the certificate exceeds its issue
price for purposes of the de
minimis
rule
described below. The OID Regulations suggest that all interest on a
long-first-period regular certificate that is issued with non-de
minimis
OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first distribution date on a regular certificate
is shorter than the interval between subsequent distribution dates, interest
due
on the first Distribution Date in excess of the amount that accrued during
the
first period would be added to the certificates stated redemption price at
maturity. Regular securityholders should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a regular
certificate.
Under
the
de
minimis
rule,
OID on a regular certificate will be considered to be zero if the amount of
OID
is less than 0.25% of the stated redemption price at maturity of the regular
certificate multiplied by the weighted average maturity of the regular
certificate. For this purpose, the weighted average maturity of the regular
certificate is computed as the sum of the amounts determined by multiplying
·
the
number of full years (i.e.,
rounding down partial years) from the issue date until each distribution
in reduction of stated redemption price at maturity is scheduled
to be
made
132
times
·
a
fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the regular
certificate and the denominator of which is the stated redemption
price at
maturity of the regular
certificate.
Although
currently unclear, it appears that the schedule of such distributions should
be
determined in accordance with the assumed rate of prepayment of the mortgage
loans and the anticipated reinvestment rate, if any, relating to the regular
certificates. This prepayment assumption with respect to a series of regular
certificates will be set forth in the related prospectus supplement. Holders
generally must report de
minimis OID
pro
rata as principal payments are received and such income will be capital gain
if
the regular certificate is held as a capital asset. However, accrual method
holders may elect to accrue all de
minimis
OID as
well as market discount under a constant interest method.
The
prospectus supplement with respect to a trust fund may provide for certain
regular certificates to be issued as “super-premium” certificates at prices
significantly exceeding their principal amounts or based on notional principal
balances. The income tax treatment of these super-premium certificates is not
entirely certain. For information reporting purposes, the trust fund intends
to
take the position that the stated redemption price at maturity of the
super-premium certificates is the sum of all payments to be made on these
certificates determined under the prepayment assumption set forth in the related
prospectus supplement, with the result that the super-premium certificates
would
be treated as being issued with OID. The calculation of income in this manner
could result in negative OID (which delays future accruals of OID rather than
being immediately deductible) when prepayments on the mortgage loans exceed
those estimated under the prepayment assumption. The IRS might contend, however,
that the contingent payment regulations should apply to the super-premium
certificates.
Although
the contingent payment regulations are not applicable to instruments governed
by
section 1272(a)(6) of the Code, they represent the only guidance regarding
the
current view of the IRS with respect to contingent payment instruments. In
the
alternative, the IRS could assert that the stated redemption price at maturity
of such regular certificates should be limited to their principal amount
(subject to the discussion under “—Accrued
Interest Certificates”
below),
so that such regular certificates would be considered for U.S. federal income
tax purposes to be issued at a premium. If such position were to prevail, the
rules described under “—Premium” below would apply. It is unclear when a loss
may be claimed for any unrecovered basis for a super-premium certificate. It
is
possible that a holder of a super-premium certificate may only claim a loss
when
its remaining basis exceeds the maximum amount of future payments, assuming
no
further prepayments, or when the final payment is received with respect to
the
super-premium certificate.
Under
the
REMIC Regulations, if the issue price of a regular certificate (other than
regular certificate based on a notional amount) does not exceed 125% of its
actual principal amount, the interest rate is not considered disproportionately
high. Accordingly, a regular certificate generally should not be treated as
a
super-premium certificate and the rules described below under “—Premium”
below
should apply. However, it is possible that holders of regular certificates
issued at a premium, even if the premium is less than 25% of the certificate’s
actual principal balance, will be required to amortize the premium under an
OID
method or contingent interest method even though no election under section
171
of the Code is made to amortize such premium.
133
Generally,
a regular certificateholder must include in gross income the “daily portions,”
as determined below, of the OID that accrues on a regular certificate for each
day the regular certificateholder holds the regular certificate, including
the
purchase date but excluding the disposition date. In the case of an original
holder of a regular certificate, a calculation will be made of the portion
of
the OID that accrues during each successive accrual period that ends on the
day
in the calendar year corresponding to a distribution date (or if distribution
dates are on the first day or first business day of the immediately preceding
month, interest may be treated as payable on the last day of the immediately
preceding month) and begins on the day after the end of the immediately
preceding accrual period (or on the issue date in the case of the first accrual
period). This will be done, in the case of each full accrual period, by
adding
·
the
present value at the end of the accrual period (determined by using
as a
discount factor the original yield to maturity of the regular certificates
as calculated under the Prepayment Assumption) of all remaining payments
to be received on the regular certificate under the Prepayment Assumption,
and
·
any
payments included in the stated redemption price at maturity received
during the accrual period,
and
subtracting from that total the “adjusted issue price” of the regular
certificates at the beginning of the accrual period.
The
“adjusted issue price” of a regular certificate at the beginning of the first
accrual period is its issue price; the “adjusted issue price” of a regular
certificate at the beginning of a subsequent accrual period is the “adjusted
issue price” at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period and reduced by the accrual
period. The OID accrued during an accrual period will then be divided by the
number of days in the period to determine the daily portion of OID for each
day
in the accrual period. The calculation of OID under the method described above
will cause the accrual of OID to either increase or decrease (but never below
zero) in a given accrual period to reflect the fact that prepayments are
occurring faster or slower than under the Prepayment Assumption. With respect
to
an initial accrual period shorter than a full accrual period, the daily portions
of OID may be determined according to an appropriate allocation under any
reasonable method.
A
subsequent purchaser of a regular certificate issued with OID who purchases
the
regular certificate at a cost less than the remaining stated redemption price
at
maturity will also be required to include in gross income the sum of the daily
portions of OID on that regular certificate. In computing the daily portions
of
OID for such a purchaser (as well as an initial purchaser that purchases at
a
price higher than the adjusted issue price but less than the stated redemption
price at maturity), however, the daily portion is reduced by the amount that
would be the daily portion for such day (computed in accordance with the rules
set forth above) multiplied by a fraction, the numerator of which is the amount,
if any, by which the price paid by such holder for that regular certificate
exceeds the following amount:
134
·
the
sum of the issue price plus the aggregate amount of OID that would
have
been includible in the gross income of an original regular
certificateholder (who purchased the regular certificate at its issue
price),
less
·
any
prior payments included in the stated redemption price at maturity,
and
the
denominator of which is the sum of the daily portions for that regular
certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed under the Prepayment Assumption. A holder
who pays an acquisition premium instead may elect to accrue OID by treating
the
purchase as original issue.
Variable
Rate Regular Certificates. Regular
certificates may provide for interest based on a variable rate. Interest based
on a variable rate will constitute qualified stated interest and not contingent
interest if, generally,
·
the
interest is unconditionally payable at least annually;
·
the
issue price of the debt instrument does not exceed the total noncontingent
principal payments; and
·
interest
is based on a “qualified floating rate”, an “objective rate”, a
combination of a single fixed rate and one or more “qualified floating
rates”, one “qualified inverse floating rate”, or a combination of
“qualified floating rates” that do not operate in a manner that
significantly accelerates or defers interest payments on the regular
certificate.
The
amount of OID with respect to a regular certificate bearing a variable rate
of
interest will accrue in the manner described under “—Original
Issue Discount and Premium”
above
by assuming generally that the index used for the variable rate will remain
fixed throughout the term of the certificate. Appropriate adjustments are made
for the actual variable rate.
Although
unclear at present, the depositor intends to treat interest on a regular
certificate that is a weighted average of the net interest rates on mortgage
loans as qualified stated interest. In such case, the weighted average rate
used
to compute the initial pass-through rate on the regular certificates will be
deemed to be the index in effect through the life of the regular certificates.
It is possible, however, that the IRS may treat some or all of the interest
on
regular certificates with a weighted average rate as taxable under the rules
relating to obligations providing for contingent payments. Such treatment may
effect the timing of income accruals on regular certificates.
Market
Discount.
A
purchaser of a regular certificate may be subject to the market discount
provisions of sections 1276 through 1278 of the Code. Under these provisions
and
the OID Regulations, “market discount” equals the excess, if any, of
135
·
the
regular certificate’s stated principal amount or, in the case of a regular
certificate with OID, the adjusted issue price (determined for this
purpose as if the purchaser had purchased the regular certificate
from an
original holder)
over
·
the
price for the regular certificate paid by the
purchaser.
A
holder
who purchases a regular certificate at a market discount will recognize income
upon receipt of each distribution representing stated redemption price. In
particular, under section 1276 of the Code such a holder generally will be
required to allocate each principal distribution first to accrued market
discount not previously included in income and to recognize ordinary income
to
that extent. A certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by the certificateholder on or after the first day
of
the first taxable year to which the election applies. In addition, the OID
Regulations permit a certificateholder using the accrual method of accounting
to
elect to accrue all interest, discount (including de
minimis
market
or original issue discount) and premium in income as interest, based on a
constant yield method. If such an election is made with respect to a regular
certificate with market discount, the certificateholder will be deemed to have
made an election to include in income currently market discount with respect
to
all other debt instruments having market discount that the certificateholder
acquires during the year of the election or thereafter. Similarly, a
certificateholder that makes this election for a certificate that is acquired
at
a premium will be deemed to have made an election to amortize bond premium
with
respect to all debt instruments having amortizable bond premium that the
certificateholder owns or acquires. See“—Original
Issues Discount and Premium”
above.
The election to accrue interest, discount and premium on a constant yield method
with respect to a certificate is irrevocable.
Market
discount with respect to a regular certificate will be considered to be zero
if
the amount allocable to the regular certificate is less than 0.25% of the
regular certificate’s stated redemption price at maturity multiplied by the
regular certificate’s weighted average maturity remaining after the date of
purchase. If market discount on a regular certificate is considered to be zero
under this rule, the actual amount of market discount must be allocated to
the
remaining principal payments on the regular certificate and gain equal to such
allocated amount will be recognized when the corresponding principal payment
is
made. Treasury regulations implementing the market discount rules have not
yet
been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any
of
the elections allowed under sections 1276 through 1278 of the Code.
The
Code
provides that any principal payment (whether a scheduled payment or a
prepayment) or any gain on disposition of a market discount bond acquired by
the
taxpayer after October 22, 1986, shall be treated as ordinary income to the
extent that it does not exceed the accrued market discount at the time of such
payment. The amount of accrued market discount for purposes of determining
the
tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
136
The
Code
also grants authority to the Treasury to issue regulations providing for the
computation of accrued market discount on debt instruments, the principal of
which is payable in more than one installment. Until such time as regulations
are issued by the Treasury, rules described in the legislative history of the
Tax Reform Act will apply. Under those rules, the holder of a market discount
bond may elect to accrue market discount either on the basis of a constant
interest rate or according to one of the following methods. For regular
certificates issued with OID, the amount of market discount that accrues during
a period is equal to the product of
·
the
total remaining market discount
multiplied
by
·
a
fraction, the numerator of which is the OID accruing during the period
and
the denominator of which is the total remaining OID at the beginning
of
the period.
For
regular certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of
·
the
total remaining market discount
multiplied
by
·
a
fraction, the numerator of which is the amount of stated interest
paid
during the accrual period and the denominator of which is the total
amount
of stated interest remaining to be paid at the beginning of the period.
For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the regular certificates) which provide for
payments which may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply.
A
holder
of a regular certificate that acquires it at a market discount also may be
required to defer, until the maturity date of the regular certificate or its
earlier disposition in a taxable transaction, the deduction of a portion of
the
amount of interest that the holder paid or accrued during the taxable year
on
indebtedness incurred or maintained to purchase or carry the regular certificate
in excess of the aggregate amount of interest (including OID) includible in
the
holder’s gross income for the taxable year with respect to the regular
certificate. The amount of such net interest expense deferred in a taxable
year
may not exceed the amount of market discount accrued on the regular certificate
for the days during the taxable year on which the holder held the regular
certificate and, in general, would be deductible when such market discount
is
includible in income. The amount of any remaining deferred deduction is to
be
taken into account in the taxable year in which the regular certificate matures
or is disposed of in a taxable transaction. In the case of a disposition in
which gain or loss is not recognized in whole or in part, any remaining deferred
deduction will be allowed to the extent of gain recognized on the disposition.
This deferral rule does not apply if the regular certificateholder elects to
include such market discount in income currently as it accrues on all market
discount obligations acquired by the regular certificateholder in that taxable
year or thereafter.
137
Premium.
A
purchaser of a regular certificate who purchases the regular certificate at
a
cost (not including accrued qualified stated interest) greater than its
remaining stated redemption price at maturity will be considered to have
purchased the regular certificate at a premium and may elect to amortize such
premium under a constant yield method. A certificateholder that makes this
election for a certificate that is acquired at a premium will be deemed to
have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such certificateholder acquires during
the
year of the election or thereafter. It is not clear whether the prepayment
assumption would be taken into account in determining the life of the regular
certificate for this purpose. However, the legislative history of the Tax Reform
Act states that the same rules that apply to accrual of market discount (which
rules require use of a prepayment assumption in accruing market discount with
respect to regular certificates without regard to whether the certificates
have
OID) will also apply in amortizing bond premium under section 171 of the Code.
The Code provides that amortizable bond premium will be allocated among the
interest payments on the regular certificates and will be applied as an offset
against the interest payment.
On
June27, 1996, the IRS published in the Federal Register proposed regulations on
the
amortization of bond premium. The foregoing discussion is based in part on
such
proposed regulations. On December 30, 1997, the IRS issued the amortizable
bond
premium regulations which generally are effective for bonds acquired on or
after
March 2, 1998 or, for holders making an election to amortize bond premium as
described above, the taxable year that includes March 2, 1998 or any subsequent
taxable year, will apply to bonds held on or after the first day of taxable
year
in which such election is made. Neither the proposed regulations nor the final
regulations, by their express terms, apply to prepayable securities described
in
section 1272(a)(6) of the Code such as the regular certificates. Holders of
regular certificates should consult their tax advisors regarding the possibility
of making an election to amortize any such bond premium.
Deferred
Interest.
Certain
classes of regular certificates will provide for the accrual of interest when
one or more ARM Loans are adding deferred interest to their principal balance
by
reason of negative amortization. Any deferred interest that accrues with respect
to a class of regular certificates will constitute income to the holders of
such
certificates prior to the time distributions of cash with respect to deferred
interest are made. It is unclear, under the OID Regulations, whether any of
the
interest on such certificates will constitute qualified stated interest or
whether all or a portion of the interest payable on the certificates must be
included in the stated redemption price at maturity of the certificates and
accounted for as OID (which could accelerate such inclusion). Interest on
regular certificates must in any event be accounted for under an accrual method
by the holders of these certificates. Applying the latter analysis therefore
may
result only in a slight difference in the timing of the inclusion in income
of
interest on the regular certificates.
Effects
of Defaults and Delinquencies. Certain
series of certificates may contain one or more classes of subordinated
certificates and, in the event there are defaults or delinquencies on the
mortgage loans, amounts that would otherwise be distributed on the subordinated
certificates may instead be distributed on the senior certificates. Holders
of
subordinated certificates nevertheless will be required to report income with
respect to these certificates under an accrual method without giving effect
to
delays and reductions in distributions on such subordinated certificates
attributable to defaults and delinquencies on the mortgage loans, except to
the
extent that it can be established that such amounts are uncollectible. As a
result, the amount of income reported by a holder of a subordinated certificate
in any period could significantly exceed the amount of cash distributed to
such
holder in that period. The holder will eventually be allowed a loss (or will
be
allowed to report a lesser amount of income) to the extent that the aggregate
amount of distributions on the subordinated certificate is reduced as a result
of defaults and delinquencies on the mortgage loans. However, the timing and
character of such losses or reductions in income are uncertain. Accordingly,
holders of subordinated certificates should consult their own tax advisors
on
this point.
138
Sale,
Exchange or Redemption. If
a
regular certificate is sold, exchanged, redeemed or retired, the seller will
recognize gain or loss equal to the difference between the amount realized
on
the sale, exchange, redemption, or retirement and the seller’s adjusted basis in
the regular certificate. The adjusted basis generally will equal the cost of
the
regular certificate to the seller, increased by any OID and market discount
included in the seller’s gross income with respect to the regular certificate,
and reduced (but not below zero) by payments included in the stated redemption
price at maturity previously received by the seller and by any amortized
premium. Similarly, a holder who receives a payment which is part of the stated
redemption price at maturity of a regular certificate will recognize gain equal
to the excess, if any, of the amount of the payment over the holder’s adjusted
basis in the regular certificate. The holder of a regular certificate that
receives a final payment which is less than the holder’s adjusted basis in the
regular certificate will generally recognize a loss. Except as provided in
the
following paragraph and as provided under “—Market
Discount”
above,
any such gain or loss will be capital gain or loss, provided that the regular
certificate is held as a “capital asset” (generally, property held for
investment) within the meaning of section 1221 of the Code.
Non-corporate
taxpayers are subject to reduced maximum rates on long-term capital gains and
are generally subject to tax at ordinary income rates on short-term capital
gains. The deductibility of capital losses is subject to certain limitations.
Prospective investors should consult their own tax advisors concerning these
tax
law provisions.
Gain
from
the sale or other disposition of a regular certificate that might otherwise
be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess,
if any,
of:
·
the
amount that would have been includible in such holder’s income with
respect to the regular certificate had income accrued thereon at
a rate
equal to 110% of the AFR as defined in section 1274(d) of the Code
determined as of the date of purchase of such regular certificate,
over
·
the
amount actually includible in the holder’s
income.
Gain
from
the sale or other disposition of a regular certificate that might otherwise
be
capital gain will be treated as ordinary income, (i) if the regular certificate
is held as part of a “conversion transaction” as defined in section 1258(c) of
the Code, up to the amount of interest that would have accrued at the applicable
federal rate under section 1274(d) of the Code in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was
held
as part of such transaction, or (ii) if the regular certificate is held as
part
of a straddle. Potential investors should consult their tax advisors with
respect to the tax consequences of ownership and disposition of an investment
in
regular certificates in their particular circumstances.
139
Regular
certificates will be “evidences of indebtedness” within the meaning of section
582(c)(1) of the Code so that gain or loss recognized from the sale of a regular
certificate by a bank or a thrift institution to which such section applies
will
be ordinary income or loss.
The
regular certificate information reports will include a statement of the adjusted
issue price of the regular certificate at the beginning of each accrual period.
In addition, the reports will include information necessary to compute the
accrual of any market discount that may arise upon secondary trading of regular
certificates. Because exact computation of the accrual of market discount on
a
constant yield method would require information relating to the holder’s
purchase price which the REMIC may not have, it appears that the information
reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued
Interest Certificates. Regular
certificates that are “payment lag” certificates may provide for payments of
interest based on a period that corresponds to the interval between distribution
dates but that ends prior to each distribution date. The period between the
initial issue date of the payment lag certificates and their first distribution
date may or may not exceed such interval. Purchasers of payment lag certificates
for which the period between the initial issue date and the first distribution
date does not exceed such interval could pay upon purchase of the regular
certificates accrued interest in excess of the accrued interest that would
be
paid if the interest paid on the distribution date were interest accrued from
distribution date to distribution date. If a portion of the initial purchase
price of a regular certificate is allocable to interest that has accrued prior
to the issue date (“pre-issuance accrued interest”), and the regular certificate
provides for a payment of stated interest on the first payment date (and the
first payment date, is within one year of the issue date) that equals or exceeds
the amount of the pre-issuance accrued interest, then the regular certificate’s
issue price may be computed by subtracting from the issue price the amount
of
pre-issuance accrued interest, rather than as an amount payable on the regular
certificate. However, it is unclear under this method how the proposed OID
Regulations treat interest on payment lag certificates as described above.
Therefore, in the case of a payment lag certificate, the REMIC intends to
include accrued interest in the issue price and report interest payments made
on
the first distribution date as interest only to the extent such payments
represent interest for the number of days that the certificateholder has held
the payment lag certificate during the first accrual period.
Investors
should consult their own tax advisors concerning the treatment for federal
income tax purposes of payment lag certificates.
140
Non-Interest
Expenses of the REMIC.
Under
temporary Treasury regulations, if the REMIC is considered to be a “single-class
REMIC”, a portion of the REMIC’s servicing, administrative and other noninterest
expenses will be allocated as a separate item to those regular securityholders
that are “pass-through interest holders”. Generally, a single-class REMIC is
defined as (i) a REMIC that would be treated as a fixed investment trust under
Treasury regulations but for its qualification as a REMIC or (ii) a REMIC that
is substantially similar to an investment trust but is structured with the
principal purpose of avoiding this allocation requirement imposed by the
temporary regulations. Such a pass-through interest holder would be required
to
add its allocable share, if any, of such expenses to its gross income and to
treat the same amount as an item of investment expense. An individual generally
would be allowed a deduction for such expenses only as a miscellaneous itemized
deduction subject to the limitations under section 67 of the Code. That section
allows such deductions only to the extent that in the aggregate such expenses
exceed 2% of the holder’s adjusted gross income. In addition, section 68 of the
Code provides that the amount of itemized deductions otherwise allowable for
an
individual whose adjusted gross income exceeds a certain amount (the “applicable
amount”) will be reduced by the lesser of (i) 3% of the excess of the
individual’s adjusted gross income over the applicable amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. As
a
result of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the
“2001 Act”), limitations imposed by section 68 of the Code on claiming itemized
deductions will be phased-out commencing in 2006. Unless amended, this provision
of the 2001 Act will no longer apply for taxable years beginning on or after
December 31, 2010. The amount of additional taxable income recognized by
residual securityholders who are subject to the limitations of either section
67
or section 68 may be substantial. The REMIC is required to report to each
pass-through interest holder and to the IRS such holder’s allocable share, if
any, of the REMIC’s non-interest expenses. The term “pass-through interest
holder” generally refers to individuals, entities taxed as individuals and
certain pass-through entities including regulated investment companies, but
does
not include real estate investment trusts. Certificateholders that are
“pass-through interest holders” should consult their own tax advisors about the
impact of these rules on an investment in the regular certificates.
Treatment
of Realized Losses.
Although
not entirely clear, it appears that holders of regular certificates that are
corporations should in general be allowed to deduct as an ordinary loss any
loss
sustained during the taxable year on account of any regular certificates
becoming wholly or partially worthless and that, in general, holders of
certificates that are not corporations should be allowed to deduct as a
short-term capital loss any loss sustained during the taxable year on account
of
any regular certificates becoming wholly worthless. Although the matter is
not
entirely clear, non-corporate holders of certificates may be allowed a bad
debt
deduction at such time that the principal balance of any regular certificate
is
reduced to reflect realized losses resulting from any liquidated mortgage loans.
The IRS, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all mortgage
loans remaining in the related trust fund have been liquidated or the
certificates of the related series have been otherwise retired. Prospective
investors in and holders of the certificates are urged to consult their own
tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such certificates, including any loss resulting from
the failure to recover previously accrued interest or discount income. Special
loss rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. Such taxpayers are advised to consult their
tax advisors regarding the treatment of losses on certificates.
141
Non-U.S.
Persons.
Generally, payments of interest (including any payment with respect to accrued
OID) on the regular certificates to a regular certificateholder who is a
non-U.S. Person not engaged in a trade or business within the United States
will
not be subject to federal withholding tax if
·
the
regular certificateholder does not actually or constructively own
10% or
more of the combined voting power of all classes of equity in the
issuer
(which for purposes of this discussion may be defined as the trust
fund or
the beneficial owners of the related residual certificates);
·
the
regular certificateholder is not a controlled foreign corporation
(within
the meaning of section 957 of the Code) related to the issuer; and
·
the
regular certificateholder complies with certain identification
requirements, including delivery of a statement, signed by the regular
certificateholder under penalties of perjury, certifying that it
is a
foreign person and providing its name and
address.
If
a
regular certificateholder is not exempt from withholding, distributions of
interest, including distributions in respect of accrued OID, the holder may
be
subject to a 30% withholding tax, subject to reduction under any applicable
tax
treaty.
Further,
it appears that a regular certificate would not be included in the estate of
a
nonresident alien individual and would not be subject to United States estate
taxes. However, securityholders who are non-resident alien individuals should
consult their tax advisors concerning this question.
Regular
securityholders who are non-U.S. Persons and persons related to such holders
should not acquire any residual certificates, and residual securityholders
and
persons related to residual securityholders should not acquire any regular
certificates without consulting their tax advisors as to the possible adverse
tax consequences of doing so.
Information
Reporting and Backup Withholding.
The
master servicer will furnish or make available, within a reasonable time after
the end of each calendar year, to each regular certificateholder at any time
during such year, such information as may be deemed necessary or desirable
to
assist regular securityholders in preparing their federal income tax returns
or
to enable holders to make such information available to owners or other
financial intermediaries of holders that hold regular certificates. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply
a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, backup withholding may
be
required with respect to any payments. Any amounts deducted and withheld from
a
distribution to a recipient would be allowed as a credit against such
recipient’s federal income tax liability.
Residual
Certificates
Allocation
of the Income of the REMIC to the Residual Certificates.
The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See“—Prohibited
Transactions and Other Taxes” below. Instead, each original holder of a residual
certificate will report on its federal income tax return, as ordinary income,
its share of the taxable income of the REMIC for each day during the taxable
year on which such holder owns any residual certificates. The taxable income
of
the REMIC for each day will be determined by allocating the taxable income
of
the REMIC for each calendar quarter ratably to each day in the quarter. The
holder’s share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding residual certificates that the holder owns on
that day. The taxable income of the REMIC will be determined under an accrual
method and will be taxable to the residual securityholders without regard to
the
timing or amounts of cash distributions by the REMIC. Ordinary income derived
from residual certificates will be “portfolio income” for purposes of the
taxation of taxpayers subject to the limitations on the deductibility of
“passive losses”. As residual interests, the residual certificates will be
Subject to tax rules, described below, that differ from those that would apply
if the residual certificates were treated for federal income tax purposes as
direct ownership interests in the certificates or as debt instruments issued
by
the REMIC.
142
A
residual certificateholder may be required to include taxable income from the
residual certificate in excess of the cash distributed. For example, a structure
where principal distributions are made serially on regular interests
(i.e.,
a
fast-pay, slow-pay structure) may generate such a mismatching of income and
cash
distributions (i.e.,
“phantom income”). This mismatching may be caused by the use of certain required
tax accounting methods by the REMIC, variations in the prepayment rate of the
underlying mortgage loans and certain other factors. Depending upon the
structure of a particular transaction, the aforementioned factors may
significantly reduce the after-tax yield of a residual certificate to a residual
certificateholder. Investors should consult their own tax advisors concerning
the federal income tax treatment of a residual certificate and the impact of
such tax treatment on the after-tax yield of a residual certificate.
A
subsequent residual certificateholder also will report on its federal income
tax
return amounts representing a daily share of the taxable income of the REMIC
for
each day that the residual certificateholder owns the residual certificate.
Those daily amounts generally would equal the amounts that would have been
reported for the same days by an original residual certificateholder, as
described above. The legislative history of the Tax Reform Act indicates that
certain adjustments may be appropriate to reduce (or increase) the income of
a
subsequent holder of a residual certificate that purchased the residual
certificate at a price greater than (or less than) the adjusted basis the
residual certificate would have in the hands of an original residual
certificateholder. See
“—Sale or Exchange of Residual Certificates”
below.
It is not clear, however, whether such adjustments will in fact be permitted
or
required and, if so, how they would be made. The REMIC Regulations do not
provide for any such adjustments.
Taxable
Income of the REMIC Attributable to Residual Certificates.
The
taxable income of the REMIC will reflect a netting of the income from the
mortgage loans and the REMIC’s other assets and the deductions allowed to the
REMIC for interest and OID on the regular certificates and, except as described
under “—Non-Interest
Expenses of the REMIC”
below,
other expenses.
For
purposes of determining its taxable income, the REMIC will have an initial
aggregate tax basis in its assets equal to the sum of the issue prices of the
regular and residual certificates (or, if a class of certificates is not old
initially, their fair market values). Such aggregate basis will be allocated
among the mortgage loans and other assets of the REMIC in proportion to their
respective fair market values. A mortgage loan will be deemed to have been
acquired with discount or premium to the extent that the REMIC’s basis therein
is less or greater, respectively than its principal balance. Any such discount
(whether market discount or OID) will be includible in the income of the REMIC
as it accrues, in advance of receipt of the cash attributable to such income,
under a method similar to the method described above for accruing OID on the
regular certificates. The REMIC expects to elect under section 171 of the Code
to amortize any premium on the mortgage loans. Premium on any mortgage loan
to
which the election applies would be amortized under a constant yield method.
It
is likely that the yield of a mortgage loan would be calculated for this purpose
taking account of the prepayment assumption. However, the election would not
apply to any mortgage loan originated on or before September 27, 1985. Instead,
premium on such a mortgage loan would be allocated among the principal payments
thereon and would be deductible by the REMIC as those payments become due.
143
The
REMIC
will be allowed a deduction for interest and OID on the regular certificates.
The amount and method of accrual of OID will be calculated for this purpose
in
the same manner as described above with respect to regular certificates except
that the 0.25% per annum de minimis
rule and
adjustments for subsequent holders described therein will not apply.
A
residual certificateholder will not be permitted to amortize the cost of the
residual certificate as an offset to its share of the REMIC’s taxable income.
However, such taxable income will not include cash received by the REMIC that
represents a recovery of the REMIC’s basis in its assets, and, as described
above, the issue price of the residual certificates will be added to the issue
price of the regular certificates in determining the REMIC’s initial basis in
its assets. See
“—Sale or Exchange of Residual Certificates”
below.
For a discussion of possible adjustments to income of a subsequent holder of
a
residual certificate to reflect any difference between the actual cost of the
residual certificate to such holder and the adjusted basis the residual
certificate would have in the hands of an original residual certificateholder,
see“—
Allocation
of the Income of the REMIC to the Residual Certificates”
above.
Additional
Taxable Income of Residual Interests.
Any
payment received by a holder of a residual certificate in connection with the
acquisition of the residual certificate will be taken into account in
determining the income of such holder for federal income tax purposes. Although
it appears likely that any such payment would be includible in income
immediately upon its receipt or accrual as ordinary income, the IRS might assert
that such payment should be included in income over time according to an
amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of residual
certificates should consult their tax advisors concerning the treatment of
such
payments for income tax purposes.
Net
Losses of the REMIC.
The
REMIC will have a net loss for any calendar quarter in which its deductions
exceed its gross income. The net loss would be allocated among the residual
securityholders in the same manner as the REMIC’s taxable income. The net loss
allocable to any residual certificate will not be deductible by the holder
to
the extent that such net loss exceeds such holder’s adjusted basis in the
residual certificate. Any net loss that is not currently deductible by reason
of
this limitation may only be used by the residual certificateholder to offset
its
share of the REMIC’s taxable income in future periods (but not otherwise). The
ability of residual securityholders that are individuals or closely held
corporations to deduct net losses may be subject to additional limitations
under
the Code.
144
Mark-to-Market
Regulations.
Prospective purchasers of a residual certificate should be aware that the IRS
finalized mark-to-market regulations which provide that a residual certificate
acquired after January 3, 1995 cannot be marked to market. The mark-to-market
regulations replaced the temporary regulations which allowed a residual
certificate to be marked to market provided that it was not a “negative value”
residual interest.
Inducement
Fees.
The
Treasury Department has issued final regulations, effective May 11, 2004, that
address the federal income tax treatment of “inducement fees” received by
transferees of noneconomic REMIC residual interests. The final regulations
require inducement fees to be included in income over a period reasonably
related to the period in which the related REMIC residual interest is expected
to generate taxable income or net loss allocable to the holder. The final
regulations provide two safe harbor methods that permit transferees to include
inducement fees in income either (i) in the same amounts and over the same
period that the taxpayer uses for financial reporting purposes, provided that
such period is not shorter than the period the REMIC is expected to generate
taxable income or (ii) ratably over the remaining anticipated weighted average
life of all the regular and residual interests issued by the REMIC, determined
based on actual distributions projected as remaining to be made on such
interests under the prepayment assumption. If the holder of a REMIC residual
interest sells or otherwise disposes of the residual certificate, any
unrecognized portion of the inducement fee must be taken into account at the
time of the sale or disposition. The final regulations also provide that an
inducement fee shall be treated as income from sources within the United States.
In addition, the IRS has issued administrative guidance addressing the
procedures by which transferees of noneconomic REMIC residual interests may
obtain automatic consent from the IRS to change the method of accounting for
REMIC inducement fee income to one of the safe harbor methods provided in these
final regulations (including a change from one safe harbor method to the other
safe harbor method). Prospective purchasers of the residual certificates should
consult with their tax advisors regarding the effect of these final regulations
and the related guidance regarding the procedures for obtaining automatic
consent to change the method of accounting.
Non-Interest
Expenses of the REMIC.
The
REMIC’s taxable income will be determined in the same manner as if the REMIC
were an individual. However, all or a portion of the REMIC’s servicing,
administrative and other non-interest expenses will be allocated as a separate
item to residual securityholders that are “pass-through interest holders”. Such
a holder would be required to add an amount equal to its allocable share, if
any, of such expenses to its gross income and to treat the same amount as an
item of investment expense. Individuals are generally allowed a deduction for
such an investment expense only as a miscellaneous itemized deduction subject
to
the limitations under section 67 of the Code which allows such deduction only
to
the extent that, in the aggregate, all such expenses exceed 2% of an
individual’s adjusted gross income. In addition, the personal exemptions and
itemized deductions of individuals with adjusted gross incomes above particular
levels are subject to certain limitations which reduce or eliminate the benefit
of such items. The REMIC is required to report to each pass-through interest
holder and to the IRS the holder’s allocable share, if any, of the REMIC’s
non-interest expenses. The term “pass-through interest holder” generally refers
to individuals, entities taxed as individuals and certain pass-through entities,
but does not include real estate investment trusts. Residual securityholders
that are “pass-through interest holders” should consult their own tax advisors
about the impact of these rules on an investment in the residual certificates.
See“—
Regular Certificates—Non-Interest
Expenses of the REMIC”
above.
145
Excess
Inclusions. A
portion
of the income on a residual certificate (referred to in the Code as an “excess
inclusion”) for any calendar quarter will, with an exception discussed below for
certain thrift institutions, be subject to federal income tax in all events.
Thus, for example, an excess inclusion
·
may
not, except as described below, be offset by any unrelated losses,
deductions or loss carryovers of a residual certificateholder;
·
will
be treated as “unrelated business taxable income” within the meaning of
section 512 of the Code if the residual certificateholder is a pension
fund or any other organization that is subject to tax only on its
unrelated business taxable income (see “Tax-Exempt Investors” below); and
·
is
not eligible for any reduction in the rate of withholding tax in
the case
of a residual certificateholder that is a foreign
investor.
See
“—Non-U.S. Persons”
below.
The exception for thrift institutions is available only to the institution
holding the residual certificate and not to any affiliate of the institution,
unless the affiliate is a subsidiary all the stock of which, and substantially
all the indebtedness of which, is held by the institution, and which is
organized and operated exclusively in connection with the organization and
operation of one or more REMICs.
Except
as
discussed in the following paragraph, with respect to any residual
certificateholder, the excess inclusions for any calendar quarter is the
excess,
if any,
of
·
the
income of the residual certificateholder for that calendar quarter
from
its residual certificate
over
·
the
sum of the “daily accruals” for all days during the calendar quarter on
which the residual certificateholder holds the residual
certificate.
For
this
purpose, the daily accruals with respect to a residual certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the “adjusted issue price” of the residual certificate at the
beginning of the calendar quarter and 120% of the “Federal long-term rate” in
effect at the time the residual certificate is issued. For this purpose, the
“adjusted issue price” of a residual certificate at the beginning of any
calendar quarter equals the issue price of the residual certificate, increased
by the amount of daily accruals for all prior quarters, and decreased (but
not
below zero) by the aggregate amount of payments made on the residual certificate
before the beginning of such quarter. The “Federal long-term rate” is an average
of current yields on Treasury securities with a remaining term of greater than
nine years, computed and published monthly by the IRS.
146
In
the
case of any residual certificates held by a real estate investment trust, the
aggregate excess inclusions with respect to such residual certificates, reduced
(but not below zero) by the real estate investment trust taxable income (within
the meaning of section 857(b)(2) of the Code, excluding any net capital gain),
will be allocated among the shareholders of such trust in proportion to the
dividends received by the shareholders from such trust, and any amount so
allocated will be treated as an excess inclusion with respect to a residual
certificate as if held directly by such shareholder. Regulated investment
companies, common trust funds and certain cooperatives are subject to similar
rules.
In
addition, the Code provides three rules for determining the effect of excess
inclusions on the alternative minimum taxable income of a residual
certificateholder. First, the alternative minimum taxable income for the
residual certificateholder is determined without regard to the special rule
that
taxable income cannot be less than excess inclusion. Second, the amount of
any
alternative minimum tax net operating loss deductions must be computed without
regard to any excess inclusions. Third, the residual certificateholder’s
alternative minimum taxable income for a tax year cannot be less than excess
inclusions for the year. The effect of this last statutory amendment is to
prevent the use of nonrefundable tax credits to reduce a taxpayer’s income tax
below its tentative minimum tax computed only on excess inclusions.
Payments.
Any
distribution made on a residual certificate to a residual certificateholder
will
be treated as a non-taxable return of capital to the extent it does not exceed
the residual certificateholder’s adjusted basis in the residual certificate. To
the extent a distribution exceeds such adjusted basis, it will be treated as
gain from the sale of the residual certificate.
Pass-Through
of Miscellaneous Itemized Deductions.
As a
general rule, all of the fees and expenses of a REMIC will be taken into account
by holders of the residual certificates. In the case of a “single class REMIC”,
however, the expenses and a matching amount of additional income will be
allocated, under temporary Treasury regulations, among the holders of the
regular certificates and the holders of the residual certificates on a daily
basis in proportion to the relative amounts of income accruing to each
certificateholder on that day. In the case of individuals (or trusts, estates
or
other persons who compute their income in the same manner as individuals) who
own an interest in a regular certificate directly or through a pass-through
entity which is required to pass miscellaneous itemized deductions through
to
its owners or beneficiaries (e.g., a partnership, an S corporation or a grantor
trust), such expenses will be deductible only to the extent that such expenses,
plus other “miscellaneous itemized deductions” of the individual, exceed 2% of
such individual’s adjusted gross income. The reduction or disallowance of this
deduction coupled with the allocation of additional income may have a
significant impact on the yield of the regular certificate to such a holder.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders’ alternative minimum taxable income. In general terms, a single class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable prospectus supplement, the expenses of the REMIC will
be allocated to holders of the related residual certificates in their entirety
and not to holders of the related regular certificates.
147
Sale
or Exchange of Residual Certificates. If
a
residual certificate is sold or exchanged, the seller will generally recognize
gain or loss equal to the difference between the amount realized on the sale
or
exchange and its adjusted basis in the residual certificate (except that the
recognition of loss may be limited under the “wash sale” rules described below).
A holder’s adjusted basis in a residual certificate generally equals the cost of
the residual certificate to the residual certificateholder, increased by the
taxable income of the REMIC that was included in the income of the residual
certificateholder with respect to the residual certificate, and decreased (but
not below zero) by the net losses that have been allowed as deductions to the
residual certificateholder with respect to the residual certificate and by
the
distributions received thereon by the residual certificateholder. In general,
any such gain or loss will be capital gain or loss provided the residual
certificate is held as a capital asset. However, residual certificates will
be
“evidences of indebtedness” within the meaning of section 582(c)(1) of the Code,
so that gain or loss recognized from sale of a residual certificate by a bank
or
thrift institution to which such section applies would be ordinary income or
loss.
Except
as
provided in Treasury regulations yet to be issued, if the seller of a residual
certificate reacquires the residual certificate or acquires any other residual
certificate, any residual interest in another REMIC or similar interest in
a
“taxable mortgage pool” (as defined in section 7701(i)) of the Code during the
period beginning six months before, and ending six months after, the date of
such sale, such sale will be subject to the “wash sale” rules of section 1091 of
the Code. In that event, any loss realized by the residual certificateholder
on
the sale will not be deductible, but instead will increase the residual
certificateholder’s adjusted basis in the newly acquired asset.
Non-corporate
taxpayers are subject to reduced maximum rates on long-term capital gains and
are generally subject to tax at ordinary income rates on short-term capital
gains. The deductibility of capital losses is subject to certain limitations.
Prospective investors should consult their own tax advisors concerning these
tax
law provisions.
Prohibited
Transactions and Other Taxes
The
REMIC
is subject to a tax at a rate equal to 100% of the net income derived from
“prohibited transactions”. In general, a prohibited transaction means the
disposition of a mortgage loan other than pursuant to certain specified
exceptions, the receipt of investment income from a source other than a mortgage
loan or certain other permitted investments or the disposition of an asset
representing a temporary investment of payments on the mortgage loans pending
payment on the residual certificates or regular certificates. In addition,
the
assumption of a mortgage loan by a subsequent purchaser could cause the REMIC
to
recognize gain which would also be subject to the 100% tax on prohibited
transactions.
In
addition, certain contributions to a REMIC made after the initial issue date
of
the certificates could result in the imposition of a tax on the REMIC equal
to
100% of the value of the contributed property.
148
It
is not
anticipated that the REMIC will engage in any prohibited transactions or receive
any contributions subject to the contributions tax. However, in the event that
the REMIC is subject to any such tax, unless otherwise disclosed in the related
prospectus supplement, such tax would be borne first by the residual
securityholders, to the extent of amounts distributable to them, and then by
the
master servicer.
Liquidation
and Termination
If
the
REMIC adopts a plan of complete liquidation, within the meaning of section
860F(a)(4)(A)(i) of the Code, which may be accomplished by designating in the
REMIC’s final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning
on
such date, the REMIC will not be subject to any prohibited transaction tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of regular and residual certificates within the 90-day
period.
The
REMIC
will terminate shortly following the retirement of the regular certificates.
If
a residual certificateholder’s adjusted basis in the residual certificate
exceeds the amount of cash distributed to the residual certificateholder in
final liquidation of its interest, it would appear that the residual
certificateholder would be entitled to a loss equal to the amount of such
excess. It is unclear whether such a loss, if allowed, will be a capital loss
or
an ordinary loss.
ADMINISTRATIVE
MATTERS
Solely
for the purpose of the administrative provisions of the Code, the REMIC will
be
treated as a partnership and the residual securityholders will be treated as
the
partners. Under temporary regulations, however, if there is at no time during
the taxable year more than one residual certificateholder, a REMIC shall not
be
subject to the rules of subchapter C of chapter 63 of the Code relating to
the
treatment of partnership items for a taxable year. Accordingly, the REMIC will
file an annual tax return on Form 1066, U.S. Real Estate Mortgage Investment
Conduit Income Tax Return. In addition, certain other information will be
furnished quarterly to each residual certificateholder who held the residual
certificate on any day in the previous calendar quarter.
Each
residual certificateholder is required to treat items on its return consistently
with their treatment on the REMIC’s return, unless the residual
certificateholder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC. The IRS may assert a deficiency resulting from a failure to
comply with the consistency requirement without instituting an administrative
proceeding at the REMIC level. Any person that holds a residual certificate
as a
nominee for another person may be required to furnish the REMIC, in a manner
to
be provided in Treasury regulations, with the name and address of such person
and other information.
Tax-Exempt
Investors
Any
residual certificateholder that is a pension fund or other entity that is
subject to federal income taxation only on its “unrelated business taxable
income” within the meaning of section 512 of the Code will be subject to such
tax on that portion of the distributions received on a residual certificate
that
is considered an “excess inclusion.”See”—Residual
Certificates— Excess
Inclusions”
above.
149
Non-U.S.
Persons
Amounts
paid to residual securityholders who are not U.S. Persons (see“—Regular
Certificates—Non-U.S. Persons” above) are treated as interest for purposes of
the 30% (or lower treaty rate) United States withholding tax. Amounts
distributed to residual securityholders should qualify as “portfolio interest”,
subject to the conditions described in “—Regular Certificates” above, but only
to the extent that the mortgage loans were originated after July 18, 1984.
Furthermore, the rate of withholding on any income on a residual certificate
that is excess inclusion income will not be subject to reduction under any
applicable tax treaties. See“—
Residual Certificates—Excess Inclusions” above. If the portfolio interest
exemption is unavailable, such amount will be subject to United States
withholding tax when paid or otherwise distributed (or when the residual
certificate is disposed of) under rules similar to those for withholding upon
disposition of debt instruments that have OID. The Code, however, grants the
Treasury authority to issue regulations requiring that those amounts be taken
into account earlier than otherwise provided where necessary to prevent
avoidance of tax (e.g.,
where
the residual certificates do not have significant value). See“—Residual
Certificates—Excess Inclusions” above. If the amounts paid to residual
securityholders that are not U.S. Persons are effectively connected with their
conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding tax will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U. S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of residual
certificates, see“—Tax-Related
Restrictions on Transfers of Residual Certificates” below.
Regular
securityholders and persons related to such holders should not acquire any
residual certificates, and residual securityholders and persons related to
residual securityholders should not acquire any regular certificates without
consulting their tax advisors as to the possible adverse tax consequences of
such acquisition.
Tax-Related
Restrictions on Transfers of Residual Certificates
Disqualified
Organizations. An
entity
may not qualify as a REMIC unless there are reasonable arrangements designed
to
ensure that residual interests in such entity are not held by “disqualified
organizations”. Further, a tax is imposed on the transfer of a residual interest
in a REMIC to a disqualified organization. The amount of the tax equals the
product of
·
an
amount (as determined under the REMIC Regulations) equal to the present
value of the total anticipated “excess inclusions” with respect to such
interest for periods after the
transfer
multiplied
by
·
the
highest marginal federal income tax rate applicable to corporations.
The
tax
is imposed on the transferor unless the transfer is through an agent (including
a broker or other middlemen) for a disqualified organization, in which event
the
tax is imposed on the agent. The person otherwise liable for the tax shall
be
relieved of liability for the tax if the transferee furnished to such person
an
affidavit that the transferee is not a disqualified organization and, at the
time of the transfer, such person does not have actual knowledge that the
affidavit is false. A “disqualified organization” means
150
·
the
United States, any state, possession, or political subdivision thereof,
any foreign government, any international organization, or any agency
or
instrumentality of any of the foregoing (provided that such term
does not
include an instrumentality if all its activities are subject to tax
and,
except for Freddie Mac, a majority of its board of directors is not
selected by any such governmental agency),
·
any
organization (other than certain farmers’ cooperatives) generally exempt
from federal income taxes unless such organization is subject to
the tax
on “unrelated business taxable
income”,
·
a
rural electric or telephone cooperative, and
·
electing
large partnerships.
A
tax is
imposed on a “pass-through entity” holding a residual interest in a REMIC if at
any time during the taxable year of the pass-through entity a disqualified
organization is the record holder of an interest in such entity. The amount
of
the tax is equal to the product of
·
the
amount of excess inclusions for the taxable year allocable to the
interest
held by the disqualified organization, and
·
the
highest marginal federal income tax rate applicable to corporations.
The
pass-through entity otherwise liable for the tax, for any period during which
the disqualified organization is the record holder of an interest in such
entity, will be relieved of liability for the tax if such record holder
furnishes to such entity an affidavit that such record holder is not a
disqualified organization and, for such period, the pass-through entity does
not
have actual knowledge that the affidavit is false. For this purpose, a
“pass-through entity” means
·
a
regulated investment company, real estate investment trust or common
trust
fund,
·
a
partnership, trust or estate, and
·
certain
cooperatives.
Except
as
may be provided in Treasury regulations not yet issued, any person holding
an
interest in a pass-through entity as a nominee for another will, with respect
to
such interest, be treated as a pass-through entity. The tax on pass-through
entities is generally effective for periods after March 31, 1988, except that
in
the case of regulated investment companies, real estate investment trusts,
common trust funds and publicly-traded partnerships the tax shall apply only
to
taxable years of such entities beginning after December 31, 1988.
151
In
order
to comply with these rules, the pooling and servicing agreement will provide
that no record or beneficial ownership interest in a residual certificate may
be, directly or indirectly, purchased, transferred or sold without the express
written consent of the master servicer. The master servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the residual certificate as
a
nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the residual
certificate.
Non-economic
Residual Certificates.
The
REMIC Regulations disregard, for federal income tax purposes, any transfer
of a
non-economic residual certificate to a U.S. Person, unless no significant
purpose of the transfer is to enable the transferor to impede the assessment
or
collection of tax. A “non-economic residual certificate” is any residual
certificate (including a residual certificate with a positive value at issuance)
unless at the time of transfer, taking into account the prepayment assumption
and any required or permitted clean up calls or required liquidation provided
for in the REMIC’s organizational documents,
·
the
present value of the expected future distributions on the residual
certificate at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax
rate in
effect for the year in which the transfer occurs, and
·
the
transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which taxes
accrue on
the anticipated excess inclusions in an amount sufficient to satisfy
the
accrued taxes.
A
significant purpose to impede the assessment or collection of tax exists if
the
transferor, at the time of the transfer, either knew or should have known that
the transferee would be unwilling or unable to pay taxes due on its share of
the
taxable income of the REMIC. A transferor is presumed not to have such knowledge
if
·
the
transferor conducted a reasonable investigation of the transferee’s
financial condition and found that the transferee had historically
paid
its debts as they come due and found no evidence to indicate that
the
transferee would not continue to pay its debts in the future; and
·
the
transferee acknowledges to the transferor that the residual interest
may
generate tax liabilities in excess of the cash flow and the transferee
represents that it intends to pay such taxes associated with the
residual
interest as they become due.
Final
Treasury regulations issued on July 18, 2002 (the “New REMIC Regulations”),
provide that transfers of non-economic residual interests must meet two
additional requirements to qualify for the safe harbor:
152
·
the
transferee must represent that it will not cause income from the
non-economic residual interest to be attributable to a foreign permanent
establishment or fixed base (within the meaning of an applicable
income
tax treaty, hereafter a “foreign branch”) of the transferee or another
U.S. taxpayer; and
·
the
transfer must satisfy either an “asset test” or a “formula test” provided
under the REMIC Regulations.
A
transfer to an “eligible corporation,” generally a domestic corporation, will
satisfy the asset test if:
·
at
the time of the transfer, and at the close of each of the transferee’s two
fiscal years preceding the transferee’s fiscal year of transfer, the
transferee’s gross and net assets for financial reporting purposes exceed
$100 million and $10 million, respectively, in each case, exclusive
of any
obligations of certain related persons;
·
the
transferee agrees in writing that any subsequent transfer of the
interest
will be to another eligible corporation in a transaction that satisfies
the asset test, and the transferor does not know or have reason to
know
that the transferee will not honor these restrictions on subsequent
transfers, and
·
a
reasonable person would not conclude, based on the facts and circumstances
known to the transferor on or before the date of the transfer
(specifically including the amount of consideration paid in connection
with the transfer of the non-economic residual interest), that the
taxes
associated with the residual interest will not be
paid.
In
addition, the direct or indirect transfer of the residual interest to a foreign
branch of a domestic corporation is not treated as a transfer to an eligible
corporation under the asset test.
The
formula test provides that the transfer of a non-economic residual interest
will
not qualify under the formula test unless the present value of the anticipated
tax liabilities associated with holding the residual interest does not exceed
the present value of the sum of
·
any
consideration given to the transferee to acquire the interest (the
inducement payment),
·
future
distributions on the interest, and
·
any
anticipated tax savings associated with holding the interest as the
REMIC
generates losses.
For
purposes of this calculation, the present value is calculated using a discount
rate equal to the lesser of the applicable federal rate and the transferee’s
cost of borrowing.
If
the
transferee has been subject to the alternative minimum tax in the preceding
two
years and will compute its taxable income in the current taxable year using
the
alternative minimum tax rate, then it may use the alternative minimum tax rate
in lieu of the corporate tax rate. In addition, the direct or indirect transfer
of the residual interest to a foreign branch of a domestic corporation is not
treated as a transfer to an eligible corporation under the formula test.
153
The
New
REMIC Regulations generally apply to transfers of non-economic residual
interests occurring on or after February 4, 2000. The requirement of a
representation that a transfer of a non-economic residual interest is not made
to a foreign branch of a domestic corporation and the requirement of using
the
short term applicable federal rate for purposes of the formula test apply to
transfers occurring on or after August 19, 2002.
If
a
transfer of a non-economic residual certificate is disregarded, the transferor
would continue to be treated as the owner of the residual certificate and would
continue to be subject to tax on its allocable portion of the net income of
the
REMIC.
Foreign
Investors. The
REMIC
Regulations provide that the transfer of a residual certificate that has a
“tax
avoidance potential” to a “foreign person” will be disregarded for federal
income tax purposes. This rule appears to apply to a transferee who is not
a
U.S. Person, unless such transferee’s income in respect of the residual
certificate is effectively connected with the conduct of a United States trade
or business. A residual certificate is deemed to have a tax avoidance potential
unless, at the time of transfer, the transferor reasonably expects that the
REMIC will distribute to the transferee amounts that will equal at least 30%
of
each excess inclusion and that such amounts will be distributed at or after
the
time the excess inclusion accrues and not later than the end of the calendar
year following the year of accrual. If the non- U.S. Person transfers the
residual certificate to a U.S. Person, the transfer will be disregarded and
the
foreign transferor will continue to be treated as the owner, if the transfer
has
the effect of allowing the transferor to avoid tax on accrued excess inclusions.
The pooling and servicing agreement will provide that no record or beneficial
ownership interest in a residual certificate may be, directly or indirectly,
transferred to a non-U.S. Person unless such person provides the trustee with
a
duly completed IRS Form W-8ECI and the trustee consents to such transfer in
writing.
Any
attempted transfer or pledge in violation of the transfer restrictions shall
be
absolutely null and void and shall vest no rights in any purported transferee.
Investors in residual certificates are advised to consult their own tax advisors
with respect to transfers of the residual certificates and, in addition,
pass-through entities are advised to consult their own tax advisors with respect
to any tax which may be imposed on a pass-through entity.
State
Tax Considerations
In
addition to the federal income tax consequences described in this prospectus
under “Material Federal Income Tax Considerations” above, potential investors
should consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the certificates. State and local income tax
law
may differ substantially from the corresponding federal law, and this discussion
does not purport to describe any aspect of the income tax laws of any state
or
locality. Therefore, potential investors should consult their own tax advisors
with respect to the various tax consequences of investments in the certificates.
154
ERISA
Considerations
The
following describes certain considerations under the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”), and the Code. The related prospectus
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to the particular securities offered by the
prospectus supplement.
ERISA
imposes requirements on certain employee benefit plans (and the Code imposes
requirements on certain other retirement plans and arrangements, including
individual retirement accounts and annuities and Keogh plans) as well as on
collective investment funds and separate accounts in which these plans, accounts
or arrangements are invested, and on persons who bear specified relationships
to
these types of plans or arrangements (“Parties in Interest”) or are fiduciaries
with respect to these types of plans or arrangements. In this prospectus we
refer to these types of plans and arrangements as “Plans.” Generally, ERISA
applies to investments made by Plans. Among other things, ERISA requires that
the assets of a Plan be held in trust and that the trustee, or other duly
authorized fiduciary, have exclusive authority and discretion to manage and
control the assets of the Plan. ERISA also imposes certain duties on persons
who
are fiduciaries of Plans, such as the duty to invest prudently, to diversify
investments unless it is prudent not to do so, and to invest in accordance
with
the documents governing the Plan. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets
of a
Plan is considered to be a fiduciary of that Plan (subject to certain exceptions
not here relevant). In addition to the imposition of general fiduciary standards
of investment prudence and diversification, ERISA and Section 4975 of the Code
prohibit a broad range of transactions involving Plan assets and Parties in
Interest, and impose additional prohibitions where Parties in Interest are
fiduciaries with respect to a Plan. Parties in Interest that participate in
a
prohibited transaction may be subject to excise taxes imposed pursuant to
Section 4975 of the Code, or penalties imposed pursuant to Section 502(i) of
ERISA, unless a statutory, regulatory or administrative exemption is
available.
Certain
employee benefit plans, such as governmental plans (as defined in Section 3(32)
of ERISA) and, if no election has been made under Section 410(d) of the Code,
church plans (as defined in Section 3(33) of ERISA), are not subject to ERISA’s
requirements. Accordingly, assets of such plans may be invested in securities
without regard to the ERISA considerations described above and below, subject
to
the provisions of applicable federal, state and local law. Any such plan which
is qualified and exempt from taxation under Sections 401(a) and 501(a) of the
Code is subject to the prohibited transaction rules set forth in Section 503
of
the Code.
The
United States Department of Labor (DOL) issued regulations concerning the
definition of what constitutes the assets of a Plan (DOL Reg. Section
2510.3-101). Under this “Plan Assets Regulation,” the underlying assets and
properties of corporations, partnerships, trusts and certain other entities
in
which a Plan makes an “equity” investment could be deemed, for purposes of
ERISA, to be assets of the investing Plan in certain circumstances.
The
Plan
Assets Regulation provides that, generally, the assets of an entity in which
a
Plan invests will not be deemed to be assets of the Plan for purposes of ERISA
if the equity interest acquired by the investing Plan is a “publicly-offered
security”, or if equity participation by “benefit plan investors” is not
“significant”. In general, a publicly-offered security, as defined in the Plan
Assets Regulation, is a security that is widely held, freely transferable and
registered under the Securities Exchange Act of 1934. Equity participation
in an
entity by “benefit plan investors” is not significant if, after the most recent
acquisition of an equity interest in the entity, less than 25% of the value
of
each class of equity interest in the entity is held by benefit plan investors,
which include benefit plans described in ERISA or under Section 4975 of the
Code, whether or not they are subject to ERISA, as well as entities the
underlying assets of which include assets of the benefit plan by reason of
investment in the entity by the benefit plan.
155
If
no
exception under the Plan Assets Regulation applies and if a Plan (or a person
investing assets of a Plan, such as an insurance company general account)
acquires an equity interest in the trust, then the assets of the trust could
be
considered to be assets of the Plan. In that event, the master servicer and
other persons exercising management or discretionary control over the assets
of
the trust could become subject to the fiduciary responsibility provisions of
Title I of ERISA to the extent that they exercised discretionary control of
Plan
assets. In addition, parties with certain relationships to investing plans
or
providing services with respect to the issuer’s assets could be deemed to be
Parties in Interest with respect to investing plans and could become subject
to
the prohibited transaction provisions of Section 406 of ERISA and Section 4975
of the Code with respect to transactions involving the assets of the trust.
Because the loans held by the trust may be deemed assets of each Plan that
purchases an equity interest, an investment in an equity interest issued by
the
trust by a Plan may not only be a prohibited transaction under ERISA and subject
to an excise tax under Section 4975 of the Code, but may cause transactions
undertaken in the course of operating the trust to constitute prohibited
transactions, unless a statutory, regulatory or administrative exemption
applies.
Without
regard to whether securities are considered to be equity interest in the trust,
the trust, certain affiliates of the trust (including the holder of the trust
certificate), or a seller of a security (including an underwriter) might be
considered or might become Parties in Interest with respect to a Plan. In this
case, the acquisition or holdings of the securities by or on behalf of the
Plan
could constitute or give rise to a prohibited transaction, within the meaning
of
ERISA and the Code, unless they were subject to one or more exemptions.
Depending on the relevant facts and circumstances, certain prohibited
transaction exemptions may apply to the purchase or holding of securities-for
example, Prohibited Transaction Class Exemption (“PTCE”) 96-23, which exempts
certain transactions effected on behalf of a Plan by an “in-house asset
manager”; PTCE 95-60, which exempts certain transactions by insurance company
general accounts; PTCE 91-38, which exempts certain transactions by bank
collective investment funds; PTCE 90-1, which exempts transactions by insurance
company pooled separate accounts; or PTCE 84-14; which exempts certain
transactions effected on behalf of a Plan by a “qualified professional asset
manager”. There can be no assurance that any of these exemptions will apply with
respect to any Plan’s investment in securities, or that such an exemption, if it
did apply, would apply to all prohibited transactions that may occur in
connection with the investment. Furthermore, these exemptions would not apply
to
transactions involved in operation of the trust if, as described above, the
assets of the trust were considered to include Plan assets.
Insurance
Company General Accounts
The
DOL
has published final regulations under Section 401(c) of ERISA describing a
safe
harbor for insurers that, on or before December 31, 1998, issued certain
non-guaranteed policies supported by their general accounts to Plans (Labor
Reg.
Section 2550.401c-1). Under this regulation, an insurer will not be considered
an ERISA fiduciary with respect to its general account by virtue of a Plan’s
investment in such a policy. In general, to meet the safe harbor, an insurer
must
156
·
disclose
certain specified information to investing Plan fiduciaries initially
and
on an annual basis;
·
allow
Plans to terminate or discontinue a policy on 90 days’ notice to the
insurer, and to elect, without penalty, either a lump-sum payment
or
annual installment payments over a ten-year period, with interest;
and
·
give
Plans written notice of “insurer-initiated amendments” 60 days before the
amendments take effect.
Prohibited
Transaction Class Exemption 83-1
Any
fiduciary or other Plan asset investor that proposes to purchase securities
on
behalf of, or with assets of, a Plan should consult with its counsel on the
potential applicability of ERISA and Section 4975 of the Code to that investment
and the availability of any prohibited transaction class exemption in connection
therewith. In particular, in connection with a contemplated purchase of
certificates, but not notes, representing a beneficial ownership interest in
a
pool of single-family residential mortgages, the fiduciary should consider
the
availability of PTCE 83-1 for various transactions involving mortgage pool
investment trusts. PTCE 83-1 permits, subject to certain conditions,
transactions that might otherwise be prohibited between Plans and Parties in
Interest with respect to those plans related to the origination, maintenance
and
termination of mortgage pools consisting of mortgage loans secured by first
or
second mortgages or deeds of trust on single-family residential property, and
the acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in those mortgage pools by Plans. However, PTCE 83-1
does not provide exemptive relief with respect to certificates evidencing
interests in trusts which include mortgage loans secured by third or more junior
liens, revolving credit loans, loans on unimproved land, contracts, cooperative
loans, multifamily or mixed-use mortgage loans or some types of private
securities, or which contain an interest rate swap (a “swap”), a yield
maintenance agreement (a “cap”) or a pre-funding arrangement. In addition, PTCE
83-1 does not provide exemptive relief for transactions involving subordinated
securities. The prospectus supplement may indicate whether it is expected that
PTCE 83-1 will apply to securities offered by that prospectus
supplement.
Underwriter
Exemption
On
September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc. an
underwriter exemption (PTE 90-59, Application No. D-8374, 55 Fed. Reg. 36724
(1990)) (the “Exemption”) from certain of the prohibited transaction rules of
ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, holding and subsequent resale by Plans of
“securities” that are obligations of an issuer containing certain receivables,
loans and other obligations, and with respect to which Greenwich Capital
Markets, Inc. is the underwriter, manager or co-manager of an underwriting
syndicate. The Exemption, which was amended and expanded by PTE 97-34, 62 Fed.
Reg. 39021 (1997); PTE 2000-58, 65 Fed. Reg. 67765 (2000); and PTE 2002-41,
67
Fed. Reg. 54487 (2002), provides relief which is generally similar to that
provided by PTCE 83-1, but is broader in several respects.
157
The
Exemption contains a number of requirements. It does not apply to any investment
pool unless, among other things, the investment pool satisfies the following
conditions:
·
the
investment pool consists only of assets of a type which have been
included
in other investment pools;
·
securities
evidencing interests in such other investment pools have been purchased
by
investors other than Plans for at least one year prior to the Plan’s
acquisition of securities pursuant to the exemption; and
·
securities
in such other investment pools have been rated in one of the three
(or
four, if the investment pool contains certain types of assets) highest
generic rating categories by one of the credit rating agencies noted
below.
The
Exemption sets forth general conditions which must be satisfied for a
transaction to be eligible for exemptive relief thereunder. Generally, the
Exemption holds that the acquisition of the securities by a Plan must be on
terms (including the price for the securities) that are at least as favorable
to
the Plan as they would be in an arm’s length transaction with an unrelated
party. The Exemption requires that the rights and interests evidenced by the
securities not be “subordinated” to the rights and interests evidenced by other
securities of the same trust, except when the trust holds certain types of
assets. The Exemption requires that securities acquired by a Plan have received
a rating at the time of their acquisition that is in one of the three (or four,
if the trust holds certain types of assets) highest generic rating categories
of
Standard & Poor’s, Moody’s Investors Service, Inc. or Fitch Ratings. The
Exemption specifies that the pool trustee must not be an affiliate of any other
member of the “Restricted Group” (defined below), other than an underwriter. The
Exemption stipulates that any Plan investing in the securities must be an
“accredited investor” as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Securities Act of 1933, as amended. The Exemption requires that
certain payments made in connection with the creation and operation of the
trust
and the sale of its securities be reasonable. Finally, the Exemption requires
that, depending on the type of issuer, the documents establishing the issuer
and
governing the transaction contain certain provisions to protect the assets
of
the issuer, and that the issuer receive certain legal opinions.
If
an
issuer holds obligations that have loan-to-value ratios in excess of 100%,
the
Exemption may apply to only the issuer’s non-subordinated securities rated in
one of the two highest generic rating categories by at least one of the rating
agencies named in the Exemption if both of the following conditions are
met:
·
the
obligations are residential or home equity loans,
and
·
the
fair market value of the real property collateral securing the loan
on the
closing date is at least 80% of the sum of the outstanding principal
balance of the loan held in the investment pool and the outstanding
principal balance of any other loan of higher lien priority secured
by the
same real property collateral.
158
Moreover,
the Exemption generally provides relief from certain self-dealing and conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities of an issuer holding receivables as to
which
the fiduciary (or its affiliate) is an obligor, provided that, among other
requirements:
·
in
the case of an acquisition in connection with the initial issuance
of
securities, at least 50% of each class of securities in which Plans
have
invested and at least 50% of the aggregate interest in the issuer
is
acquired by persons independent of the Restricted Group;
·
the
fiduciary (or its affiliate) is an obligor with respect to not more
than
5% of the fair market value of the obligations contained in the issuer;
·
the
Plans’ investment in securities of any class does not exceed 25% of all
of
the securities of that class outstanding at the time of the acquisition;
and
·
immediately
after the acquisition, no more than 25% of the assets of any Plan
with
respect to which the person is a fiduciary is invested in securities
representing an interest in one or more issuers containing assets
sold or
serviced by the same entity.
This
relief is not available to Plans sponsored by the “Restricted Group”, which
consists of the seller, the underwriter, the trustee, the master servicer,
any
servicer, any counterparty of a permitted swap or notional principal contract
or
any insurer with respect to the mortgage loans, any obligor with respect to
mortgage loans included in the investment pool constituting more than 5% of
the
aggregate principal balance of the assets in the investment pool, or any
affiliate of those parties, and in general the Exemption provides only limited
relief to such Plans.
If
pre-funding is anticipated, the Exemption extends exemptive relief to securities
issued in transactions using pre-funding accounts, whereby a portion of the
loans backing the securities are transferred to the trust fund within a
specified period following the closing date (the “DOL Pre-Funding Period”), when
the conditions of the Exemption are satisfied and the pre-funding accounts
meet
certain requirements.
The
Exemption, as amended, extends exemptive relief to certain mortgage-backed
and
asset-backed securities transactions involving trusts that contain a swap or
a
cap, provided the swap or cap satisfies certain criteria and the other
requirements of the Exemption are met. Among other requirements, the
counterparty to the swap or cap must maintain ratings at certain levels from
Exemption rating agencies, and the documentation for the swap or cap must
provide for certain remedies if the rating declines. The swap or cap must be
an
interest rate notional contract denominated in U.S. dollars, may not be
leveraged, and must satisfy several other criteria, including limitations on
its
notional amount. Securities of any class affected by the swap or cap may be
sold
to Plan investors only if they are “qualified plan investors” that satisfy
several requirements relating to their ability to understand the terms of the
swap or cap and the effects of the swap or cap on the risks associated with
an
investment in the security.
159
The
rating of a security may change. If a class of securities no longer satisfies
the applicable rating requirement of the Exemption, securities of that class
will no longer be eligible for relief under the Exemption (although a Plan
that
had purchased the security when it had an appropriate rating would not be
required by the Exemption to dispose of it). However, PTCE 95- 60, which is
applicable to Plan investors that are insurance company general accounts, may
be
available in such circumstances.
The
prospectus supplement for each series of securities will indicate the classes
of
securities, if any, offered thereby as to which it is expected that the
Exemption will apply.
In
the
case of certain types of securities, transfer of the securities will not be
registered unless the transferee represents that it is not, and is not
purchasing on behalf of, or with assets of, a Plan, or provides an opinion
of
counsel or a certification, which opinion of counsel or certification will
not
be at the expense of the trustee or depositor, satisfactory to the trustee
and
the depositor that the purchase of the securities by or on behalf of, or with
assets of, a Plan, is permissible under applicable law, will not give rise
to a
non-exempt prohibited transaction under ERISA or Section 4975 of the Code and
will not subject the trustee, the master servicer or the depositor to any
obligation or liability in addition to those undertaken in the operative
agreements.
Any
Plan
fiduciary which proposes to cause a Plan to purchase securities should consult
with their counsel concerning the impact of ERISA and the Code, the
applicability of the Exemption or any other available exemption, and the
potential consequences in their specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan’s
investment portfolio.
Legal
Investment Considerations
The
prospectus supplement for each series of certificates will specify which, if
any, of those classes of certificates constitute “mortgage related securities”
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended (SMMEA). Classes of certificates that qualify as “mortgage related
securities” will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any of these entities with respect to “mortgage related
securities,” certificates will constitute legal investments for entities subject
to the legislation only to the extent provided therein. Approximately twenty-one
states adopted the legislation prior to the October 4, 1991 deadline. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest
in
certificates, or require the sale or other disposition of certificates, so
long
as such contractual commitment was made or such certificates were acquired
prior
to the enactment of the legislation.
160
SMMEA
also amended the legal investment authority of federally-chartered depository
institutions as follows: federal savings and loan associations and federal
savings banks may invest in, sell or otherwise deal in certificates without
limitations as to the percentage of their assets represented thereby, federal
credit unions may invest in mortgage related securities, and national banks
may
purchase certificates for their own account without regard to the limitations
generally applicable to investment securities set forth in 12 U.S.C. 24
(Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration (NCUA) Letter to Credit Unions No.
96,
as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities, and the NCUA’s regulation “Investment and Deposit Activities” (12
C.F.R. Part 703), which sets forth certain restrictions on investment by federal
credit unions in mortgage related securities.
All
depository institutions considering an investment in the certificates (whether
or not the class of certificates under consideration for purchase constitutes
a
“mortgage related security”) should review the Federal Financial Institutions
Examination Council’s Supervisory Policy Statement on the Securities Activities
(to the extent adopted by their respective regulators), setting forth, in
relevant part, certain securities trading and sales practices deemed unsuitable
for an institution’s investment portfolio, and guidelines for (and restrictions
on) investing in mortgage derivative products, including “mortgage related
securities”, which are “high-risk mortgage securities” as defined in the Policy
Statement. According to the Policy Statement, “high-risk mortgage securities”
include securities such as certificates not entitled to distributions allocated
to principal or interest, or subordinated certificates. Under the Policy
Statement, it is the responsibility of each depository institution to determine,
prior to purchase (and at stated intervals thereafter), whether a particular
mortgage derivative product is a “high-risk mortgage security”, and whether the
purchase (or retention) of such a product would be consistent with the Policy
Statement.
The
foregoing does not take into consideration the applicability of statutes, rules,
regulations, orders, guidelines or agreements generally governing investments
made by a particular investor, including, but not limited to, “prudent investor”
provisions, percentage-of-assets limits and provisions which may restrict or
prohibit investment in securities which are not “interest bearing” or “income
paying.”
The
Office of Thrift Supervision, or OTS, has issued Thrift Bulletin 73a, entitled
“Investing in Complex Securities” (“TB 73a”), which applies to savings
associations regulated by the OTS, and Thrift Bulletin 13a, entitled “Management
of Interest Rate Risk, Investment Securities, and Derivatives Activities” (“TB
13a”), which applies to thrift institutions regulated by the OTS.
161
One
of
the primary purposes of TB 73a is to require savings associations, prior to
taking any investment position, to determine that the investment position meets
applicable regulatory and policy requirements (including those set forth TB
13a
(see below)) and internal guidelines, is suitable for the institution, and
is
safe and sound. OTS recommends, with respect to purchases of specific
securities, additional analyses, including, among others, analysis of repayment
terms, legal structure, expected performance of the issuer and any underlying
assets as well as analysis of the effects of payment priority, with respect
to
security which is divided into separate tranches with unequal payments, and
collateral investment parameters, with respect to a security that is prefunded
or involves a revolving period. TB 73a reiterates the due diligence requirements
of the OTS for investing in all securities and warns that if a savings
association makes an investment that does not meet the applicable regulatory
requirements, the savings association’s investment practices will be subject to
criticism, and OTS any require divestiture of such securities. OTS also
recommends, with respect to an investment in any “complex securities,” that
savings associations should take into account quality and suitability, interest
rate risk and classification factors. For the purpose of each of TB 73a and
TB
13a, the term “complex security” includes among other things any collateralized
mortgage obligation or real estate mortgage investment conduit security, other
than any “plain vanilla” mortgage pass-through security (i.e.,
securities that are part of a single class of securities in the related pool
that are non-callable and do not have any special features). Accordingly, all
Classes of the Offered Certificates would likely be viewed as “complex
securities.” With respect to quality and suitability factors, TB 73a warns (i)
that a savings association’s sole reliance on outside ratings for material
purchases of complex securities is an unsafe and unsound practice, (ii) that
a
savings association should only use ratings and analyses from nationally
recognized rating agencies in conjunction with, and in validation of, its own
underwriting processes, and (iii) that it should not use ratings as a substitute
for its own thorough underwriting analyses. With respect the interest rate
risk
factor, TB 73a recommends that savings associations should follow the guidance
set forth in TB 13a. With respect to collateralized loan or bond obligations,
TB
73a also requires that the savings associations meet similar requirements with
respect to the underlying collateral, and warns that investments that are not
fully rated as to both principal and interest do not meet OTS regulatory
requirements.
One
of
the primary purposes of TB 13a is to require thrift institutions, prior to
taking any investment position, to (i) conduct a pre-purchase portfolio
sensitivity analysis for any “significant transaction” involving securities or
financial derivatives, and (ii) conduct a pre-purchase price sensitivity
analysis of any “complex security” or financial derivative. The OTS recommends
that a thrift institution should conduct its own in-house pre acquisition
analysis, although it may rely on an analysis conducted by an independent
third-party as long as management understands the analysis and its key
assumptions. Further, TB 13a recommends that the use of “complex securities with
high price sensitivity” be limited to transactions and strategies that lower a
thrift institution’s portfolio interest rate risk. TB 13a warns that investment
in complex securities by thrift institutions that do not have adequate risk
measurement, monitoring and control systems may be viewed by OTS examiners
as an
unsafe and unsound practice.
There
may
be other restrictions on the ability of certain investors, including depository
institutions, either to purchase certificates or to purchase certificates
representing more than a specified percentage of the investor’s assets.
Investors should consult their own legal advisors in determining whether and
to
what extent the certificates constitute legal investments for them.
162
Method
of Distribution
The
certificates offered by this prospectus and by the related prospectus supplement
will be offered in series. The distribution of the certificates may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related prospectus supplement and subject to the receipt of
any
required approvals from the Board of Governors of the Federal Reserve System,
the certificates will be distributed in a firm commitment underwriting, subject
to the terms and conditions of the underwriting agreement, by Greenwich Capital
Markets, Inc. (GCM) acting as underwriter with other underwriters, if any,
named
in the prospectus supplement. In such event, the related prospectus supplement
may also specify that the underwriters will not be obligated to pay for any
certificates agreed to be purchased by purchasers pursuant to purchase
agreements acceptable to the depositor. In connection with the sale of the
certificates, underwriters may receive compensation from the depositor or from
purchasers of the certificates in the form of discounts, concessions or
commissions. The related prospectus supplement will describe any compensation
paid by the depositor.
Alternatively,
the related prospectus supplement may specify that the certificates will be
distributed by GCM acting as agent or in some cases as principal with respect
to
certificates that it has previously purchased or agreed to purchase. If GCM
acts
as agent in the sale of certificates, GCM will receive a selling commission
with
respect to each series of certificates, depending on market conditions,
expressed as a percentage of the aggregate principal balance of the related
mortgage assets as of the cut-off date. The exact percentage for each series
of
certificates will be disclosed in the related prospectus supplement. To the
extent that GCM elects to purchase certificates as principal, GCM may realize
losses or profits based upon the difference between its purchase price and
the
sales price. The prospectus supplement with respect to any series offered other
than through underwriters will contain information regarding the nature of
such
offering and any agreements to be entered into between the depositor and
purchasers of certificates of that series.
The
depositor will indemnify GCM and any underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or will
contribute to payments GCM and any underwriters may be required to make in
respect of those liabilities.
In
the
ordinary course of business, GCM and the depositor may engage in various
securities and financing transactions, including repurchase agreements to
provide interim financing of the depositor’s mortgage loans pending the sale of
the mortgage loans or interests in the loans, including the
certificates.
The
depositor anticipates that the certificates will be sold primarily to
institutional investors. Purchasers of certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
“underwriters” within the meaning of the Securities Act of 1933, in connection
with reoffers and sales of certificates by them. Holders of certificates should
consult with their legal advisors in this regard prior to any such reoffer
or
sale.
163
Legal
Matters
The
legality of the certificates of each series, including certain material federal
income tax consequences with respect to the certificates, will be passed upon
for the depositor by Sidley Austin Brown & Wood LLP, 787 Seventh Avenue, NewYork, New York10019, or by Thacher Proffitt & Wood LLP, Two World Financial
Center, New York, New York10281, as specified in the related prospectus
supplement.
Financial
Information
A
new
trust fund will be formed with respect to each series of certificates and no
trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of certificates.
Accordingly, no financial statements with respect to any trust fund will be
included in this Prospectus or in the related prospectus
supplement.
Available
Information
The
depositor has filed with the SEC a Registration Statement under the Securities
Act of 1933, as amended, with respect to the certificates. This prospectus,
which forms a part of the Registration Statement, and the prospectus supplement
relating to each series of certificates contain summaries of the material terms
of the documents referred to herein and therein, but do not contain all of
the
information set forth in the Registration Statement pursuant to the Rules and
Regulations of the SEC. For further information, reference is made to the
Registration Statement and the exhibits thereto. The Registration Statement
and
exhibits can be inspected and copied at prescribed rates at the public reference
facilities maintained by the SEC at its Public Reference Section, 450 Fifth
Street, N. W., Washington, D.C. 20549. In addition, the SEC maintains a website
at http://www.sec.gov containing reports, proxy and information statements
and
other information regarding registrants, including the depositor, that file
electronically with the SEC.
Ratings
It
is a
condition to the issuance of the certificates of each series offered by this
prospectus and the accompanying prospectus supplement that they shall have
been
rated in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related prospectus
supplement.
Ratings
on mortgage pass-through certificates address the likelihood of receipt by
securityholders of all distributions on the underlying mortgage loans. These
ratings address the structural, legal and issuer-related aspects associated
with
such certificates, the nature of the underlying mortgage loans and the credit
quality of the credit enhancer or guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood
of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, securityholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates in certain cases might fail to recoup their
underlying investments.
A
security rating is not a recommendation to buy, sell or hold securities and
may
be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
164
Glossary
Of Terms
Agency
Securities:
Mortgage pass-through securities issued or guaranteed by Ginnie Mae, Fannie
Mae
or Freddie Mac.
Home
Equity Loans:
Closed
end and/or revolving home equity loans generally secured by junior liens on
one-
to four-family residential properties.
Home
Improvement Contracts:
Home
improvement installment sales contracts and loan agreements that are either
unsecured or secured by senior or junior liens on one- to four-family
residential or mixed-use properties or by purchase money security interests
in
the related home improvements.
Insurance
Proceeds:
All
proceeds of the related hazard insurance policies and any primary mortgage
insurance policies to the extent the proceeds are not applied to property
restoration or released to mortgagors in accordance with the master servicer’s
normal servicing procedures, net of insured expenses including unreimbursed
payments of property taxes, insurance premiums and other items incurred by
any
related sub-servicer and net of reimbursed advances made by the
sub-servicer.
Liquidation
Proceeds:
All
cash amounts (other than Insurance Proceeds) received and retained in connection
with the liquidation of defaulted mortgage loans, by foreclosure or otherwise,
net of unreimbursed liquidation and foreclosure expenses incurred by any related
sub-servicer and net of unreimbursed advances made by the
sub-servicer.
Manufactured
Housing Contracts:
Conditional sales contracts and installment sales or loan agreements secured
by
manufactured housing.
Multifamily
Loans:
First
lien mortgage loans, or participation interests in the loans, secured by
residential properties consisting of five or more residential units, including
cooperative apartment buildings.
Private
Label Securities:
Mortgage-backed or asset-backed securities that are not Agency Securities.
REMIC
Regulations:
Regulations promulgated by the Department of the Treasury on December 23, 1992
and generally effective for REMICs with start-up dates on or after November
12,
1991.
Single
Family Loans:
First
lien mortgage loans, or participation interests in the loans, secured by one-
to
four-family residential properties.
U.S.
Person:
Any of
the following:
·
a
citizen or resident of the United
States;
·
a
corporation or a partnership (including an entity treated as a corporation
or partnership for U.S. federal income tax purposes) organized in
or under
the laws of the United States, or any State thereof or the District
of
Columbia (unless in the case of a partnership Treasury regulations
are
adopted that provide otherwise);
165
·
an
estate whose income is includible in gross income for federal income
tax
purposes regardless of its source; or
·
a
trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more U.S.
Persons have the authority to control all substantial decisions of
the
trust.
In
addition, certain trusts which would not qualify as U.S. Persons under the
above
definition but which are eligible to and make an election to be treated as
U.S.
Persons will also be treated as U.S. Persons.
166
Until
90 days after the date of this prospectus supplement, all dealers effecting
transactions in the Securities offered by this prospectus supplement, whether
or
not participating in this distribution, may be required to deliver this
prospectus supplement and the prospectus. This is in addition to the obligation
of dealers to deliver this prospectus supplement and the prospectus when acting
as underwriters and with respect to their unsold allotments or
subscriptions.
$776,628,200
(Approximate)
Luminent
Mortgage Trust 2006-2
Mortgage
Loan Pass-Through Certificates, Series 2006-2
Class
Approximate
Principal Balance
Pass-Through
Rate
Class
A1A
$430,392,000
Variable
Class
A1B
$179,330,000
Variable
Class
A1C
$107,598,000
Variable
Class X
Notional
Amount
Variable
Class
PO
$
100
N/A
Class
A-R
$
100
Weighted
Average
Class
B-1
$
29,653,000
Variable
Class
B-2
$
18,434,000
Variable
Class
B-3
$
11,221,000
Variable
Greenwich
Capital Acceptance, Inc.
Depositor
Luminent
Mortgage Trust 2006-2
Issuing
Entity
Luminent
Mortgage Capital, Inc.
Sponsor
Wells
Fargo Bank, N.A.
Master
Servicer
PROSPECTUS
SUPPLEMENT
You
should rely only on the information contained or incorporated by reference
in
this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We
are
not offering the certificates in any state where the offer is not
permitted.
We
do not
claim that the information in this prospectus supplement and the accompanying
prospectus is accurate as of any date other than the dates stated on their
respective covers.