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Wells Fargo Asset Securities Corp, et al. – ‘424B5’ on 2/26/08

On:  Tuesday, 2/26/08, at 4:47pm ET   ·   Accession #:  1193125-8-38785   ·   File #s:  333-143751, -13

Previous ‘424B5’:  ‘424B5’ on 2/25/08   ·   Latest ‘424B5’:  This Filing

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/26/08  Wells Fargo Asset Securities Corp 424B5                  1:2.1M                                   RR Donnelley/FA
          Wells Fargo Mortgage Backed Securities 2008-AR2 Trust

Prospectus   —   Rule 424(b)(5)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B5       Prospectus                                          HTML   1.77M 


Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Important Notice About Information Presented in This Prospectus Supplement and the Accompanying Prospectus
"Summary Information
"Risk Factors
"Decline in Residential Real Estate Values and Features of Adjustable Rate Mortgage Loans May Increase Risk of Loss and Adversely Affect Your Investment
"Mortgage Securities Market Illiquidity May Adversely Affect the Value of Your Certificates
"Prepayments May Adversely Affect Yield
"The Variable Rate of Interest on the Offered Certificates Will Affect Your Yield
"Increase in LIBOR May Adversely Affect Yield
"Geographic Concentration May Increase Risk of Loss Because of Adverse Economic Conditions or Natural Disasters
"High Balance Loans May Increase Risk of Loss on Certificates
"Delinquencies and Losses on the Mortgage Loans Will Adversely Affect Your Yield
"Interest Only Mortgage Loans May Have Higher Risk of Default or Rates of Prepayment
"Lack of income or asset verification may increase risk of loss
"Subordination of Super Senior Support Certificates and Class B Certificates Increases Risk of Loss
"The Rate of Default on Mortgage Loans that are Secured by Investor Properties May be Higher than on Other Mortgage Loans
"FICO Scores May Not Accurately Predict the Likelihood of Default
"The Class A-1 and Class A-IO Certificates are Subject to Counterparty Risk
"The Class A-1 Certificates May Not Receive Amounts Expected from the Yield Maintenance Agreement
"Decrement and Sensitivity Tables are Based Upon Assumptions and Models
"Residual Certificates May Have Adverse Tax Consequences
"United States Military Operations May Increase Risk of Relief Act Shortfalls
"Proposed Bankruptcy Amendments May Delay or Reduce Collections on Mortgage Loans
"Forward Looking Statements
"The Sponsor
"Static Pool Information
"The Depositor
"The Issuing Entity
"The Trustee
"The Master Servicer
"The Paying Agent
"The Servicer
"The Custodian
"The Counterparty
"Roles of Wells Fargo Bank
"Description of the Certificates
"General
"Book-Entry Certificates
"Distributions
"Interest
"The Yield Maintenance Agreement
"The Reserve Fund
"Principal (Including Prepayments)
"Additional Rights of the Residual Certificateholders
"Restrictions on Transfer of the Residual Certificates
"Periodic Advances
"Subordination of Class B Certificates
"Allocation of Losses
"Description of the Mortgage Loans
"Mortgage Loan Data Appearing in Appendix A
"Mortgage Loan Underwriting
"Mandatory Repurchase or Substitution of Mortgage Loans
"Optional Purchase of Mortgage Loans
"Prepayment and Yield Considerations
"Sensitivities of Certain Classes of Certificates
"Pooling and Servicing Agreement
"Compensation and Payment of Expenses of the Master Servicer, Servicer and Trustee
"Optional Termination of the Trust
"Voting
"Fixed Retained Yield
"Federal Income Tax Considerations
"Regular Certificates
"Residual Certificates
"Taxation of the Class A-1 and Class A-IO Certificates
"Erisa Considerations
"Legal Investment
"Secondary Market
"Plan of Distribution
"Legal Matters
"Use of Proceeds
"Ratings
"Index of Prospectus Supplement Definitions

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  FORM 424B5  
Table of Contents

PROSPECTUS SUPPLEMENT

(To Prospectus Dated February 25, 2008)

LOGO

LOGO

Depositor

Wells Fargo Bank, N.A.

Sponsor and Master Servicer

Wells Fargo Mortgage Backed Securities 2008-AR2 Trust

Issuing Entity

$216,787,100

(Approximate)

Mortgage Pass-Through Certificates, Series 2008-AR2

Principal and interest payable monthly, commencing in March 2008

 

You should carefully consider the risk factors beginning on page S-18 of this prospectus supplement.

 

Neither the offered certificates nor the underlying mortgage loans are insured or guaranteed by any governmental agency or instrumentality or any other entity.

 

The offered certificates will represent interests in the assets deposited with the issuing entity only and will not represent interests in or obligations of the depositor, the sponsor or any other entity.

 

This prospectus supplement may be used to offer and sell the offered certificates only if accompanied by the prospectus.

 

The Issuing Entity Will Issue—

 

 

Four classes of senior certificates.

 

 

Six classes of subordinated certificates, all of which are subordinated to, and provide credit enhancement for, the senior certificates. Each class of subordinated certificates is also subordinated to each class of subordinated certificates, if any, with a lower number.

 

The classes of offered certificates are listed and their sizes and basic payment characteristics are described under the heading “Offered Certificates” in the table beginning on page S-6.

 

The Assets of the Issuing Entity Will Include—

 

 

A pool of fully amortizing, one- to four-family, adjustable interest rate, residential first mortgage loans, substantially all of which have original terms to stated maturity of approximately 30 years. A substantial portion of the mortgage loans will require only payments of interest for a term specified in the related mortgage note.

 

Credit Enhancement Will Consist Of—

 

 

Subordination of the subordinated certificates to the senior certificates for the distributions of principal and interest and the allocation of losses.

 

 

Shifting interest in prepayments through the allocation, subject to certain exceptions, of most principal collections to the senior certificates for the first seven years and a lesser, but still disproportionately large, allocation of these collections to the senior certificates during the following four years.

 

 

In the case of the super senior certificates, the subordination of the super senior support certificates for losses if the subordinated certificates are no longer outstanding.

 

Interest Rate Support Will be Provided for—

 

 

The Class A-1 Certificates through a yield maintenance agreement with Lehman Brothers Special Financing Inc., as counterparty.

 

Neither the SEC nor any state securities commission has approved the certificates offered by this prospectus supplement or determined that this prospectus supplement or the prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

The underwriter will purchase the underwritten certificates (as described herein) from the depositor and offer them to investors at varying prices to be determined at the time of sale. The offered certificates (other than the underwritten certificates) will be directly placed by the depositor with the sponsor. The offered certificates will be available for delivery to investors on or about February 28, 2008. Classes in book-entry form will be made available through The Depository Trust Company, Clearstream International or the Euroclear System. Total proceeds to the depositor for the underwritten certificates will be approximately $214,892,023 before deducting expenses estimated at $205,000 plus accrued interest from February 1, 2008 to February 28, 2008.

 

Lehman Brothers Inc.

 

The date of this prospectus supplement is February 25, 2008


Table of Contents

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

 

IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS

   S-4

SUMMARY INFORMATION

   S-8

RISK FACTORS

   S-18

Decline in Residential Real Estate Values and Features of Adjustable Rate Mortgage Loans May Increase Risk of Loss and Adversely Affect Your Investment

   S-18

Mortgage Securities Market Illiquidity May Adversely Affect the Value of Your Certificates

   S-18

Prepayments May Adversely Affect Yield

   S-18

The Variable Rate of Interest on the Offered Certificates Will Affect Your Yield

   S-20

Increase in LIBOR May Adversely Affect Yield

   S-20

Geographic Concentration May Increase Risk of Loss Because of Adverse Economic Conditions or Natural Disasters

   S-20

High Balance Loans May Increase Risk of Loss on Certificates

   S-21

Delinquencies and Losses on the Mortgage Loans Will Adversely Affect Your Yield

   S-21

Interest Only Mortgage Loans May Have Higher Risk of Default or Rates of Prepayment

   S-21

Lack of income or asset verification may increase risk of loss

   S-22

Subordination of Super Senior Support Certificates and Class B Certificates Increases Risk of Loss

   S-22

The Rate of Default on Mortgage Loans that are Secured by Investor Properties May be Higher than on Other Mortgage Loans

   S-22

FICO Scores May Not Accurately Predict the Likelihood of Default

   S-23

The Class A-1 and Class A-IO Certificates are Subject to Counterparty Risk

   S-23

The Class A-1 Certificates May Not Receive Amounts Expected from the Yield Maintenance Agreement

   S-23

Decrement and Sensitivity Tables are Based Upon Assumptions and Models

   S-23

Residual Certificates May Have Adverse Tax Consequences

   S-24

United States Military Operations May Increase Risk of Relief Act Shortfalls

   S-24

Proposed Bankruptcy Amendments May Delay or Reduce Collections on Mortgage Loans

   S-24

FORWARD LOOKING STATEMENTS

   S-25

THE SPONSOR

   S-25

STATIC POOL INFORMATION

   S-25

THE DEPOSITOR

   S-26

THE ISSUING ENTITY

   S-26

THE TRUSTEE

   S-27

THE MASTER SERVICER

   S-27

THE PAYING AGENT

   S-28

THE SERVICER

   S-28

THE CUSTODIAN

   S-29

THE COUNTERPARTY

   S-29

ROLES OF WELLS FARGO BANK

   S-29

DESCRIPTION OF THE CERTIFICATES

   S-30

General

   S-30

Book-Entry Certificates

   S-30

Distributions

   S-30

Interest

   S-32

The Yield Maintenance Agreement

   S-34

The Reserve Fund

   S-35

Principal (Including Prepayments)

   S-36

Additional Rights of the Residual Certificateholders

   S-39

Restrictions on Transfer of the Residual Certificates

   S-40

Periodic Advances

   S-40

Subordination of Class B Certificates

   S-40

Allocation of Losses

   S-41

DESCRIPTION OF THE MORTGAGE LOANS

   S-43

General

   S-43

Mortgage Loan Data Appearing in Appendix A

   S-45

Mortgage Loan Underwriting

   S-47

Mandatory Repurchase or Substitution of Mortgage Loans

   S-48

Optional Purchase of Mortgage Loans

   S-48

PREPAYMENT AND YIELD CONSIDERATIONS

   S-48

General

   S-48

Sensitivities of Certain Classes of Certificates

   S-54

POOLING AND SERVICING AGREEMENT

   S-54

General

   S-54

 

S-2


Table of Contents

Compensation and Payment of Expenses of the Master Servicer, Servicer and Trustee

   S-55

Optional Termination of the Trust

   S-56

Voting

   S-56

Fixed Retained Yield

   S-57

FEDERAL INCOME TAX CONSIDERATIONS

   S-57

General

   S-57

Regular Certificates

   S-57

Residual Certificates

   S-58

Taxation of the Class A-1 and Class A-IO Certificates

   S-59

ERISA CONSIDERATIONS

   S-60

LEGAL INVESTMENT

   S-61

SECONDARY MARKET

   S-61

PLAN OF DISTRIBUTION

   S-61

LEGAL MATTERS

   S-62

USE OF PROCEEDS

   S-62

RATINGS

   S-62

INDEX OF PROSPECTUS SUPPLEMENT DEFINITIONS

   S-63

APPENDIX A: MORTGAGE LOAN DATA

   A-1

APPENDIX B: ASSUMED MORTGAGE LOAN CHARACTERISTICS

   B-1

APPENDIX C: DECREMENT TABLES

   C-1

APPENDIX D: SENIOR SENSITIVITY TABLE

   D-1

 

S-3


Table of Contents

IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS

PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS

Information is provided to you about the offered certificates in two separate documents that progressively provide more detail:

 

   

the accompanying prospectus, which provides general information, some of which may not apply to your certificates; and

 

   

this prospectus supplement, which incorporates and includes the appendices, and describes the specific terms of your certificates.

Cross-references are included in this prospectus supplement and the accompanying prospectus to captions in these materials where you can find further related discussions. The foregoing table of contents and the table of contents included in the accompanying prospectus provide the pages on which these captions are located.

You can find a listing of the pages where capitalized terms used in this prospectus supplement and the accompanying prospectus are defined under the caption “Index of Prospectus Supplement Definitions” beginning on page S-63 in this document and under the caption “Index of Prospectus Definitions” beginning on page 139 in the accompanying prospectus. Any capitalized terms used but not defined in this prospectus supplement have the meanings assigned in the prospectus.

European Economic Area

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), the 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 offered certificates to the public in that Relevant Member State prior to the publication of a prospectus in relation to the offered certificates 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 offered certificates to the public in that Relevant Member State at any time:

(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized 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.

For the purposes of this provision, the expression an “offer of offered certificates to the public” in relation to any offered certificates in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the offered certificates to be offered so as to enable an investor to decide to purchase or subscribe the offered certificates, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

 

S-4


Table of Contents

United Kingdom

The underwriter has represented and agreed that:

(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the “FSMA”)) received by it in connection with the issue or sale of the offered certificates in circumstances in which Section 21(1) of the FSMA does not apply to the trust; and

(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the offered certificates in, from or otherwise involving the United Kingdom.

Notice to United Kingdom Investors

The distribution of this prospectus supplement and the accompanying prospectus, if made by a person who is not an authorized person under the FSMA, is being made only to, or directed only at persons who (1) are outside the United Kingdom, or (2) have professional experience in matters relating to investments, or (3) are persons falling within Articles 49(2)(a) through (d) (“high net worth companies, unincorporated associations, etc.”) or 19 (Investment Professionals) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons together being referred to as the “Relevant Persons”). This prospectus supplement and the accompanying prospectus must not be acted on or relied on by persons who are not Relevant Persons. Any investment or investment activity to which this prospectus supplement and the accompanying prospectus relates, including the offered certificates, is available only to Relevant Persons and will be engaged in only with Relevant Persons.

Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the offered certificates and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

 

S-5


Table of Contents

THE SERIES 2008-AR2 CERTIFICATES

 

                          

Initial Rating

of Offered

Certificates(3)

                   

Class

   Initial
Principal
Balance(1)
   

Pass-

Through

Rate

  

Principal Types(2)

  

Interest Types(2)

  

Fitch

  

Moody’s

  

Original

Form(4)

   Minimum
Denomination(5)
   Incremental
Denomination(5)
  

Final Scheduled

Distribution Date(6)

Offered Certificates

                    

Class A-1

   $ 175,893,000     (7)   

Super Senior,

Pass-Through

   Floating Rate    AAA    Aaa    BE    $ 25,000    $ 1    February 25, 2038

Class A-2

   $ 35,068,000     (8)   

Super Senior Support,

Pass-Through

   Variable Rate    AAA    Aaa    BE    $ 100,000    $ 1    February 25, 2038

Class A-IO

     (9 )   (10)    Senior, Notional Amount    Inverse Floating Rate, Interest Only    AAA    Aaa    BE    $ 1,265,000    $ 1    February 25, 2038

Class A-R

   $ 100     (8)    Senior, Sequential Pay    Variable Rate    AAA    None    D    $ 100      N/A    February 25, 2038

Class B-1

   $ 3,188,000     (8)    Subordinated    Variable Rate    AA    None    BE    $ 100,000    $ 1    February 25, 2038

Class B-2

   $ 1,869,000     (8)    Subordinated    Variable Rate    A    None    BE    $ 100,000    $ 1    February 25, 2038

Class B-3

   $ 769,000     (8)    Subordinated    Variable Rate    BBB    None    BE    $ 100,000    $ 1    February 25, 2038

Non-Offered Certificates

                    

Class B-4

   $ 1,319,000     (8)    Subordinated    Variable Rate    N/A    N/A    N/A      N/A      N/A    February 25, 2038

Class B-5

   $ 440,000     (8)    Subordinated    Variable Rate    N/A    N/A    N/A      N/A      N/A    February 25, 2038

Class B-6

   $ 1,319,852     (8)    Subordinated    Variable Rate    N/A    N/A    N/A      N/A      N/A    February 25, 2038

 

(1) Approximate. The initial principal balances are subject to adjustment as described under “Summary Information — Description of the Certificates — Principal Balance of the Certificates” in this prospectus supplement.
(2) See “Description of the Certificates — Categories of Classes of Certificates” in the prospectus for a description of the principal and interest categories listed.
(3) A description of the ratings of the offered certificates is set forth under the heading “Rating of Certificates” in the Summary Information and under “Ratings” in the main text of this prospectus supplement.
(4) See “Description of the Certificates — Definitive Form” and “— Book-Entry Form” in the prospectus for a description of the forms of certificates. Book-entry form is designated as “BE” and definitive form is designated as “D” in the table above.
(5) Denominations for interest only certificates are expressed in notional amount.
(6) The final scheduled distribution date represents the distribution date in the month following the latest maturity date of any mortgage loan in the mortgage pool. The actual final payment on your certificates could occur earlier or later than the final scheduled distribution date.
(7) The following table describes the methodology for determining the pass-through rate for the class of floating rate certificates. See “Description of the Certificates—Interest” in this prospectus supplement.

 

Class

   Initial Pass-
Through Rate
    Pass-Through
Rate Formula
    Minimum Pass-
Through Rate
    Maximum Pass-
Through Rate

Class A-1*

   3.811 %   LIBOR + 0.700 %   0.700 %   adjusted net WAC

of the mortgage loans

  * In addition, under certain circumstances, the Class A-1 Certificates are entitled to amounts received under a yield maintenance agreement as described in this prospectus supplement under “Description of the Certificates — The Yield Maintenance Agreement” and “— The Reserve Fund.”
(8) The pass-through rate with respect to each distribution date will be a per annum rate equal to the net WAC (as defined in this prospectus supplement under “Description of the Certificates—Interest”) of the mortgage loans. For the initial distribution date in March 2008, this rate is expected to be approximately 6.404% per annum.
(9) The Class A-IO Certificates are interest only certificates, have no principal balance and will bear interest on its notional amount, initially approximately $175,893,000, as described in this prospectus supplement under “Description of the Certificates—Interest.”

 

S-6


Table of Contents

(10)  The pass-through rate with respect to each distribution date will be a per annum rate equal to the excess, if any, of (i) the adjusted net WAC of the mortgage loans over (ii) the pass-through rate for the Class A-1 Certificates. For the initial distribution date in March 2008, this rate is expected to be approximately 2.814% per annum. In addition, under certain circumstances, the Class A-IO Certificates are entitled to amounts received under a yield maintenance agreement as described in this prospectus supplement under “Description of the Certificates — The Yield Maintenance Agreement” and “—The Reserve Fund.”

 

S-7


Table of Contents

SUMMARY INFORMATION

This summary highlights selected information from this document, but does not contain all of the information that you should consider in making your investment decision. Please read this entire prospectus supplement and the accompanying prospectus carefully for additional detailed information about the offered certificates.

RELEVANT PARTIES

Sponsor

Wells Fargo Bank, N.A.

Depositor

Wells Fargo Asset Securities Corporation.

Master Servicer

Wells Fargo Bank, N.A.

Servicer

Initially, Wells Fargo Bank, N.A. Any other servicer will be approved by the master servicer.

Issuing Entity

The Wells Fargo Mortgage Backed Securities 2008-AR2 Trust, a New York common law trust.

Trustee

HSBC Bank USA, National Association.

Custodian

Wells Fargo Bank, N.A.

Paying Agent

Wells Fargo Bank, N.A.

Counterparty

Lehman Brothers Special Financing Inc.

AFFILIATIONS

Wells Fargo Bank, N.A., which is the sponsor, custodian, master servicer, paying agent and servicer, is the direct parent of the depositor. There are no relationships, agreements or arrangements outside of this transaction among the affiliated parties that are material to an understanding of the offered certificates.

CUT-OFF DATE

February 1, 2008.

CLOSING DATE

On or about February 28, 2008.

DISTRIBUTION DATES

The 25th day of each month, or the following business day if the 25th day is not a business day, commencing in March 2008.

DETERMINATION DATES

With respect to each distribution date, the 17th day of each month.

THE TRANSACTION PARTIES

The sponsor originated or purchased and currently services the mortgage loans. On the closing date the sponsor will sell the mortgage loans to the depositor, who will in turn deposit them into a common law trust, which is the issuing entity. The trust will be formed by a pooling and servicing agreement, to be dated as of the closing date, among the depositor, the master servicer and the trustee. The master servicer will master service the mortgage loans and calculate distributions and other information regarding the certificates in accordance with the pooling and servicing agreement. The trustee will have limited administrative duties under the pooling and servicing agreement. The servicer will service the mortgage loans in accordance with the underlying servicing agreement entered into between the servicer and the master servicer.

 

S-8


Table of Contents

The transfers of the mortgage loans from the sponsor to the depositor to the issuing entity in exchange for the certificates is illustrated below:

LOGO

RATING OF CERTIFICATES

The trust will not issue the offered certificates unless they have received at least the ratings set forth in the table beginning on page S-6.

 

 

The ratings of the rating agencies are not recommendations to buy, sell or hold the certificates rated. A rating may be revised or withdrawn at any time by the assigning rating agency.

 

 

The ratings do not address the possibility that, as a result of principal prepayments, the yield on your certificate may be lower than anticipated.

 

 

The ratings do not address the possibility that, if you hold an interest only certificate, you may not recover your initial investment as a result of principal prepayments on the mortgage loans.

See “— Effects of Prepayments on Your Investment Expectations” below and “Ratings” in this prospectus supplement.

DESCRIPTION OF CERTIFICATES

A summary chart of the initial principal balances, notional amounts, pass-through rates, principal types, interest types, ratings, original form, denominations and final scheduled distribution dates of the certificates is set forth in the table beginning on page S-6.

 

S-9


Table of Contents

The certificates consist of:

 

 

the four classes of senior Class A Certificates designated as “Senior,” “Super Senior” and “Super Senior Support” certificates in the table beginning on page S-6; and

 

 

the six classes of junior Class B Certificates designated as “Subordinated” certificates in the table beginning on page S-6. The Class B Certificates are subordinate to, and provide credit enhancement for, the Class A Certificates.

Only the Class A, Class B-1, Class B-2 and Class B-3 Certificates are being offered by this prospectus supplement and the accompanying prospectus. The Class A Certificates are referred to herein as the underwritten certificates. The Class B-4, Class B-5 and Class B-6 Certificates are not being offered pursuant to this prospectus supplement and the accompanying prospectus. The depositor will transfer the offered classes (other than the underwritten certificates) and the non-offered certificates to the sponsor on the closing date. The sponsor may retain or sell such classes. Information provided with respect to the Class B-4, Class B-5 and Class B-6 Certificates is included solely to aid your understanding of the offered certificates.

See the table beginning on page S-6 for more information with respect to each class of certificates.

Principal Balance of the Certificates

The certificates will have an approximate total initial principal balance of $219,865,952. Any difference between the total principal balance of the certificates as of the date of issuance of the certificates and the approximate total initial principal balance of the certificates as of the date of this prospectus supplement will not exceed 5% of the total initial principal balance of the certificates. Any such difference will be allocated among the various classes of certificates so as to materially retain the characteristics of the offered certificates described in this prospectus supplement.

Interests in Mortgage Loans

The relative interests in the mortgage loans represented by the Class A Certificates and the Class B Certificates are subject to change over time because:

 

 

certain unscheduled principal payments on the mortgage loans will be disproportionately allocated to the Class A Certificates for a specified period; and

 

 

certain losses and certain shortfalls on the mortgage loans will be allocated first to the classes of Class B Certificates in reverse numerical order prior to the allocation of such losses and shortfalls to the Class A Certificates, as discussed in “Description of the Certificates — Distributions” and “— Allocation of Losses” in this prospectus supplement.

Forms of Certificates; Denominations

Your certificates will be issued either in book-entry form or in fully registered, certificated form and in the minimum denomination and the incremental denomination set forth in the table beginning on page S-6. The offered certificates are not intended to be directly or indirectly held or beneficially owned by anyone in amounts lower than such minimum denominations.

MORTGAGE POOL

The assets of the trust are expected to consist of approximately 390 mortgage loans with an aggregate unpaid principal balance as of the cut-off date of approximately $219,865,953. The mortgage loans, which are the source of distributions to holders of the certificates, will consist of adjustable interest rate, monthly pay, fully amortizing, one- to four-family, residential first mortgage loans substantially all of which have original terms to maturity of approximately 30 years. Some of the mortgage loans are “relocation mortgage loans” which means they were originated in connection with an employee relocation program.

The mortgage loans provide for a fixed interest rate during an initial period of approximately ten years and thereafter provide for adjustments to that interest rate on an annual basis. The interest rate of each mortgage loan will adjust to equal the sum of the applicable index and a gross margin. Interest rate adjustments will be subject to certain limitations stated in the related mortgage note on increases and decreases for any adjustment date. In addition, interest rate adjustments will be subject to a lifetime maximum mortgage interest rate and a minimum mortgage interest rate which will be the related gross margin or such higher percentage as specified in the related mortgage note. The index will be the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year or the one-year London interbank offered rate as described

 

S-10


Table of Contents

under “Description of Mortgage Loans” in this prospectus supplement.

A substantial portion of the mortgage loans will require only payments of interest for a term specified in the related mortgage note.

See “Description of the Mortgage Loans” and “Appendix A” in this prospectus supplement.

Changes to Mortgage Pool

The depositor may remove mortgage loans from the mortgage pool, or may make substitutions for certain mortgage loans, in advance of the closing date.

After the issuance of the certificates, the depositor may purchase mortgage loans from the mortgage pool that have become delinquent or which are required to be transferred to the sponsor in order to permit the sponsor to exercise rights which it may have against the originator of the mortgage loans. In addition, the depositor will be required to repurchase or, at its election, during the two year period following the closing date, substitute for, mortgage loans as a result of breaches of representations or warranties or as a result of defective documentation.

See “Description of the Mortgage Loans—Mandatory Repurchase or Substitution of Mortgage Loans” and “—Optional Purchase of Mortgage Loans” in this prospectus supplement.

Information regarding repurchases of the mortgage loans after the closing date will be available on the trust’s monthly distribution reports on Form 10-D. See “Reports to Certificateholders” in the prospectus.

Optional Termination of the Trust

On any distribution date on which the aggregate scheduled principal balance of the mortgage loans is less than 10% of the aggregate unpaid principal balance of the mortgage loans as of the cut-off date, the depositor may, subject to certain conditions, purchase all outstanding mortgage loans in the mortgage pool and thereby effect early retirement of the certificates. See “The Pooling and Servicing Agreement—Termination; Optional Purchase of Mortgage Loans” in the prospectus.

DISTRIBUTIONS OF PRINCIPAL AND INTEREST TO CERTIFICATEHOLDERS

On each distribution date the amount available for distribution on the certificates, which consists of those payments, recoveries, advances and other receipts in respect of the mortgage loans which are available for distribution on such date, will be distributed generally in the following order of priority:

first, pro rata, to the Class A Certificates, in respect of interest which they are entitled to receive on such distribution date;

second, to the Class A Certificates, in respect of principal which they are entitled to receive on such distribution date;

third, to the Class B Certificates in numerical order beginning with the Class B-1 Certificates in respect of interest and principal which they are entitled to receive on such distribution date; and

fourth, to the Class A-R Certificates, any remaining amounts.

The amount available for distribution to certificateholders will not include amounts used to pay the servicing fee and the master servicing fee or amounts used to reimburse the expenses of certain transaction parties. Such fees will be paid on each distribution date from interest payments received on the mortgage loans prior to any distributions on the certificates. The servicing fee for each distribution date is equal to the product of (i) one-twelfth of 0.250% and (ii) the aggregate scheduled principal balance of the mortgage loans as of the first day of the preceding month. The master servicing fee for each distribution date is equal to the product of (i) one-twelfth of 0.010% and (ii) the aggregate scheduled principal balance of the mortgage loans as of the first day of the preceding month.

Interest Distributions

An interest-bearing class (other than the floating rate and inverse floating rate certificates) will accrue interest for each interest accrual period in an amount equal to:

 

 

1/12th of the pass-through rate for the class multiplied by the outstanding principal balance of such class on the related distribution date minus

 

 

the amount of certain interest shortfalls arising from the timing of prepayments on the mortgage loans and the application of the Servicemembers Civil Relief Act, as it may be amended from time to time, or comparable state legislation and interest losses allocated to the class as described

 

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under “Description of the Certificates — Interest” in this prospectus supplement.

The floating rate and inverse floating rate certificates will accrue interest for each interest accrual period in an amount equal to:

 

 

(i) the product of (a) a fraction, the numerator of which is equal to the actual number of days in the related interest accrual period and the denominator of which is equal to 360 and (b) the pass-through rate for the class multiplied by (ii) the outstanding principal balance or notional amount of such class on the related distribution date minus

 

 

the amount of certain interest shortfalls arising from the timing of prepayments on the mortgage loans and the application of the Servicemembers Civil Relief Act, as it may be amended from time to time, or comparable state legislation and interest losses allocated to the class as described under “Description of the Certificates — Interest” in this prospectus supplement.

The allocation of interest distributions among the Class A Certificates will be made as described under “Description of the Certificates — Distributions” and “— Interest” in this prospectus supplement.

Principal Distributions

The calculation of the amount of principal which each class of offered certificates is entitled to receive on each distribution date and the priority of principal distributions among the Class A Certificates are described under “Description of the Certificates—Distributions” and “—Principal (Including Prepayments)” in this prospectus supplement.

Credit Enhancement

The rights of the holders of each class of Class B Certificates to receive distributions will be subordinated to the rights of the holders of the Class A Certificates to receive distributions and the holders of the classes of Class B Certificates, if any, with lower numerical designations to receive distributions.

In general, the protection afforded the holders of more senior classes of certificates by means of the subordination of the more junior classes of certificates will be effected in two ways:

 

 

by the preferential right of the holders of such more senior classes to receive, prior to any distribution being made on any distribution date to the holders of the more junior classes of certificates, the amounts of interest and principal due on the more senior classes of certificates and, if necessary, by the right of holders of such more senior classes of certificates to receive future distributions on the mortgage loans that would otherwise have been allocated to the holders of the more junior classes of certificates; and

 

 

by the allocation of losses resulting from the liquidation of defaulted mortgage loans or the bankruptcy of mortgagors to the more junior classes of certificates in inverse order of seniority, until their respective principal balances have been reduced to zero, prior to the allocation of such losses to the more senior classes of certificates.

Credit support for the Class A Certificates is provided by subordination of the Class B Certificates as follows:

Subordination of Subordinated Certificates

LOGO

The approximate initial credit support percentages set forth in the preceding chart show the initial principal balance of the class or classes of certificates subordinate to a class or classes of certificates as a percentage of the aggregate unpaid principal balance of the mortgage loans as of the cut-off date.

In addition, in order to increase the period during which the principal balances of the Class B Certificates remain available as credit enhancement to the Class A Certificates, a disproportionate amount of prepayments and unscheduled principal receipts

 

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with respect to the mortgage loans will be allocated to the Class A Certificates in the aggregate. This allocation will accelerate the amortization of the Class A Certificates while, in the absence of losses due to the liquidation of defaulted mortgage loans or losses resulting from the bankruptcy of mortgagors, increasing the percentage interest in the principal balance of the mortgage loans evidenced by the Class B Certificates. This disproportionate allocation of prepayments and unscheduled principal receipts will “step down” over time unless specified delinquency and loss tests are not met. See “Description of the Certificates — Principal (Including Prepayments) — Calculation of Amount to be Distributed on the Certificates” and “Prepayment and Yield Considerations” in this prospectus supplement.

After the principal balances of the Class B Certificates have been reduced to zero, the principal portion of all losses will be allocated to the Class A Certificates. The principal portion of any losses borne by the Class A Certificates will be allocated among such certificates as described under “Description of the Certificates—Allocation of Losses” in this prospectus supplement and the interest portion of any losses borne by the Class A Certificates will be allocated among such certificates as described under “Description of the Certificates—Interest” in this prospectus supplement. However, the share of principal losses allocated to the super senior certificates will be borne by the super senior support certificates, together with the super senior support certificates’ own share of losses. To this extent, the super senior support certificates are subordinate to the super senior certificates. See “Description of the Certificates—Interest,” “—Subordination of Class B Certificates” and “—Allocation of Losses” in this prospectus supplement.

If you are purchasing the Class B Certificates, you should be aware that losses will be allocated to your certificates before being borne by the Class A Certificates.

See “Description of the Certificates—Distributions,” “—Subordination of Class B Certificates” and “—Allocation of Losses” in this prospectus supplement.

Yield Maintenance Agreement

The master servicer, on behalf of the trust, will enter into a yield maintenance agreement with Lehman Brothers Special Financing Inc., as counterparty, for the benefit of the Class A-1 and Class A-IO Certificates. For any distribution date prior to and including the distribution date in December 2017, if LIBOR, as calculated in accordance with the yield maintenance agreement with respect to such distribution date, exceeds 5.70% per annum, the counterparty will be obligated to pay to the master servicer, for deposit into a separate reserve fund, an amount equal to the product of (a) the amount by which LIBOR exceeds 5.70%, (b) the principal balance of the Class A-1 Certificates prior to any distributions on that distribution date and (c) a fraction, the numerator of which is equal to the actual number of days in the related interest accrual period and the denominator of which is equal to 360. The amount in the reserve fund will be used to make payments to the Class A-1 and Class A-IO Certificates on such distribution date in the following order of priority:

 

 

first, to the Class A-1 Certificates in an amount up to the excess, if any, of (a) the product of (i) LIBOR plus 0.70%, (ii) the principal balance of the Class A-1 Certificates prior to any distribution on such distribution date and (iii) a fraction, the numerator of which is equal to the actual number of days in the related interest accrual period and the denominator of which is equal to 360 over (b) the interest accrual amount of the Class A-1 Certificates for such distribution date; and

 

 

second, to the Class A-IO Certificates, any amounts remaining in the reserve fund after payment to the Class A-1 Certificates has been made.

See “Description of the Certificates — The Yield Maintenance Agreement” and “— The Reserve Fund” in this prospectus supplement.

EFFECTS OF PREPAYMENTS ON YOUR INVESTMENT EXPECTATIONS

The rate of prepayments on the mortgage loans will affect the investment performance of the offered certificates.

The Class A and Class B Certificates were structured assuming, among other things, that prepayments on the mortgage loans occur at a constant rate of 25% of the constant prepayment rate as described in this prospectus supplement under “Prepayment and Yield Considerations.” However, no one can predict the actual rate of prepayment of principal on the mortgage loans.

In deciding whether to purchase any offered certificates, you should make an independent

 

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decision as to the appropriate prepayment assumptions to use. If prepayments on the mortgage loans are higher or lower than you anticipate, the investment performance of the offered certificates may vary materially and adversely from your investment expectations.

Factors affecting the rate of prepayment on the mortgage loans and the manner in which prepayments are allocated among the classes of certificates are discussed in this prospectus supplement under “Description of the Certificates—Principal (Including Prepayments)” and “Prepayment and Yield Considerations.”

The actual yield on your certificates may not be equal to the yield you anticipated at the time of purchase. In addition, even if the actual yield is equal to the yield you anticipated at the time of purchase, the total return on investment you expected or the expected weighted average life of your certificates may not be realized. These effects are summarized below.

Yield

The actual yield on your certificates depends on the:

 

 

pass-through rate, if any;

 

 

price paid;

 

 

absence or occurrence of interest shortfalls or losses;

 

 

absence or occurrence of principal losses; and

 

 

rate and timing of principal prepayments.

If you purchase offered certificates, your yield, absent shortfalls or losses, will primarily be a function of the price paid and the rate and timing of prepayments on the mortgage loans.

 

 

If you purchase your certificate at an amount equal to its unpaid principal balance — that is, at “par”— your effective yield will approximate the pass-through rate on that certificate.

 

 

If you pay less or more than the unpaid principal balance of your certificate — that is, buy the certificate at a “discount” or “premium,” respectively — then your effective yield will be higher or lower, respectively, than the pass-through rate on the certificate, because such discount or premium will be amortized over the life of the certificate.

 

 

Any deviation in the actual rate of prepayments on the mortgage loans from the rate you assumed will affect the period of time over which, or the rate at which, any discount or premium will be amortized and, consequently, will cause your actual yield to differ from that which you anticipated.

In addition, the pass-through rate on each certificate may decrease, and may decrease significantly, after the mortgage interest rates on the mortgage loans begin to adjust as a result of, among other factors, the dates of adjustment, the gross margins and changes in the applicable index. Moreover, each mortgage loan has a maximum mortgage interest rate and a minimum mortgage interest rate which will be the related gross margin or such higher percentage as specified in the related mortgage note. Also, if, despite increases in the applicable index, the mortgage interest rate on any mortgage loan cannot increase due to a maximum mortgage interest rate limitation or a periodic cap, the yield on a certificate could be adversely affected. Because the pass-through rates on the classes of certificates will be based on the net WAC (or, in the case of the Class A-1 and Class A-IO Certificates, the adjusted net WAC) of the mortgage loans, disproportionate prepayments on the mortgage loans having net mortgage interest rates higher or lower than the then-current pass-through rates on the certificates may affect the pass-through rate for those certificates for future periods and the yield on those certificates. In addition, the interest only certificates will also be affected by disproportionate principal payments on the mortgage loans with higher net mortgage interest rates because the pass-through rate for the interest only certificates is equal to the difference between the adjusted net WAC of the mortgage loans and the pass-through rate on the Class A-1 Certificates. For any distribution date on which the pass-through rate on the Class A-1 Certificates is equal to the adjusted net WAC of the mortgage loans, the interest only certificates will receive no interest distribution for such distribution date.

If you purchase interest only certificates, your yield will be highly sensitive to both the timing of receipt of prepayments and the overall rate of prepayment on the mortgage loans.

In addition, the inverse floating rate certificates are highly sensitive to LIBOR and increases in LIBOR will have a negative effect on the yield to maturity of your certificates. If you purchase inverse floating rate certificates, which are also interest only certificates, you should consider the risk that high constant rates

 

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of LIBOR combined with high constant prepayment rates will result in a negative yield.

The particular sensitivity of the interest only certificates to prepayments is displayed in the table appearing in Appendix D.

The yield to maturity of classes subordinated to other classes will be more sensitive to losses due to liquidations of the mortgage loans and the timing thereof than the classes to which they are subordinated.

If you are purchasing the super senior support certificates, which are subordinate to the super senior certificates after the Class B Certificates are no longer outstanding, you should consider the effect of this increased sensitivity to losses on your yield to maturity.

If you are purchasing offered certificates at a discount, you should consider the risk that a slower than anticipated rate of principal payments on the mortgage loans will have a negative effect on the yield to maturity of your certificates. In considering the rate of principal payments on the mortgage loans, you should consider that a substantial portion of the mortgage loans are interest only mortgage loans. With respect to an interest only mortgage loan, no scheduled payments of principal will be made by the mortgagor during the applicable interest-only period.

If you are purchasing offered certificates at a premium, or if you are purchasing interest only certificates, you should consider the risk that a faster than anticipated rate of principal payments on the mortgage loans will have a negative effect on the yield to maturity of your certificates and that a rapid rate of principal payments on the mortgage loans could result in the loss of all or part of your initial investment.

Reinvestment Risk

As stated above, if you purchase an offered certificate at par, fluctuations in the rate of distributions of principal will generally not affect your yield to maturity. However, the total return on your investment, even if you purchase your certificates at par, will be reduced if principal distributions received on your certificates cannot be reinvested at a rate as high as the stated pass-through rate.

You should consider the risk that rapid rates of prepayments on the mortgage loans may coincide with periods of low prevailing market interest rates. During periods of low prevailing market interest rates, mortgagors may be expected to prepay or refinance mortgage loans that carry interest rates significantly higher than then-current interest rates for mortgage loans. Consequently, the amount of principal distributions available to you for reinvestment at such low prevailing interest rates may be relatively large.

Moreover, some mortgagors who prefer the certainty provided by fixed interest rate mortgage loans may nevertheless obtain adjustable interest rate mortgage loans at a time when they regard the mortgage interest rates (and, therefore, the payments) on fixed interest rate mortgage loans as unacceptably high. These mortgagors may be induced to refinance adjustable interest rate mortgage loans when the mortgage interest rates and monthly payments on comparable fixed interest rate mortgage loans decline to levels which these mortgagors regard as acceptable, even if such mortgage interest rates and monthly payments may be significantly higher than current mortgage interest rates and monthly payments on the mortgagors’ adjustable interest rate mortgage loans.

Conversely, slow rates of prepayments on the mortgage loans may coincide with periods of high prevailing market interest rates. During such periods, it is less likely that mortgagors will elect to prepay or refinance mortgage loans and, therefore, the amount of principal distributions available to you for reinvestment at such high prevailing interest rates may be relatively small.

Weighted Average Life Volatility

One indication of the impact of varying prepayment speeds on a security is the change in its weighted average life.

 

 

The “weighted average life” of a class of offered certificates (other than the interest only certificates) is the average amount of time that will elapse between the date of issuance of the class and the date on which each dollar in reduction of the principal balance of the class is distributed to investors.

 

 

The “weighted average life” of a class of interest only certificates is the average amount of time that will elapse between the date of issuance of the class and the date on which each dollar in reduction of the notional amount of such class occurs.

 

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Low rates of prepayment on the mortgage loans may result in the extension of the weighted average life of a certificate. High rates of prepayment may result in the shortening of the weighted average life of a certificate.

In general, if you purchase your certificates at par and the weighted average life of your certificates is extended beyond your anticipated time period, the market value of your certificates may be adversely affected even though the yield to maturity on your certificates is unaffected.

See “Prepayment and Yield Considerations” in this prospectus supplement.

The sensitivities of the weighted average lives of the offered certificates to prepayments are illustrated in the tables appearing in Appendix C. These illustrations are based on prepayment and other assumptions which are unlikely to match the actual experience on the mortgage loans. Therefore, your results will vary.

See “Risk Factors — Prepayments May Adversely Affect Yield” and “— Interest Only Mortgage Loans May Have Higher Risk of Default or Rates of Prepayment” and “Prepayment and Yield Considerations” in this prospectus supplement.

FEDERAL INCOME TAX STATUS

For federal income tax purposes, the trust estate will consist of two separate REMICs, an upper-tier REMIC and a lower-tier REMIC.

 

 

The offered certificates (other than the Class A-R Certificates and the portion of the Class A-1 and Class A-IO Certificates representing certain rights and obligations with respect to the yield maintenance agreement and the reserve fund) and the Class B-4, Class B-5 and Class B-6 Certificates will constitute “regular interests” in the upper-tier REMIC and will be treated as newly-originated debt instruments for most federal income tax purposes.

 

 

The Class A-R Certificates are residual certificates. The Class A-R Certificates will be the sole “residual interest” in each of the upper-tier REMIC and lower-tier REMIC.

You must report income received on your certificates as it accrues from distribution date to distribution date, even if it is before such income is distributed in cash to you.

Certain classes of certificates may be issued with “original issue discount.” If your class of certificates is issued with original issue discount, you must report original issue discount income over the life of your certificate, often well before such income is distributed in cash to you. See “Federal Income Tax Considerations” in this prospectus supplement.

Beneficial owners of the Class A-1 and Class A-IO Certificates will be treated as owning the corresponding REMIC regular interest and certain rights and obligations with respect to the yield maintenance agreement and the reserve fund, and will be required to account separately for each of these assets for federal income tax purposes.

The residual certificates will not be treated as debt instruments for federal income tax purposes. Instead, if you are a holder of a residual certificate, you must include the taxable income or loss of each REMIC in determining your federal taxable income. You may have to use funds other than distributions on your certificate to meet the tax liabilities resulting from the ownership of a residual certificate.

In addition, certain transfers of the residual certificates may be disregarded for federal tax purposes, with the transferor continuing to have tax liabilities for the transferred certificates. See “Description of the Certificates — Restrictions on Transfer of the Residual Certificates” and “Federal Income Tax Considerations” in this prospectus supplement and “Certain Federal Income Tax Consequences — Federal Income Tax Consequences for REMIC Certificates” in the prospectus.

ERISA CONSIDERATIONS

If you are a fiduciary of a retirement plan or other employee benefit plan or arrangement subject to ERISA, the Internal Revenue Code or any federal, state or local law which is, to a material extent, similar to ERISA or the Internal Revenue Code, you should carefully review with your legal advisors whether the purchase or holding of offered certificates could give rise to a transaction prohibited or not otherwise permissible under the rules or regulations referred to above.

The residual certificates may not be purchased by or transferred to a plan or a person acting on behalf of or investing the assets of a plan. See “Description of the Certificates — Restrictions on Transfer of the Residual Certificates” and “ERISA Considerations” in this prospectus supplement.

 

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LEGAL INVESTMENT

 

 

The Class A and Class B-1 Certificates will constitute “mortgage related securities” for purposes of the Secondary Mortgage Market Enhancement Act of 1984 as amended, so 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 and Class B-3 Certificates will not constitute “mortgage related securities” under this act.

Prospective purchasers, particularly those whose investment activities are subject to legal investment laws and regulations, regulatory capital requirements or review by regulatory authorities, may be subject to restrictions on investment in the offered certificates and should consult their own legal, tax, financial and accounting advisors in determining the suitability of and consequences to them of the purchase, ownership and disposition of the offered certificates.

See “Legal Investment” in the prospectus.

PERIODIC REPORTS

The master servicer will file periodic reports with the SEC on behalf of the issuing entity under the name “Wells Fargo Mortgage Backed Securities 2008-AR2 Trust” (File No. 333-143751-13).

See “Where You Can Find More Information” in the prospectus.

 

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RISK FACTORS

You should consider carefully in connection with the purchase of the offered certificates, the following factors, as well as those described under “Risk Factors” in the prospectus.

Decline in Residential Real Estate Values and Features of Adjustable Rate Mortgage Loans May Increase Risk of Loss and Adversely Affect Your Investment

In recent months, delinquencies and losses with respect to residential mortgage loans generally have increased and may continue to increase. In addition, in recent months the value of mortgaged properties in many states have declined or remained stable, after extended periods of appreciation. If residential real estate values generally or in a particular geographic area decline or fail to increase, the loan-to-value ratios shown in the tables appearing in Appendix A might not be a reliable indicator of the rates of delinquencies, foreclosures and losses that could occur on the mortgage loans. A continued decline or lack of increase in property values where the outstanding balances of the mortgage loans and any secondary financing on the related mortgaged properties are close to or exceed the value of the mortgaged properties may result in delinquencies, foreclosures and losses that are higher than you anticipated or those in the sponsor’s prior securitizations involving the depositor. Another factor that may have contributed to, and may in the future result in, higher delinquency rates is the increase in monthly payments on adjustable rate mortgage loans. Moreover, with respect to adjustable rate mortgage loans which have an initial fixed rate period, after such period borrowers may experience a substantial increase in their monthly payment even without an increase in prevailing market interest rates.

In addition, adverse economic conditions and other factors (which may or may not affect real property values) may affect the mortgagors’ timely payment of scheduled payments of principal and interest on the mortgage loans and, accordingly, the actual rates of delinquencies, foreclosures and losses with respect to any mortgage pool. These other factors could include excessive building resulting in an oversupply of housing in a particular area or a decrease in employment reducing the demand for housing in an area or zoning or environmental restrictions preventing additions to the housing supply in an area. To the extent that credit enhancements do not cover such losses, the yield on the offered certificates may be adversely impacted.

Mortgage Securities Market Illiquidity May Adversely Affect the Value of Your Certificates

Recently, the mortgage backed securities market has experienced reduced liquidity. Although such reduced liquidity has resulted primarily from investor concerns arising from increased delinquencies and foreclosures on subprime mortgage loans and the failure of several subprime and “Alternative A” mortgage lenders, it has not been limited solely to securities backed by those types of mortgage loans. Accordingly, it is possible that for some period of time investors who desire to sell their certificates in the secondary market may find fewer potential purchasers and experience lower resale prices than under “normal” market conditions. See “Risk Factors—Limited Liquidity for Certificates” in the prospectus.

Prepayments May Adversely Affect Yield

The rate of distributions of principal and the yield to maturity on your certificates will be directly related to the rate of payments of principal on the mortgage loans and the amount and timing of mortgagor defaults resulting in realized losses. Mortgagors are permitted to prepay the mortgage loans, in whole or in part, at any time without penalty. The principal payments on the mortgage loans may be in the form of scheduled principal payments or principal prepayments (for this purpose, the term “principal prepayment” includes prepayments and any other recovery of principal in advance of the scheduled due date, including repurchases and liquidations due to default, casualty, condemnation and similar events). Any of these prepayments will result in distributions to you of amounts that would otherwise be distributed over the remaining term of the mortgage loans.

The rate of principal payments on the mortgage loans will be affected by, among other things:

 

   

the amortization schedules of the mortgage loans;

 

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the rate of principal prepayments (including partial prepayments and those resulting from refinancing) thereon by mortgagors;

 

   

liquidations of, or modifications in reduction of the principal balance of, defaulted mortgage loans;

 

   

repurchases of mortgage loans by the depositor as a result of defective documentation or breaches of representations and warranties;

 

   

optional purchases by the depositor of defaulted mortgage loans;

 

   

the optional purchase by the depositor of all of the mortgage loans in connection with the termination of the trust estate; and

 

   

general and targeted solicitations for refinancing by mortgage originators (including the sponsor).

The rate of payments (including prepayments) on pools of mortgage loans is influenced by a variety of economic, geographic and social factors and will depend greatly on the level of mortgage interest rates:

 

   

If prevailing rates for similar mortgage loans fall below the mortgage interest rates on the mortgage loans, the rate of prepayment would generally be expected to increase.

 

   

Conversely, if interest rates on similar mortgage loans rise above the mortgage interest rates on the mortgage loans, the rate of prepayment would generally be expected to decrease.

If you are purchasing offered certificates at a discount, you should consider the risk that if principal payments on the mortgage loans occur at a rate slower than you expected, there will be a negative effect on the yield to maturity of your certificates. In considering the rate of principal payments on the mortgage loans, you should consider that a substantial portion of the mortgage loans are interest only mortgage loans. With respect to an interest only mortgage loan, no scheduled payments of principal will be made by the mortgagor during the applicable interest-only period.

If you are purchasing offered certificates at a premium, or if you are purchasing interest only certificates, you should consider the risk that if principal payments on the mortgage loans occur at a rate faster than you expected, there will be a negative effect on the yield to maturity of your certificates. If you are purchasing interest only certificates, you should consider the risk that a rapid rate of prepayment on the mortgage loans could result in your failure to recover your initial investment.

The particular sensitivity of the interest only certificates to prepayments is displayed in the table appearing in Appendix D.

You must make your own decisions as to the appropriate prepayment assumptions to be used in deciding whether to purchase offered certificates.

As described in this prospectus supplement under “Description of the Certificates-Principal (Including Prepayments),” the Class A Prepayment Percentage of all principal prepayments (excluding for this purpose, partial liquidations due to default, casualty, condemnation and similar events) initially will be distributed to the classes of Class A Certificates that are entitled to receive principal prepayment distributions at that time. This may result in all (or a disproportionate percentage) of those principal prepayments being distributed to the Class A Certificates and none (or less than their pro rata share) of those principal prepayments being distributed to holders of the subordinated certificates during the periods of time described in the definition of “Class A Prepayment Percentage.”

The timing of changes in the rate of prepayments may significantly affect the actual yield to you, even if the average rate of principal prepayments is consistent with your expectations. In general, the earlier the payment of principal of the mortgage loans, the greater the effect on your yield to maturity for certificates purchased at a price other than par.

 

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See “— Interest Only Mortgage Loans May Have Higher Risk of Default or Rates of Prepayment” below and “Summary Information — Effects of Prepayments on Your Investment Expectations” and “Prepayment and Yield Considerations” herein.

The Variable Rate of Interest on the Offered Certificates Will Affect Your Yield

The mortgage interest rate on each mortgage loan will be fixed for an initial period from origination of approximately ten years. Thereafter, each mortgage loan provides for adjustments to the mortgage interest rate on an annual basis. The mortgage interest rate on each mortgage loan will adjust to equal the sum of the applicable index and a gross margin. Mortgage interest rate adjustments will be subject to a periodic cap. In addition, the mortgage interest rate will be subject to a rate ceiling and a minimum mortgage interest rate which will be the related gross margin or such higher percentage as specified in the related mortgage note. See “Description of the Mortgage Loans” in this prospectus supplement.

The pass-through rate on each offered certificate may decrease, and may decrease significantly, after the mortgage interest rates on the mortgage loans begin to adjust as a result of, among other factors, the dates of adjustment, the gross margins and changes in the applicable index. The mortgage interest rates on the mortgage loans will not all begin to adjust on the same date. Therefore, the mortgage interest rates of some of the mortgage loans may still be in their fixed-rate period while the mortgage interest rates on other mortgage loans may have begun to adjust.

Moreover, each mortgage loan has a rate ceiling and a minimum mortgage interest rate to which the mortgage loans may adjust. The minimum mortgage interest rate will be the applicable gross margin or such higher percentage as specified in the related mortgage note. In addition, if, despite increases in the applicable index, the mortgage interest rate on any mortgage loan cannot increase due to a periodic cap, the yield on such offered certificates could be adversely affected. In addition, because the pass-through rate on the classes of offered certificates will be based on the net WAC (or, in the case of the Class A-1 and Class A-IO Certificates, the adjusted net WAC) of the mortgage loans, disproportionate principal payments on the mortgage loans having net mortgage interest rates higher or lower than the then-current pass-through rate on a class of offered certificates may affect the pass-through rate for such offered certificates for future periods and the yield on such offered certificates. The interest only certificates will also be affected by the disproportionate principal payments on the mortgage loans with higher net mortgage interest rates because the pass-through rate for the interest only certificates is equal to the difference between the adjusted net WAC of the mortgage loans and the pass-through rate on the Class A-1 Certificates. For any distribution date on which the pass-through rate on the Class A-1 Certificates is equal to the adjusted net WAC of the mortgage loans, the interest only certificates will receive no interest distribution for such distribution date. See “Description of the Mortgage Loans” and “Prepayment and Yield Considerations” in this prospectus supplement.

Increase in LIBOR May Adversely Affect Yield

If you are purchasing the inverse floating rate certificates, you should consider the risk that a high rate of LIBOR will have a negative effect on the yield to maturity on your certificates. In particular, because your certificates are interest only certificates, you should consider the risk that high constant rates of LIBOR combined with high constant prepayment rates on the mortgage loans will result in a negative yield on your certificates.

The particular sensitivity of the inverse floating certificates to prepayments and rates of LIBOR is displayed in the table appearing in Appendix D.

See “Prepayment and Yield Consideration” herein.

Geographic Concentration May Increase Risk of Loss Because of Adverse Economic Conditions or Natural Disasters

The yield to maturity on your certificates may be affected by the geographic concentration of the mortgaged properties securing the mortgage loans. Certain regions of the United States from time to time will experience weaker regional economic conditions and housing markets and, consequently, will experience higher rates of loss and delinquency than on mortgage loans generally. Any concentration of the mortgage loans in such a region may present risk considerations in addition to those generally present for similar mortgage-backed securities without such

 

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concentration. In addition, certain regions have experienced or may experience natural disasters, including earthquakes, fires, floods, hurricanes and tornadoes, which may adversely affect property values. Although mortgaged properties located in certain identified flood zones will be required to be covered by flood insurance, for the minimum amount required by the sponsor, such amount may be significantly smaller than the unpaid principal balance of the related mortgage loan. In addition, no mortgaged properties will otherwise be required to be insured against earthquake damage. California and New York are the only states to have a concentration of mortgaged properties in excess of 10% (by aggregate unpaid principal balance as of the cut-off date) of the mortgage pool.

Any deterioration in housing prices in the regions in which there is a significant concentration of mortgaged properties, as well as the other regions in which the mortgaged properties are located, and any deterioration of economic conditions in such regions which adversely affects the ability of borrowers to make payments on the mortgage loans may increase the likelihood of losses on the mortgage loans. Such losses, if they occur, may have an adverse effect on the yield to maturity of your certificates, especially if they are subordinated and particularly if they are Class B-3 Certificates.

The concentrations of mortgaged properties by state and geographic areas are identified in Appendix A.

High Balance Loans May Increase Risk of Loss on Certificates

Mortgage loans with large balances relative to the principal balances of the classes of Class B Certificates may, in the event of liquidation, result in realized losses large enough to significantly reduce or eliminate the principal balance of one or more of such classes.

In addition, any realized loss that reduces the principal balances of the Class B Certificates decreases the subordination provided to the Class A Certificates.

The original principal balances of the mortgage loans and the percentage they represent of the trust estate are specified in Appendix A.

Delinquencies and Losses on the Mortgage Loans Will Adversely Affect Your Yield

Delinquencies on the mortgage loans which are not advanced by the servicer (because the servicer has determined that these amounts, if advanced, would be nonrecoverable) will adversely affect the yield on the certificates. The servicer will determine that a proposed advance is nonrecoverable when, in the good faith exercise of its servicing judgment, it believes the proposed advance would not be ultimately recoverable from the related mortgagor, related liquidation proceeds, or other recoveries in respect of the mortgage loan. The servicer will be entitled to recover from amounts on deposit in the certificate account any advances previously made which it subsequently determines to be nonrecoverable prior to any distribution on the certificates. Because of the priority of distributions, shortfalls resulting from delinquencies that are not covered by advances or from the reimbursement of advances which the servicer determines to be nonrecoverable will be borne first by the subordinated certificates (in reverse numerical order), and then by the senior certificates.

Net interest shortfalls will adversely affect the yields on the offered certificates. In addition, losses generally will be borne by the subordinated certificates, as described in this prospectus supplement under “Description of the Certificates — Allocation of Losses.” As a result, the yields on the offered certificates will depend on the rate and timing of realized losses on the mortgage loans.

Interest Only Mortgage Loans May Have Higher Risk of Default or Rates of Prepayment

Approximately 75.17% (by aggregate unpaid principal balance as of the cut-off date) of the mortgage loans are interest only mortgage loans, which require only the payment of interest with respect to, at the borrower’s election at the time of origination of the mortgage loan, the first three to fifteen years of payments with respect to the mortgage loan. At that time, the payments on each such mortgage loan will be recalculated to fully amortize its unpaid principal balance over the remaining life of such mortgage loan and the mortgagor will be required to make payments of both principal and interest. The required payment of principal will increase the burden on the mortgagor and may increase the risk of default under such mortgage loan. In underwriting an interest only mortgage loan, the ability of the mortgagor to make payments in respect of principal is not considered. The increase in the

 

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mortgagor’s monthly payment attributable to principal will occur when the mortgagor’s monthly payment may also be increasing as a result of an increase in the mortgage interest rate on the related adjustment date. This increase in monthly payment may significantly increase the risk of default under such mortgage loan. In addition, the increase in the monthly payment to be made by a mortgagor may induce the mortgagor to refinance such mortgage loan which would result in a prepayment of such loan.

Lack of income or asset verification may increase risk of loss

Certain of the mortgage loans were underwritten under reduced documentation programs referred to as the “stated income, stated assets,” “stated income, verified assets” and “verified income, stated assets” documentation programs. The “stated income, stated assets” documentation program permits the mortgagor to be qualified on the basis of his or her monthly income and assets as stated on the loan application, without independent verification. The “stated income, verified assets” and “verified income, stated assets” documentation programs permit the mortgagor to be qualified on the basis of his or her income or assets, as applicable, as stated on the loan application, in each case without independent verification. When the borrower chooses a reduced documentation program instead of providing full documentation, it may increase the possibility that, due to mortgagor error or fraud, the amount of credit extended exceeds the mortgagor’s capacity to pay, particularly with respect to adjustable rate mortgage loans and interest only mortgage loans, on which the payments are likely to increase during the term of the mortgage loan.

Under the pooling and servicing agreement, the depositor will represent that there is no fraud by the mortgagor in the origination of a mortgage loan, however, this representation does not cover information regarding income or assets as stated on the loan application under these reduced documentation programs. Therefore, the depositor will not have any repurchase or substitution obligation as a result of mortgagor fraud regarding income or assets stated on a loan application. As a consequence, the rate of delinquencies and losses may be higher on such mortgage loans than on mortgage loans under which the mortgagor’s income and/or assets has been verified.

See “Description of the Mortgage Loans—Mortgage Loan Data Appearing in Appendix A” herein and Appendix A to this prospectus supplement for information regarding the mortgage loans underwritten under the “stated income, stated assets,” “stated income, verified assets” or “verified income, stated assets” documentation programs.

Subordination of Super Senior Support Certificates and Class B Certificates Increases Risk of Loss

If you purchase the super senior support certificates, you should consider the risk that on or after the date on which the aggregate principal balance of the Class B Certificates has been reduced to zero, the principal portion of realized losses allocated to the super senior certificates will be borne by your super senior support certificates (in addition to the principal portion of realized losses allocated to your super senior support certificates) and not by the super senior certificates so long as the principal balance of your super senior support certificates remains outstanding. See “Description of the Certificates — Allocation of Losses” herein.

The rights of the holders of each class of Class B Certificates to receive distributions will be subordinated to such rights of the holders of the Class A Certificates and the holders of the lower-numbered classes of Class B Certificates, if any. In addition, realized losses will be allocated to the Class B Certificates in the reverse order in which they are entitled to distributions of principal before being allocated to the Class A Certificates. Accordingly, if you are purchasing Class B Certificates, you will be more likely to experience losses as a result of the occurrence of losses or interest shortfalls on the mortgage loans. See “Description of the Certificates — Subordination of Class B Certificates” herein.

The Rate of Default on Mortgage Loans that are Secured by Investor Properties May be Higher than on Other Mortgage Loans

Approximately 2.15% (by aggregate unpaid principal balance as of the cut-off date) of the mortgage loans in the mortgage pool are expected to be secured by investor properties. An investor property is a property which, at the time of origination, the mortgagor represented would not be used as the mortgagor’s primary residence or second home. Because the mortgagor is not living on the property, the mortgagor may be more likely to default on the mortgage loan than on a comparable mortgage loan secured by a primary residence, or to a lesser extent, a second

 

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home. In addition, income expected to be generated from an investor property may have been considered for underwriting purposes in addition to the income of the mortgagor from other sources. Should this income not materialize, it is possible the mortgagor would not have sufficient resources to make payments on the mortgage loan.

FICO Scores May Not Accurately Predict the Likelihood of Default

The sponsor generally uses FICO scores as part of its underwriting process. The tables appearing in Appendix A show FICO scores for the mortgagors obtained either at the time of origination of their mortgage loans or more recently. A FICO score purports only to be a measurement of the relative degree of risk a borrower represents to a lender, i.e., that a borrower with a higher score is statistically expected to be less likely to default in payment than a borrower with a lower score. In addition, it should be noted that FICO scores were developed to indicate a level of default probability over a two-year period, which does not correspond to the expected life of a mortgage loan. Furthermore, FICO scores were not developed specifically for use in connection with mortgage loans, but for consumer loans in general. Therefore, FICO scores do not take into consideration the effect of mortgage loan characteristics on the probability of repayment by the borrower. Neither the depositor nor the sponsor makes any representations or warranties as to any borrower’s current FICO score, the actual performance of any mortgage loan or that a particular FICO score should be relied upon as a basis for an expectation that a borrower will repay its mortgage loan according to its terms.

The FICO scores shown in the tables were obtained prior to the cut-off date. As a result of the impact of adverse economic conditions on borrowers and other factors, which may or may not adversely affect borrower credit, such as payment default on other obligations, new consumer debt or recent credit inquiries, the FICO scores shown in the tables may be higher than the FICO scores would be if obtained on the cut-off date and the weighted average of the FICO scores shown in the tables may be higher than what the weighted average of the FICO scores would be if obtained on the cut-off date. Borrowers whose current FICO scores are significantly lower than the FICO scores used in connection with the origination of their mortgage loans may be more likely to default than borrowers with FICO scores that have not declined.

The Class A-1 and Class A-IO Certificates are Subject to Counterparty Risk

The master servicer on behalf of the trust will enter into a yield maintenance agreement with Lehman Brothers Special Financing Inc., as counterparty, for the benefit of the Class A-1 and Class A-IO Certificates. The yield maintenance agreement will require the counterparty to make certain payments in the circumstances set forth herein under “Description of the Certificates — The Yield Maintenance Agreement.” To the extent that payments on the Class A-1 and Class A-IO Certificates depend in part on payments to be received by the master servicer under the yield maintenance agreement, the ability of the master servicer to make such payments on such certificates will be subject to the credit risk of the counterparty and the guarantor of the counterparty.

The Class A-1 Certificates May Not Receive Amounts Expected from the Yield Maintenance Agreement

The pass-through rate of the Class A-1 Certificates is subject to a maximum pass-through rate equal to the adjusted net WAC of the mortgage loans. If the pass-through rate formula for the Class A-1 Certificates set forth in the table beginning on page S-6 provides a rate greater than the applicable adjusted net WAC, the payment, if any, under the yield maintenance agreement may not cover the full amount of interest that would have been received but for the limitation on the pass-through rate imposed by the maximum pass-through rate.

Decrement and Sensitivity Tables are Based Upon Assumptions and Models

The decrement tables set forth in Appendix C and the sensitivity table set forth in Appendix D have generally been prepared on the basis of the structuring assumptions described under “Prepayment and Yield Considerations” and the characteristics of the assumed mortgage loans set forth in the table appearing in Appendix B. There will likely be discrepancies between the characteristics of the actual mortgage loans included in the trust estate and the characteristics of the assumed mortgage loans used in preparing the decrement tables and the sensitivity table. Any such discrepancy may have an effect on the percentages of initial principal balances outstanding set forth in the decrement tables (and the weighted average lives of the offered certificates) and the yields to maturity set forth in the sensitivity table. In addition, to the extent that the mortgage loans that actually are included in the mortgage pool

 

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have characteristics that differ from those assumed in preparing the decrement tables and the sensitivity table, the principal balance of a class of offered certificates could be reduced to zero earlier or later than indicated by the decrement tables and the yield to maturity may be higher or lower than indicated in the sensitivity table.

The model used in this prospectus supplement for prepayments also does not purport to be 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 contained in the trust. It is highly unlikely that the mortgage loans will prepay at any of the rates specified. The assumed percentages of CPR shown in the Appendices are for illustrative purposes only. For a description of CPR, see “Prepayment and Yield Considerations” in this prospectus supplement. The actual rates of prepayment of the mortgage loans may not correspond to any of the assumptions made in this prospectus supplement. For these reasons, the weighted average lives of the offered certificates may differ from the weighted average lives shown in the tables appearing in Appendix C. Further, because the timing of cash flows is critical to determining yield, the pre-tax yields to maturity of the Class A-IO Certificates are likely to differ from the pre-tax yields to maturity shown in the table appearing in Appendix D.

Residual Certificates May Have Adverse Tax Consequences

The residual certificates will be the sole “residual interest” in each REMIC for federal income tax purposes. Holders of the residual certificates must report as ordinary income or loss the net income or the net loss of each REMIC whether or not any cash distributions are made to them. This allocation of income or loss may result in a zero or negative after-tax return. Under current law, a holder of a Class A-R Certificate must account separately for its interest in each REMIC and generally cannot offset income from one REMIC with losses from another REMIC. No cash distributions are expected to be made with respect to the residual certificates other than the distribution of their principal balance and interest on that balance. Due to their tax consequences, the residual certificates will be subject to restrictions on transfer that may affect their liquidity. In addition, the residual certificates may not be acquired by ERISA plans or similar governmental plans.

United States Military Operations May Increase Risk of Relief Act Shortfalls

As a result of military operations in Afghanistan and Iraq, the United States has placed a substantial number of armed forces reservists and members of the National Guard on active duty status. It is possible that the number of reservists and members of the National Guard placed on active duty status may remain at high levels for an extended time. To the extent that a member of the military, or a member of the armed forces reserves or National Guard who is called to active duty, is a mortgagor of a mortgage loan in the trust, the interest rate limitation of the Servicemembers Civil Relief Act, as it may be amended from time to time, or any comparable state legislation will apply. This may result in interest shortfalls on the mortgage loans, which will be borne by all interest-bearing classes of certificates as described herein under “Description of the Certificates—Interest.” The depositor has not taken any action to determine whether any of the mortgage loans would be affected by such interest rate limitation. See “Description of the Certificates — Interest” herein and “Certain Legal Aspects of the Mortgage Loans — Servicemembers Civil Relief Act and Similar Laws” in the prospectus.

Proposed Bankruptcy Amendments May Delay or Reduce Collections on Mortgage Loans

Various amendments to the United States Bankruptcy Code have been proposed in the United States Senate and House of Representatives that would, if adopted, give bankruptcy courts increased power to modify the terms of a mortgage loan secured by the borrower’s principal residence after the borrower files for relief under Chapter 13 of the Bankruptcy Code. These proposed amendments would allow a court to, among other things, reduce the principal balance of the mortgage loan that is treated as secured (treating the remainder as unsecured), extend the loan’s final maturity date, reduce the loan’s interest rate and delay the effective date of an adjustable rate increase. In addition, one such proposed amendment would allow a court to treat certain of the borrower’s prior payments of interest on the mortgage loan as voidable transfers if the court found a substantial failure by the lender to disclose material terms regarding such interest. The depositor is unable to predict whether or when any of the proposals may be enacted into law or whether the scope of the proposals may be narrowed or expanded in the legislative process. However, if adopted, any of the actions taken by a bankruptcy court, as set forth above, could delay distributions, reduce the yield or result in losses on your certificates.

 

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FORWARD LOOKING STATEMENTS

This prospectus supplement and the accompanying prospectus contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements, together with related qualifying language and assumptions, are found in the material, including each of the tables, set forth under “Risk Factors” and “Prepayment and Yield Considerations” and in the Appendices. Forward-looking statements are also found elsewhere in this prospectus supplement and the prospectus, and may be identified by, among other things, accompanying language including the words “expects,” “intends,” “anticipates,” “estimates” or analogous expressions, or by qualifying language or assumptions. Such statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results or performance to differ materially from such forward-looking statements. Such risks, uncertainties and other factors include, among others, general economic and business conditions, competition, changes in political, social and economic conditions, regulatory initiatives and compliance with government regulations, customer preference and various other matters, many of which are beyond the Depositor’s control. These forward-looking statements speak only as of the date of this prospectus supplement. The Depositor expressly disclaims any obligation or undertaking to disseminate any updates or revisions to such forward-looking statements to reflect any change in the Depositor’s expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based.

THE SPONSOR

The Sponsor, Wells Fargo Bank, N.A. (“Wells Fargo Bank”) is an indirect, wholly-owned subsidiary of Wells Fargo & Company.

See “The Sponsor,” “The Sponsor’s Mortgage Loan Programs,” “Servicing of the Mortgage Loans” and “The Pooling and Servicing Agreement” in the prospectus for more information about the Sponsor, its securitization programs, underwriting criteria and procedures used to originate the Mortgage Loans and its material roles and duties in this securitization.

STATIC POOL INFORMATION

Information concerning the Sponsor’s prior residential mortgage loan securitizations involving Prime Adjustable Rate Loans is available on the internet at http://www.securitieslink.com/staticpools/WFMBS.

Without charge or registration, by clicking on the link in the row titled “WFMBS 2008-AR2,” investors can view on this website the following information:

 

   

summary information regarding original characteristics of the Sponsor’s prior securitized pools of Prime Adjustable Rate Loans; and

 

   

delinquency, cumulative loss, and prepayment information for the five years preceding the date of first use of this prospectus supplement regarding the Sponsor’s prior securitized pools of Prime Adjustable Rate Loans.

In the event any changes or updates are made to the information available on the Sponsor’s website, the Depositor will provide a copy of the original information upon request to any person who writes or calls the Depositor at 5325 Spectrum Drive, Frederick, Maryland 21703 Attention: Vice President, Structured Finance, telephone number (240) 586-5999.

The static pool reports available on the Sponsor’s website relating to any of the Sponsor’s prior securitized pools issued prior to January 1, 2006 are not deemed to be part of this prospectus supplement, the accompanying prospectus or the Depositor’s registration statement.

Static pool performance may have been affected by various factors relating to the underlying borrower’s personal circumstances, including, but not limited to, unemployment or change in employment (or in the case of

 

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self-employed mortgagors or mortgagors relying on commission income, fluctuations in income), marital separation and the mortgagor’s equity in the related mortgaged property. In addition, static pool performance may be sensitive to adverse economic conditions, either nationally or regionally, may exhibit seasonal variations and may be influenced by the level of housing prices, the level of interest rates and changes in mortgage loan product features. In addition, changes over time in servicing practices or variations in mortgage loan underwriting guidelines or the application of such guidelines may affect the static pool performance. See “The Sponsor’s Mortgage Loan Programs-Mortgage Loan Underwriting” in the prospectus. Regional economic conditions (including declining real estate values) may particularly affect delinquency and cumulative loss experience on mortgage loans to the extent that mortgaged properties are concentrated in certain geographic areas. The historical pool performance information contained in the static pool reports may be attributable to factors such as those described above, although there can be no assurance as to whether this information is the result of any particular factor or a combination of factors. Due to all of these factors, the Sponsor’s static pool performance data may not be indicative of the future performance of the Mortgage Loans.

For additional information concerning the static pool information available on the website set forth above, see “Static Pool Information” in the prospectus.

THE DEPOSITOR

Wells Fargo Asset Securities Corporation (the “Depositor”) is a direct, wholly owned subsidiary of Wells Fargo Bank and an indirect, wholly owned subsidiary of Wells Fargo & Company. The Depositor was incorporated in the State of Delaware on March 28, 1996 as Norwest Asset Securities Corporation. On April 7, 2000, Norwest Integrated Structured Assets, Inc., an affiliate of the Depositor, was merged into and with the Depositor. On April 17, 2000, the Depositor changed its name from Norwest Asset Securities Corporation to Wells Fargo Asset Securities Corporation.

The limited purposes of the Depositor are, in general, to acquire, own and sell mortgage loans; to issue, acquire, own, hold and sell mortgage pass-through securities and home equity asset-backed pass-through securities which represent ownership interests in mortgage loans, collections thereon and related properties; and to engage in any acts which are incidental to, or necessary, suitable or convenient to accomplish, the foregoing.

The Depositor will have limited obligations and rights under the Pooling and Servicing Agreement after the Closing Date, including, but not limited to, repurchasing or substituting Mortgage Loans due to breaches of representations and warranties or as a result of defective documentation, repurchasing at its option certain Mortgage Loans that have become delinquent, repurchasing Mortgage Loans that are required to be transferred to the Sponsor in order to permit the Sponsor to exercise rights that it may have against the originator of the Mortgage Loans or, in the circumstances described in the prospectus under “The Pooling and Servicing Agreement-Termination; Optional Purchase of Mortgage Loans,” repurchasing all of the Mortgage Loans.

The Depositor maintains its principal office at 5325 Spectrum Drive, Frederick, Maryland 21703. Its telephone number is (240) 586-5999.

See “The Depositor” in the prospectus for more information about the Depositor.

THE ISSUING ENTITY

The Issuing Entity will be a New York common law trust (the “Trust”), formed on the Closing Date pursuant to the Pooling and Servicing Agreement. The Mortgage Loans will be deposited by the Depositor into the Trust under the Pooling and Servicing Agreement. The Trust will have no officers or directors and no continuing duties other than to hold the assets underlying the Certificates and to issue the Certificates. The fiscal year end of the Issuing Entity will be December 31. The Trust will be administered by the Trustee and the Master Servicer pursuant to the terms of the Pooling and Servicing Agreement.

 

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THE TRUSTEE

HSBC Bank USA, National Association (“HSBC Bank”) will act as trustee (the “Trustee”) under the Pooling and Servicing Agreement. HSBC Bank is a national banking association. The Depositor and the Master Servicer may maintain other banking relationships in the ordinary course of business with the Trustee. The Trustee’s corporate trust office is located at 452 Fifth Avenue, New York, New York 10018, Attention: Corporate Trust or at such other address as the Trustee may designate from time to time.

HSBC Bank, has been, and currently is, serving as trustee for numerous securities transactions involving similar residential mortgage pool assets to those found in this transaction.

The Trustee has limited administrative responsibilities under the terms of the Pooling and Servicing Agreement. The Trustee is not responsible for securities administration, does not monitor access to and activity in the Certificate Account or compliance with covenants in the Pooling and Servicing Agreement. Under the Pooling and Servicing Agreement, the Trustee will be required to make Periodic Advances to the limited extent described herein with respect to the Mortgage Loans serviced by Wells Fargo Bank if Wells Fargo Bank, as Servicer, fails to make a Periodic Advance required by the related Underlying Servicing Agreement. See “Description of the Certificates — Periodic Advances” herein.

The Trustee may appoint one or more co-trustees if necessary to comply with the fiduciary requirements imposed by any jurisdiction in which a Mortgaged Property is located. In the case of any appointment of a co-trustee, all rights, powers, duties and obligations conferred or imposed upon the Trustee will be conferred or imposed upon and exercised or performed by the Trustee and the co-trustee jointly, unless the law of a jurisdiction prohibits the Trustee from performing its duties under the Pooling and Servicing Agreement, in which event such rights, powers, duties and obligations (including the holding of title to the Trust or any portion of the Trust in any such jurisdiction) shall be exercised and performed by the co-trustee at the direction of the Trustee.

See “The Pooling and Servicing Agreement—The Trustee” in the prospectus for more information about the Trustee and its obligations and rights (including the right to indemnity and reimbursement in certain circumstances) under the Pooling and Servicing Agreement.

THE MASTER SERVICER

The Corporate Trust Services division of Wells Fargo Bank will act as master servicer (the “Master Servicer”) of the Mortgage Loans and, in that capacity, will supervise the servicing of the Mortgage Loans, cause the Mortgage Loans to be serviced in the event a Servicer (other than Wells Fargo Bank) is terminated and a successor servicer is not appointed, provide certain reports to the Certificateholders regarding the Mortgage Loans and the Certificates and make Periodic Advances to the limited extent described herein. See “Description of the Certificates—Periodic Advances” herein. As of the date of this prospectus supplement, the Master Servicer has not failed to make any required Periodic Advance with respect to any issuance of residential mortgage-backed securities.

In addition, the Master Servicer will be responsible for securities administration of the Trust. In such capacity, the Master Servicer is responsible for pool performance calculation, distribution calculations, the preparation of monthly distribution reports and the preparation of tax returns on behalf of the Trust and the preparation of monthly reports on Form 10-D (based on information included in the monthly distribution date statements), annual reports on Form 10-K and certain reports on Form 8-K that are required to be filed with the SEC on behalf of the Trust.

The assessment of compliance with applicable servicing criteria prepared by the Corporate Trust Services division of Wells Fargo Bank for its platform that includes residential mortgage-backed securities transactions for which Wells Fargo Bank performs securities administration and master servicing functions for the twelve months ended December 31, 2006, furnished pursuant to Item 1122 of Regulation AB, discloses that it was not in compliance with the 1122(d)(3)(i) servicing criterion during that reporting period. Such assessment of compliance indicates that certain monthly investor or remittance reports included errors in the calculation and/or the reporting of delinquencies for the related pool assets, which errors may or may not have been material, and that all such errors were the result of data processing errors and/or the mistaken interpretation of data provided by other parties participating in the servicing function. Such assessment further states that all necessary adjustments to Wells Fargo

 

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Bank’s Corporate Trust Services division data processing systems and/or interpretive clarifications have been made to correct those errors and to remedy related procedures.

Under the Pooling and Servicing Agreement, any good faith interpretation of the Master Servicer of any provisions of the Pooling and Servicing Agreement relating to the distributions to be made on or the allocation of any losses to the Certificates which the Master Servicer concludes are ambiguous or unclear will be binding on Certificateholders.

See “The Sponsor” in the prospectus for more information about Wells Fargo Bank and “Servicing of the Mortgage Loans—The Master Servicer” in the prospectus for more information about Wells Fargo Bank in its capacity as Master Servicer.

THE PAYING AGENT

The Corporate Trust Services division of Wells Fargo Bank will also act as paying agent (the “Paying Agent”) under the Pooling and Servicing Agreement. The Paying Agent is responsible for making distributions to Certificateholders. The Paying Agent will establish and maintain a payment account which will be a trust account and which may be the Certificate Account for so long as the Master Servicer is also acting as the Paying Agent (the “Payment Account”). On each Distribution Date or, if Wells Fargo Bank is no longer acting as Paying Agent, on the business day prior to each Distribution Date, the Master Servicer will deposit funds from the Certificate Account into the Payment Account. The Paying Agent will make payments to Certificateholders with the funds in the Payment Account on the related Distribution Date.

See “The Sponsor” in the prospectus for more information about Wells Fargo Bank.

THE SERVICER

As of the Closing Date, the Sponsor, as Servicer,” will service all of the Mortgage Loans in accordance with the terms of the servicing agreement, dated the Closing Date (the “Wells Fargo Underlying Servicing Agreement” or the “Underlying Servicing Agreement”) between the Master Servicer and the Servicer. As of the Closing Date, there are no other Servicers servicing the Mortgage Loans. The rights to enforce the Servicer’s obligations under the Wells Fargo Underlying Servicing Agreement with respect to the Mortgage Loans will be assigned to the Trustee for the benefit of Certificateholders. Among other things, the Servicer is obligated under certain circumstances to advance delinquent payments of principal and interest with respect to the Mortgage Loans. As of the date of this prospectus supplement, the Servicer has not failed to make any required advance with respect to any issuance of residential mortgage-backed securities.

The Servicer may perform any of its obligations under the Wells Fargo Underlying Servicing Agreement through one or more subservicers, although the Servicer has not engaged any subservicers as of the date of this prospectus supplement. Despite the existence of subservicing arrangements, the Servicer will be liable for its servicing duties and obligations under the Wells Fargo Underlying Servicing Agreement as if the Servicer alone were servicing the Mortgage Loans.

Wells Fargo Bank, in its capacity as Servicer, has delivered its 2006 assessment of compliance under Item 1122 of Regulation AB. In its assessment, Wells Fargo Bank reported that it had complied, in all material respects, with the applicable servicing criteria set forth in Item 1122(d) of Regulation AB as of and for the year ended December 31, 2006 with respect to the primary servicing of residential mortgage loans by its Wells Fargo Home Mortgage division, except for the following:

 

  1.

1122(d)(3)(i) – Delinquency Reporting – For certain loans originated by third parties and sub-serviced by Wells Fargo Bank or for which servicing rights were acquired on a bulk-acquisition basis, Wells Fargo Bank determined it provided incomplete data to some third parties who use such data to calculate delinquency ratios and determine the status of loans with respect to bankruptcy, foreclosure or real estate owned. The incomplete reporting only affected securitizations that included delinquent loans. Instead of the actual due date being provided for use in calculating delinquencies, the date of

 

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the first payment due to the security was provided. Wells Fargo Bank subsequently included additional data in the monthly remittance reports, providing the actual borrower due date and unpaid principal balance, together with instructions to use these new fields if such monthly remittance reports are used to calculate delinquency ratios.

 

  2. 1122(d)(4)(vii) – Notification of Intent to Foreclosure – Wells Fargo Bank determined that, as required by certain servicing agreements, it did not provide mortgage loan purchasers with prior notifications of intent to foreclose. While mortgage loan purchasers received monthly delinquency status reports that listed loans in foreclosure, such reports were received after such loans had been referred to an attorney. A new process is being implemented to send such notifications if contractually required, unless a mortgage loan purchaser opts out in writing.

See “The Sponsor,” “Servicing of the Mortgage Loans—The Servicers,” “—Servicing Experience and Procedures of Wells Fargo Bank” and “The Pooling and Servicing Agreement” in the prospectus for more information about the Sponsor, the Sponsor’s experience, its servicing procedures and its obligations under the Pooling and Servicing Agreement.

All of the Mortgage Loans will be Type 1 Loans. See “Description of the Certificates—Distributions to Certificateholders—Unscheduled Principal Receipts” and “Servicing of the Mortgage Loans—Changes in Servicing” in the prospectus.

See “Servicing of the Mortgage Loans” in the prospectus.

THE CUSTODIAN

Wells Fargo Bank will act as custodian (the “Custodian”) of the mortgage files pursuant to the custodial agreement, dated the Closing Date (the “Custodial Agreement”) among the Trustee, the Depositor, the Master Servicer and the Custodian. 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. The mortgage 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 two regional offices located in Irvine, California, and Salt Lake City, Utah. As of December 31, 2007, Wells Fargo Bank maintains mortgage custody vaults in each of those locations with an aggregate capacity of over ten million files.

See “The Pooling and Servicing Agreement—The Custodian” in the prospectus for more information about the Custodian and its obligations and rights (including its right to indemnity in certain circumstances) under the Pooling and Servicing Agreement.

THE COUNTERPARTY

The Counterparty, Lehman Brothers Special Financing Inc., a Delaware corporation and a wholly-owned subsidiary of Lehman Brothers Inc., is Lehman Brothers Inc.’s principal dealer in a broad range of OTC derivative products including interest rate, currency, credit and mortgage derivatives. Lehman Brothers Special Financing Inc. benefits from a full guarantee by Lehman Brothers Holdings Inc., which is currently rated “A-1” by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., “F-1+” by Fitch Ratings and “P-1” by Moody’s Investors Service Inc. for short-term debt. There can be no assurance that such ratings will be maintained.

ROLES OF WELLS FARGO BANK

As discussed herein, Wells Fargo Bank is the Sponsor and will act as the Custodian, the Master Servicer, the Paying Agent and the Servicer with respect to the Mortgage Loans. Even though Wells Fargo Bank will be acting in these multiple capacities, it is expected that with respect to the functions of Master Servicer, Paying Agent and Custodian, on the one hand, and Servicer, on the other, different divisions within Wells Fargo Bank, acting through

 

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different personnel, will be performing these functions. See “Summary Information—Affiliations” in this prospectus supplement.

DESCRIPTION OF THE CERTIFICATES

General

The Issuing Entity will issue Mortgage Pass-Through Certificates, Series 2008-AR2 (the “Certificates”) on the Closing Date.

The Certificates will consist of four classes of senior certificates (the “Class A Certificates”) and six classes of junior certificates (the “Class B Certificates” or “Subordinated Certificates”). Only the Class A Certificates and the Class B-1, Class B-2 and Class B-3 Certificates are being offered by this prospectus supplement and the accompanying prospectus (the “Offered Certificates”). The Offered Certificates will be issued in the forms and denominations set forth in the table beginning on page S-6.

Book-Entry Certificates

Persons acquiring beneficial ownership interests in the Book-Entry Certificates will hold such Certificates through The Depository Trust Company (in the United States), or Clearstream or Euroclear (in Europe) under certain circumstances as more fully described in the prospectus under “Description of the Certificates—Book-Entry Form.”

Distributions

On each Distribution Date, the Paying Agent will make monthly distributions of interest and in reduction of Principal Balance to holders of each Class of Certificates, to the extent of each Class’s entitlement thereto. Distributions will be made on each Distribution Date to holders of record (which, in the case of the Book-Entry Certificates, will be Cede, as nominee for DTC) at the close of business on (i) in the case of the Floating Rate and Inverse Floating Rate Certificates, the business day preceding such Distribution Date and (ii) for all other Certificates, the last business day of the preceding month (each, a “Record Date”). Distributions on the Offered Certificates will be made by either wire transfer or by check mailed to the person entitled thereto as it appears on the certificate register, as described in the prospectus under “Description of the Certificates—General.”

The aggregate amount available for distribution to the Certificateholders on each Distribution Date will be the Pool Distribution Amount. The “Pool Distribution Amount” for a Distribution Date will be the sum of:

(i) all previously undistributed payments or other receipts on account of principal (including principal prepayments and Liquidation Proceeds in respect of principal, if any), and interest on or in respect of the Mortgage Loans received by the Master Servicer, including without limitation any related insurance proceeds, any proceeds received as a result of a substitution of a Mortgage Loan and the proceeds of any purchase of a Mortgage Loan for breach of a representation or warranty or the sale of a Mortgaged Property by a Servicer in connection with the liquidation of the Mortgage Loan on or prior to the Remittance Date in the month in which such Distribution Date occurs;

(ii) all Periodic Advances made; and

(iii) all other amounts (including any insurance proceeds and Compensating Interest) placed in the Certificate Account by any Servicer on or before the Remittance Date or by the Master Servicer on or before the Distribution Date pursuant to the Pooling and Servicing Agreement, but excluding the following:

(a) amounts received as late payments of principal or interest as to which one or more unreimbursed Periodic Advances has been made;

(b) those portions of each payment of interest on a particular Mortgage Loan which represent (i) the applicable Servicing Fee and (ii) the Master Servicing Fee;

 

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(c) all amounts representing scheduled payments of principal and interest due after the Due Date occurring in the month in which such Distribution Date occurs;

(d) all Unscheduled Principal Receipts that were received by the Servicers after the Unscheduled Principal Receipt Period relating to the Distribution Date for the applicable type of Unscheduled Principal Receipt, and all related payments of interest on such amounts;

(e) all repurchase proceeds with respect to the Mortgage Loans repurchased by the Depositor on or following the Determination Date in the month in which such Distribution Date occurs and the excess of the unpaid principal balance of any Mortgage Loan for which a Mortgage Loan was substituted over the unpaid principal balance of such substitute Mortgage Loan on or following the Determination Date in the month in which such Distribution Date occurs;

(f) to the extent permitted by the Pooling and Servicing Agreement, that portion of Liquidation Proceeds or insurance proceeds with respect to a Mortgage Loan or proceeds of any Mortgaged Property that becomes owned by the Trust Estate which represents (i) any unpaid Servicing Fee or Master Servicing Fee to which such Servicer or the Master Servicer, respectively, is entitled or (ii) any unreimbursed Periodic Advances;

(g) all amounts representing certain expenses reimbursable to the Master Servicer, any Servicer or the Trustee and other amounts permitted to be retained by the Master Servicer or any Servicer or withdrawn by the Master Servicer from the Certificate Account pursuant to the Pooling and Servicing Agreement;

(h) reinvestment earnings on payments received in respect of the Mortgage Loans or on other amounts on deposit in the Certificate Account;

(i) Liquidation Profits;

(j) Month End Interest; and

(k) amounts reimbursable to a Servicer for PMI Advances.

See “Description of the Certificates — Distributions to Certificateholders” in the prospectus.

Each Servicer is required to deposit in the Certificate Account by the Remittance Date certain amounts in respect of the Mortgage Loans as set forth in the prospectus under “Servicing of the Mortgage Loans — Payments on Mortgage Loans.” The Master Servicer is required to cause to be remitted to the Payment Account on or prior to the Distribution Date any payments constituting part of the Pool Distribution Amount that are received by the Master Servicer or are required to be made with the Master Servicer’s own funds. Except as described below under “— Periodic Advances,” neither the Master Servicer nor the Paying Agent is obligated to remit any amounts which a Servicer was required but failed to deposit in the Certificate Account.

On each Distribution Date, the Pool Distribution Amount will be allocated among the Classes of Certificates and distributed to the holders thereof of record as of the related Record Date as follows (the “Pool Distribution Amount Allocation”):

first, to the Classes of Class A Certificates, pro rata, based on their respective Interest Accrual Amounts, in an aggregate amount up to the sum of their Interest Accrual Amounts with respect to such Distribution Date;

second, to the Classes of Class A Certificates, pro rata, based on their respective unpaid Interest Shortfall Amounts, in an aggregate amount up to the sum of their unpaid Interest Shortfall Amounts;

third, to the Class A Certificates, in an aggregate amount up to the Class A Optimal Principal Amount; and

fourth, sequentially to the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates so that each such Class shall receive (A) first, an amount up to its Interest Accrual Amount with respect to such Distribution Date, (B) then, an amount up to its previously unpaid Interest Shortfall Amounts and (C) finally, an

 

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amount up to its Class B Optimal Principal Amount before any Classes of Class B Certificates with higher numerical designations receive any payments in respect of interest or principal.

The undivided percentage interest (the “Percentage Interest”) represented by any Offered Certificate of a Class will generally be equal to the percentage obtained by dividing the initial principal balance (or initial notional amount in the case of the Interest Only Certificates) of such Certificate by the initial Principal Balance (or initial Notional Amount) of such Class.

Interest

Interest will accrue on each Class of Certificates (other than the Floating Rate and Inverse Floating Rate Certificates) during each one-month period ending on the last day of the month preceding the month in which each Distribution Date occurs (each, a “Regular Interest Accrual Period”). The initial Regular Interest Accrual Period will be deemed to have commenced on the Cut-Off Date. Interest which accrues on such Classes of Certificates will be calculated on the assumption that distributions in reduction of the Principal Balances thereof on a Distribution Date are made on the first day of the month of each Distribution Date. Interest will accrue on the Floating Rate and Inverse Floating Rate Certificates during the period from and including the preceding Distribution Date, or in the case of the first Distribution Date, from February 25, 2008, through and including the day prior to the current Distribution Date (each, a “LIBOR Based Interest Accrual Period” and, together with each Regular Interest Accrual Period, an “Interest Accrual Period”).

The amount of interest that will accrue on each Class of Certificates during each Interest Accrual Period, after taking into account any Non-Supported Interest Shortfalls, Relief Act Shortfalls and the interest portion of certain losses allocated to such Class, is referred to herein as the “Interest Accrual Amount” for such Class.

The Interest Accrual Amount for each Class of Certificates (other than the Floating Rate and Inverse Floating Rate Certificates) equals (a) the product of (i) 1/12th of the Pass-Through Rate for such Class and (ii) the outstanding Principal Balance or Notional Amount of such Class minus (b) the sum of (i) any Non-Supported Interest Shortfall allocable to such Class, (ii) any Relief Act Shortfall allocable to such Class and (iii) in the case of the Class A Certificates, the interest portion of any Realized Losses allocable to such Class on or after the Subordination Depletion Date. The Interest Accrual Amount for each Class of Floating Rate and Inverse Floating Rate Certificates equals (a) the product of (i) a fraction, the numerator of which is equal to the actual number of days in the related Interest Accrual Period and the denominator of which is equal to 360, (ii) the Pass-Through Rate for such Class and (iii) the outstanding Principal Balance or Notional Amount of such Class minus (b) the sum of (i) any Non-Supported Interest Shortfall allocable to such Class, (ii) any Relief Act Shortfall allocable to such Class and (iii) the interest portion of any Realized Losses allocable to such Class on or after the Subordination Depletion Date. The pass-through rate (the “Pass-Through Rate”) for each Class of Certificates is the percentage set forth or described in the table beginning on page S-6 of this prospectus supplement. Interest on each Class of Certificates (other than the Floating Rate and Inverse Floating Rate Certificates) will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Interest on the Floating Rate and Inverse Floating Rate Certificates will be calculated on the basis of the actual number of days in the related Interest Accrual Period and a 360-day year. The Pass-Through Rates on the Floating Rate and Inverse Floating Rate Certificates will be determined as described in the prospectus under “Description of the Certificates — Pass-Through Rates Based on LIBOR” and may be obtained by telephoning the Paying Agent at 866-846-4526 during normal working hours on any business day.

The “Net WAC” for any Distribution Date will equal the weighted average of the Net Mortgage Interest Rates of the Mortgage Loans (based on the Scheduled Principal Balances of the Mortgage Loans on the first day of the month preceding the month in which such Distribution Date occurs).

The “Adjusted Net WAC” for any Distribution Date will be a per annum rate equal to the Net WAC (subject to adjustment based on the actual number of days in a LIBOR Based Interest Accrual Period and an assumed 360-day year).

The Class A-IO Certificates are Interest Only Certificates and have no Principal Balance. The “Notional Amount” of the Class A-IO Certificates with respect to each Distribution Date will be equal to the Principal Balance of the Class A-1 Certificates. Accordingly, any distributions in respect of principal made to, or losses in respect of principal allocated in reduction of, the Principal Balance of the Class A-1 Certificates will result in a

 

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related reduction in the Notional Amount of the Class A-IO Certificates. See “— Principal (including Prepayments) — Subordination of Class B Certificates” and “ — Allocation of Losses” herein. The Notional Amount of the Class A-IO Certificates with respect to the first Distribution Date will be approximately $175,893,000.

Subject to the adjustment described below, the “Principal Balance” of a Class of Certificates as of any date will be the principal balance of such Class on the date of initial issuance of the Certificates, less all amounts previously distributed on such Class in reduction of the principal balance of such Class on prior Distribution Dates.

After distributions of principal have been made on a Distribution Date, the Principal Balances of the Certificates will be adjusted so that they equal the Adjusted Pool Amount for such Distribution Date. Such adjustment could result in an increase or decrease in the Principal Balance of a Class. Prior to the Subordination Depletion Date, the most subordinate Class of Class B Certificates then outstanding will be subject to the adjustment. After the Subordination Depletion Date, the Principal Balance of the Class A Certificates will be adjusted to equal the Adjusted Pool Amount. Any adjustment to the Class A Certificates will be allocated among the Class A Certificates as described under “—Allocation of Losses” below.

Notwithstanding the foregoing, the Principal Balance of a Class of Certificates may not be increased such that it exceeds the initial Principal Balance of such Class less all amounts previously distributed on such Class in reduction of the Principal Balance thereof.

A Recovery with respect to a loss on a Mortgage Loan will be treated as a principal prepayment and will result in a payment of principal to one or more corresponding then-outstanding Classes of Certificates. A Class will cease to be entitled to any distribution after its Principal Balance is reduced to zero for any reason. It is possible that such payment will not be made to the Class that originally bore the loss. Further, even though a Class may have previously had its Principal Balance reduced as a result of a loss for which there is later a Recovery, that Class will not be entitled to any interest on the amount of such reduction. Because a Recovery results in a payment of principal to certain Classes without a corresponding decrease in the related Adjusted Pool Amount, the Principal Balance of the most subordinate Class then outstanding (which may not be the Class that originally bore the loss if such Class is no longer outstanding) may be increased or such Principal Balance may be decreased by a lesser amount than would otherwise be the case based on any Realized Losses allocable to such Class.

The “Class A Principal Balance” as of any date will be equal to the sum of the Principal Balances of the Classes of Class A Certificates as of such date.

The “Class B Principal Balance” as of any date will be equal to the sum of the Principal Balances of the Classes of Class B Certificates as of such date.

The “Aggregate Principal Balance” as of any date will be equal to the sum of the Class A Principal Balance and the Class B Principal Balance as of such date.

With respect to any Distribution Date, the “Adjusted Pool Amount” will equal the aggregate unpaid principal balance of the Mortgage Loans as of the Cut-Off Date minus the sum of (i) all amounts in respect of principal received in respect of such Mortgage Loans (including amounts received as Periodic Advances, principal prepayments and Liquidation Proceeds in respect of principal) and distributed to holders of the Certificates on such Distribution Date and all prior Distribution Dates, (ii) the principal portion of all Liquidated Loan Losses incurred on such Mortgage Loans for which the Liquidation Proceeds were received from the Cut-Off Date through the end of the applicable Unscheduled Principal Receipt Period for such Distribution Date, (iii) the principal portion of all Bankruptcy Losses (other than Debt Service Reductions) incurred on such Mortgage Loans from the Cut-Off Date through the end of the period which corresponds to the applicable Unscheduled Principal Receipt Period for principal prepayments in full for such Distribution Date and (iv) the principal portion of all Realized Losses as a result of Servicer Modifications made on the Mortgage Loans from the Cut-Off Date through the end of the period corresponding to the Applicable Unscheduled Principal Receipt Period for principal prepayments in full for such Distribution Date.

The “Net Mortgage Interest Rate” on each Mortgage Loan will be equal to the Mortgage Interest Rate on such Mortgage Loan as stated in the related mortgage note, as the same may be amended in accordance with any Servicer

 

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Modification, minus the sum of (i) the applicable Servicing Fee Rate and (ii) the Master Servicing Fee Rate for such Mortgage Loan.

As to any Distribution Date, Prepayment Interest Shortfalls, to the extent that they exceed Compensating Interest, and Curtailment Interest Shortfalls are referred to herein as “Non-Supported Interest Shortfalls” and will be allocated to (i) the Class A Certificates according to the percentage obtained by dividing the Class A Principal Balance by the Aggregate Principal Balance and (ii) the Class B Certificates according to the percentage obtained by dividing the Class B Principal Balance by the Aggregate Principal Balance. Such allocation of Non-Supported Interest Shortfalls will reduce the amount of interest due to be distributed to holders of Certificates then entitled to distributions in respect of interest. Any such reduction in respect of interest allocated to the Class A Certificates will be allocated among the Classes of Class A Certificates, pro rata, on the basis of their respective Interest Accrual Amounts, without regard to any reduction pursuant to this paragraph, for such Distribution Date. Any such reduction in respect of interest allocated to the Class B Certificates will be allocated among such Classes of Class B Certificates, pro rata, on the basis of their respective Interest Accrual Amounts, without regard to any reduction pursuant to this paragraph, for such Distribution Date.

Any interest shortfalls arising from Unscheduled Principal Receipts in full that are not Prepayments in Full and any other interest shortfalls arising from Unscheduled Principal Receipts, other than Curtailments, will be borne first by the Classes of Class B Certificates in reverse numerical order and then pro rata by the Class A Certificates, based on interest accrued. See “— Subordination of Class B Certificates” herein. After the Subordination Depletion Date, all interest shortfalls arising from the timing of receipt of Unscheduled Principal Receipts, other than Prepayment Interest Shortfalls covered by Compensating Interest, will be treated as Non-Supported Interest Shortfalls and allocated in reduction of interest accrued on the Class A Certificates.

See “Description of the Certificates — Distributions to Certificateholders — Distributions of Interest” in the prospectus for a discussion of Prepayment Interest Shortfalls, Curtailment Interest Shortfalls and Compensating Interest.

Any interest shortfalls arising as a result of the reduction in the amount of monthly interest payments on any Mortgage Loans as a result of the application of the Servicemembers Civil Relief Act, as it may be amended from time to time, or comparable state legislation (“Relief Act Shortfalls”) will be allocated among the Class A Certificates and Class B Certificates in the same manner as Non-Supported Interest Shortfalls.

Allocations of the interest portion of Realized Losses first to the Classes of Class B Certificates in reverse numerical order will result from the priority of distributions first to the holders of the Class A Certificates and then to the holders of the Classes of Class B Certificates in numerical order of the Pool Distribution Amount as described above under “— Distributions.”

On each Distribution Date on which the amount available to be distributed in respect of interest on a Class of Certificates pursuant to the Pool Distribution Amount Allocation is less than such Class’s Interest Accrual Amount, the amount of any such deficiency (as to each Class, an “Interest Shortfall Amount”) will be added to the amount of interest distributable to such Class on subsequent Distribution Dates, but only for so long as such Class’s Principal Balance or Notional Amount is greater than zero. No interest will accrue on any Interest Shortfall Amounts.

The Yield Maintenance Agreement

The Master Servicer, on behalf of the Trust, will enter into a yield maintenance agreement with Lehman Brothers Special Financing Inc., as counterparty (the “Counterparty”), which will be for the benefit of the Class A-1 and Class A-IO Certificates (the “Yield Maintenance Agreement”). The payment obligations of the Counterparty are guaranteed by Lehman Brothers Holdings Inc. (the “Guarantor”).

With respect to the Yield Maintenance Agreement for any Distribution Date prior to and including the Distribution Date in December 2017, if LIBOR, with respect to such Distribution Date, as calculated in accordance with the Yield Maintenance Agreement, which may result in LIBOR for purposes of the Yield Maintenance Agreement differing from LIBOR for purposes of the Pass-Through Rate of the Class A-1 Certificates, exceeds 5.70% per annum, the Counterparty will be obligated to pay to the Master Servicer, for deposit into the Reserve

 

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Fund, the Yield Maintenance Agreement Payment. The “Yield Maintenance Agreement Payment” for any Distribution Date will be an amount equal to the product of (a) the amount by which LIBOR exceeds 5.70%, (b) the Principal Balance of the Class A-1 Certificates prior to any distributions on that Distribution Date and (c) a fraction, the numerator of which is equal to the actual number of days in the related Interest Accrual Period and the denominator of which is equal to 360. The Counterparty is required to make any Yield Maintenance Agreement Payment on the business day preceding the related Distribution Date.

The Underwriter will make an upfront payment on behalf of the Trust to the Counterparty for the Yield Maintenance Agreement on the Closing Date and there will be no charge to the Trust.

For each Distribution Date prior to and including the Distribution Date in December 2017, any Yield Maintenance Agreement Payment received by the Master Servicer will be distributed to the Class A-1 and Class A-IO Certificates as described below under “— The Reserve Fund.” Amounts received on the Yield Maintenance Agreement will not be available to make distributions on any Class of Certificates other than the Class A-1 and Class A-IO Certificates.

The Yield Maintenance Agreement will be governed by and construed in accordance with the laws of the State of New York. The obligations of the Counterparty are limited to those specifically set forth in the Yield Maintenance Agreement. The Class A-1 and the Class A-IO Certificates do not represent obligations of the Counterparty or the Guarantor. The holders of the Class A-1 and the Class A-IO Certificates are not parties to or beneficiaries under the Yield Maintenance Agreement and will not have any right to proceed directly against the Counterparty or the Guarantor in respect of its obligations under the Yield Maintenance Agreement. The Yield Maintenance Agreement is terminable by the Master Servicer on behalf of the Trust or the Counterparty following the occurrence of certain specified events of default, including failure of the Counterparty to make required payments, and certain standard events under the 1992 International Swaps and Derivatives Association, Inc. Master Swap Agreement (Multicurrency—Cross-Border). Upon termination of the Yield Maintenance Agreement, the Counterparty may be required to make a termination payment.

It may be an “additional termination event” under the Yield Maintenance Agreement if it is determined at any time that the Depositor, acting on behalf of the Issuing Entity, is required, for purposes of compliance with Item 1115(b)(1) or (b)(2) of Regulation AB (17 C.F.R. 229) (“Regulation AB”), to disclose any financial data relating to the Counterparty. If such determination is made, the Counterparty will be required, at its own expense, to (a) provide to the Depositor the required financial data, (b) select a successor Counterparty who will provide the required financial data, (c) obtain a guarantee from an affiliate, who will provide the required financial data, if provision of such data would satisfy the requirements of Regulation AB or (d) post collateral in an amount sufficient to reduce the “significance percentage” (as defined in Regulation AB) to a level such that the Depositor would not be required to disclose any financial data relating to the Counterparty. If the Counterparty does not comply with the immediately preceding sentence, then it will be an “additional termination event” and the Counterparty may be required to make a termination payment under the Yield Maintenance Agreement.

As of the date of this prospectus supplement, the Yield Maintenance Agreement had a “significance percentage” (as defined in Regulation AB) of less than 10%.

The Reserve Fund

Pursuant to the Pooling and Servicing Agreement, the Master Servicer will establish a trust account (the “Reserve Fund”) for deposit of any Yield Maintenance Agreement Payment that it may receive under the Yield Maintenance Agreement. The Reserve Fund is part of the Trust Estate and will not be an asset of either REMIC.

On or before each applicable Distribution Date, the Master Servicer will deposit in the Reserve Fund any Yield Maintenance Agreement Payment received from the Counterparty for the related Distribution Date. The Yield Maintenance Agreement Payment received on or before a Distribution Date will be distributed to the Class A-1 and Class A-IO Certificates on such Distribution Date in the following order of priority:

first, to the Class A-1 Certificates in an amount up to the excess, if any, of (a) the product of (i) LIBOR plus 0.70%, (ii) the Principal Balance of the Class A-1 Certificates prior to any distribution on such Distribution Date and (iii) a fraction, the numerator of which is equal to the actual number of days in the related Interest

 

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Accrual Period and the denominator of which is equal to 360 over (b) the Interest Accrual Amount of the Class A-1 Certificates for such Distribution Date; and

second, to the Class A-IO Certificates, any amounts remaining in the Reserve Fund after payment to the Class A-1 Certificates has been made.

Principal (Including Prepayments)

The principal balance of a Certificate (other than an Interest Only Certificate) at any time is equal to the product of the related Class’s Principal Balance and such Certificate’s Percentage Interest, and represents the maximum specified dollar amount (exclusive of (i) any interest that may accrue on such Certificate and (ii) in the case of the Residual Certificates, any additional amounts to which the holders of such Certificates may be entitled as described below under “—Additional Rights of the Residual Certificateholders”) to which the holders thereof are entitled from the cash flow on the Mortgage Loans at such time and will decline to the extent of distributions in reduction of the principal balance of, and allocations of losses to, such Certificate. The approximate initial Principal Balance of each Class of Certificates is set forth in the table beginning on page S-6 of this prospectus supplement. The Interest Only Certificates have no Principal Balance.

Calculation of Amount to be Distributed on the Certificates

Distributions in reduction of the Principal Balance of the Class A Certificates will be made on each Distribution Date pursuant to the Pool Distribution Amount Allocation, in an aggregate amount equal to the Class A Principal Distribution Amount.

The “Class A Principal Distribution Amount” with respect to any Distribution Date will be equal to the amount distributed pursuant to priority third of the Pool Distribution Amount Allocation, in an aggregate amount up to the Class A Optimal Principal Amount.

Distributions in reduction of the Principal Balances of the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates will be made on each Distribution Date first to the Class B-1 Certificates, second to the Class B-2 Certificates, third to the Class B-3 Certificates, fourth to the Class B-4 Certificates, fifth to the Class B-5 Certificates and then to the Class B-6 Certificates, pursuant to priority fourth clause (C) of the Pool Distribution Amount Allocation, in an aggregate amount with respect to each such Class (each, a “Class B Principal Distribution Amount”) up to the Class B Optimal Principal Amount for such Class.

The “Class A Optimal Principal Amount” and the “Class B Optimal Principal Amount” for each Class of Class B Certificates with respect to each Distribution Date will be an amount equal to the sum of:

(I) for each outstanding Mortgage Loan (including each defaulted Mortgage Loan with respect to which the related Mortgaged Property has been acquired by the Trust Estate) the sum of:

(i) the applicable Class Percentage of the scheduled payment of principal due on such Mortgage Loan on the first day of the month in which the Distribution Date occurs;

(ii) the applicable Class Prepayment Percentage of all Unscheduled Principal Receipts (other than Recoveries) that were received by a Servicer with respect to such Mortgage Loan during the Unscheduled Principal Receipt Period relating to such Distribution Date for each applicable type of Unscheduled Principal Receipt, less the amount allocable to the principal portion of any unreimbursed advances in respect of such Mortgage Loan;

(iii) the applicable Class Prepayment Percentage of the Scheduled Principal Balance of such Mortgage Loan which, during the one month period ending on the day preceding the Determination Date for such Distribution Date, was repurchased by the Depositor, as described under the heading “Description of the Mortgage Loans — Mandatory Repurchase or Substitution of Mortgage Loans” herein; and

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Determination Date for such Distribution Date over the unpaid principal balance of such substitute Mortgage Loan, less the amount allocable to the principal portion of any unreimbursed advances in respect of such Mortgage Loan. See “The Pooling and Servicing Agreement — Assignment of Mortgage Loans to the Trustee” in the prospectus; and

(II) in the case of the Class A Certificates and each Class of Class B Certificates, the applicable Class Prepayment Percentage of any Recoveries.

The “Class Percentage” will equal (i) the Class A Percentage, in the case of the calculation of the Class A Optimal Principal Amount and (ii) the applicable Class B Percentage, in the case of the calculation of the Class B Optimal Principal Amount for a Class of Class B Certificates.

The “Class Prepayment Percentage” will equal (i) the Class A Prepayment Percentage, in the case of the calculation of the Class A Optimal Principal Amount and (ii) the applicable Class B Prepayment Percentage, in the case of the calculation of the Class B Optimal Principal Amount for a Class of Class B Certificates.

The principal distribution to the holders of a Class of Class B Certificates will be reduced on any Distribution Date on which (i) the Principal Balance of such Class of Class B Certificates would be reduced to zero as a result of principal distributions or allocation of losses and (ii) the Principal Balance of any Class A Certificates or any Class of Class B Certificates with a lower numerical designation would be subject to reduction as a result of allocation of Realized Losses. The amount of any such reduction in the principal distributed to the holders of such Class of Class B Certificates will instead be distributed pro rata to the holders of any Class senior in priority to receive distributions in accordance with the Pool Distribution Amount Allocation.

The “Pool Balance” for any Distribution Date is the sum for each outstanding Mortgage Loan of the Scheduled Principal Balance of such Mortgage Loan as of such Distribution Date.

The “Class A Percentage” for any Distribution Date occurring on or prior to the Subordination Depletion Date is the percentage, which in no event will exceed 100%, obtained by dividing the Class A Principal Balance as of such date (before taking into account distributions in reduction of Principal Balance on such date) by the Pool Balance. The Class A Percentage for the first Distribution Date will be approximately 95.95%. The Class A Percentage for any Distribution Date occurring after the Subordination Depletion Date will be 100%.

The “Class A Prepayment Percentage” for any Distribution Date prior to the Distribution Date in March 2015 will be 100% and thereafter will be the Class A Percentage for such Distribution Date plus the percentage of the Subordinated Percentage indicated in the table below; provided, however, that if on any Distribution Date the Class A Percentage exceeds the initial Class A Percentage, the Class A Prepayment Percentage for such Distribution Date will equal 100%. See “Prepayment and Yield Considerations” herein and in the prospectus. Notwithstanding the foregoing, no reduction of the level of the Class A Prepayment Percentage will occur on any Distribution Date if the Delinquency and Loss Tests are not met.

The “Delinquency and Loss Tests” with respect to any Distribution Date are met if (i) as of such Distribution Date as to which any reduction in the Class A Prepayment Percentage applies, the average outstanding principal balance on such Distribution Date and for the preceding five Distribution Dates of the Mortgage Loans that were delinquent 60 days or more (including for this purpose any Mortgage Loans in foreclosure, any Mortgage Loans with respect to which the related Mortgaged Property has been acquired by the Trust Estate and any Mortgage Loans that were the subject of a Servicer Modification within twelve months prior to such Distribution Date) is less than 50% of the Class B Principal Balance and (ii) for any Distribution Date, cumulative Realized Losses with respect to the Mortgage Loans are less than or equal to the percentages of the Class B Principal Balance as of the Closing Date (the “Original Class B Principal Balance”) indicated in the table below.

 

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Distribution Date Occurring In

   Percentage of
Subordinated
Percentage
  Percentage of
Original Class B
Principal Balance

March 2015 through February 2016

   70%   30%

March 2016 through February 2017

   60%   35%

March 2017 through February 2018

   40%   40%

March 2018 through February 2019

   20%   45%

March 2019 and thereafter

   0%   50%

In addition, if on any Distribution Date, prior to giving effect to any distributions on such Distribution Date:

(i) the Subordinated Percentage is greater than twice the Subordinated Percentage as of the Cut-Off Date;

(ii) the average outstanding principal balance on such Distribution Date and for the preceding five Distribution Dates of the Mortgage Loans that were delinquent 60 days or more (including for this purpose any Mortgage Loan in foreclosure, any Mortgage Loans with respect to which the related Mortgaged Property has been acquired by the Trust Estate and any Mortgage Loans that were the subject of a Servicer Modification within twelve months prior to such Distribution Date) does not exceed 50% of the Class B Principal Balance; and

(iii) either (A) prior to the Distribution Date in March 2011, cumulative Realized Losses on the Mortgage Loans do not exceed 20% of the Original Class B Principal Balance; or

(B) on or after the Distribution Date in March 2011, cumulative Realized Losses on the Mortgage Loans do not exceed 30% of the Original Class B Principal Balance;

then, if (i), (ii) and (iii)(A) have occurred, the Class A Prepayment Percentage for such Distribution Date will equal the Class A Percentage for such Distribution Date plus 50% of the Subordinated Percentage for such Distribution Date, or if (i), (ii) and (iii)(B) have occurred, the Class A Prepayment Percentage for such Distribution Date will equal the Class A Percentage for such Distribution Date.

If on any Distribution Date the allocation to the Class A Certificates of full and partial principal prepayments and other amounts in the percentage required as described above would reduce the outstanding Class A Principal Balance below zero, the Class A Prepayment Percentage for such Distribution Date will be limited to the percentage necessary to reduce the Class A Principal Balance to zero.

This disproportionate allocation of certain unscheduled payments in respect of principal will have the effect of accelerating the amortization of the Class A Certificates while, in the absence of Realized Losses, increasing the interest in the principal balance of the Mortgage Loans evidenced by the Class B Certificates. Increasing the respective interest of the Class B Certificates relative to that of the Class A Certificates is intended to preserve the availability of the subordination provided by the Class B Certificates. See “—Subordination of Class B Certificates” below.

A “Servicer Modification” with respect to a Mortgage Loan is a modification to the terms of such Mortgage Loan as to which the Mortgagor is in default or as to which, in the judgment of the Servicer, default is reasonably foreseeable.

The “Subordinated Percentage” for any Distribution Date will be calculated as the difference between 100% and the Class A Percentage for such date. The “Subordinated Prepayment Percentage” for any Distribution Date will be calculated as the difference between 100% and the Class A Prepayment Percentage for such date.

The “Class B Percentage” for a Class of Class B Certificates and any Distribution Date will equal the portion of the Subordinated Percentage represented by the fraction the numerator of which is the Principal Balance for such Class of Class B Certificates and the denominator of which is the Class B Principal Balance.

The “Class B Prepayment Percentage” for a Class of Class B Certificates and any Distribution Date will equal the portion of the Subordinated Prepayment Percentage represented by the fraction the numerator of which is the

 

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Principal Balance for such Class of Class B Certificates and the denominator of which is the Class B Principal Balance or, in the case of the unscheduled principal distributions described below, the sum of the Principal Balances of the Classes of Class B Certificates entitled to those unscheduled principal distributions for such Distribution Date described below. In the event that a Class of Class B Certificates is not entitled to the unscheduled principal distributions described below for such Distribution Date, the Class B Prepayment Percentage with respect to such unscheduled principal distributions for such Class will be 0% with respect to such Distribution Date.

In the event that on any Distribution Date the Current Fractional Interest of any Class of Class B Certificates is less than the Original Fractional Interest of such Class, then the Classes of Certificates that are subordinate to such Class will not be entitled to distributions in respect of unscheduled principal receipts including receipts from the repurchase of Mortgage Loans (other than Liquidation Proceeds on Liquidated Loans) and the Principal Balances of such subordinated Classes will not be used to determine the Class B Percentages and Class B Prepayment Percentages of the Classes of Class B Certificates that are senior to such subordinated Classes for such Distribution Date with respect to such unscheduled principal. The Class B-6 Certificates will not have original or current fractional interests which are required to be maintained as described above.

The “Original Fractional Interest” of a Class of Class B Certificates is the percentage obtained by dividing the sum of the initial Principal Balances of the Classes of Certificates that are subordinate to such Class by the initial Aggregate Principal Balance. The “Current Fractional Interest” of a Class of Class B Certificates for any Distribution Date is the percentage obtained by dividing the sum of the Principal Balances of the Classes of Certificates that are subordinate to such Class by the Aggregate Principal Balance.

The following table sets forth the expected approximate Original Fractional Interest for each Class of Class B Certificates on the date of issuance of the Certificates.

 

Class

   Approximate Original
Fractional Interest

B-1

   2.60%

B-2

   1.75%

B-3

   1.40%

B-4

   0.80%

B-5

   0.60%

B-6

   N/A

Allocation of Amount to be Distributed on the Class A Certificates

On each Distribution Date occurring prior to the Subordination Depletion Date, the Class A Principal Distribution Amount will be allocated among and distributed in reduction of the Principal Balances of the Class A Certificates, sequentially, as follows:

first, to the Class A-R Certificates; and

second, concurrently, to the Class A-1 and Class A-2 Certificates, pro rata.

Notwithstanding the foregoing, on each Distribution Date occurring on or after the Subordination Depletion Date, the Class A Principal Distribution Amount will be distributed among the Classes of Class A Certificates pro rata in accordance with their respective outstanding Principal Balances without regard to either the proportions or the priorities set forth above.

Any amounts distributed on a Distribution Date to the holders of any Class in reduction of its Principal Balance will be allocated among the holders of such Class pro rata in accordance with their respective Percentage Interests.

Additional Rights of the Residual Certificateholders

The Residual Certificates will remain outstanding for as long as the Trust Estate shall exist, whether or not such Class is receiving current distributions of principal or interest. The holders of the Residual Certificates will be entitled to receive the proceeds of the remaining assets of each REMIC, if any, on the final Distribution Date for the Certificates, after distributions in respect of any accrued but unpaid interest on the Certificates and after distributions

 

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in reduction of Principal Balance have reduced the Principal Balances of the Certificates to zero. It is not anticipated that there will be any material assets remaining in the Trust Estate on the final Distribution Date following the distributions of interest and in reduction of Principal Balance made on the Certificates on such date.

In addition, the Class A-R Certificateholders will be entitled on each Distribution Date to receive any Pool Distribution Amount remaining after all distributions pursuant to the Pool Distribution Amount Allocation have been made. It is not anticipated that there will be any material undistributed portion of the Pool Distribution Amount.

Restrictions on Transfer of the Residual Certificates

The Residual Certificates will be subject to restrictions on transfer and the Residual Certificates will contain a legend describing such restrictions.

Tax-related restrictions on transfer are discussed under “Certain Federal Income Tax Consequences — Federal Income Tax Consequences for REMIC Certificates — Taxation of Residual Certificates — Tax-Related Restrictions on Transfer of Residual Certificates” in the prospectus.

In addition, the Residual Certificates may not be purchased by or transferred to any person which is an employee benefit plan or other retirement plan or arrangement subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”) (any such plan or arrangement, an “ERISA Plan”) or which is a governmental plan, as defined in Section 3(32) of ERISA, subject to any federal, state or local law (“Similar Law”) which is, to a material extent, similar to the foregoing provisions of ERISA or the Code (collectively, with an ERISA Plan, a “Plan”), or any person acting on behalf of or investing the assets of such Plan. See “ERISA Considerations” herein and in the prospectus.

Periodic Advances

Generally, each Servicer is required to advance delinquent payments of principal and interest on any Mortgage Loan in the Trust Estate to the extent that such Servicer believes that such amounts will be recoverable by it from liquidation proceeds or other recoveries in respect of the related Mortgage Loan (each, a “Periodic Advance”). Upon a Servicer’s failure to make a Periodic Advance required by the applicable Underlying Servicing Agreement, the Trustee, if such Servicer is Wells Fargo Bank, or the Master Servicer, if such Servicer is not Wells Fargo Bank, will be required to make such Periodic Advance.

Amounts advanced are reimbursable to the Servicer, the Master Servicer or the Trustee, as applicable, from amounts received on the related Mortgage Loan or from other funds in the Trust Estate if it is determined that the amounts advanced will not be recoverable from amounts received on such Mortgage Loan. See “Servicing of the Mortgage Loans — Periodic Advances and Limitations Thereon” in the prospectus.

Subordination of Class B Certificates

The rights of the holders of the Class B Certificates to receive distributions with respect to the Mortgage Loans in the Trust Estate will be subordinated to such rights of the holders of the Class A Certificates and the rights of the holders of the Classes of Class B Certificates with higher numerical designations to receive distributions with respect to the Mortgage Loans in the Trust Estate will be subordinated to such rights of the holders of Classes of Class B Certificates with lower numerical designations, all to the extent described below. This subordination is intended to enhance the likelihood of timely receipt by the holders of the more senior Certificates of the full amount of their scheduled monthly payments of interest and principal and to afford the holders of the more senior Certificates protection against Realized Losses, as more fully described below. If Realized Losses exceed the credit support provided through subordination to a given Class of Certificates, all or a portion of such losses will be borne by such Class of Certificates.

The protection afforded to the holders of more senior Classes of Certificates by means of the subordination feature will be accomplished by the preferential right of such holders to receive, prior to any distribution being made on a Distribution Date in respect of the more junior Classes of Certificates, the amounts of principal and interest due

 

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such holders on each Distribution Date out of the Pool Distribution Amount with respect to such date and, if necessary, by the right of such holders to receive future distributions on the Mortgage Loans that would otherwise have been payable to the holders of the more junior Classes of Certificates. Because of the priorities in distributing principal to the Class A Certificates, some Classes of Class A Certificates may be outstanding longer than other Classes of Class A Certificates. The aggregate Principal Balance of the Class B Certificates will be reduced on each Distribution Date either through principal distributions or the allocation of Realized Losses. The longer a Class of Class A Certificates is outstanding, the smaller the Principal Balances will be of the Class B Certificates providing subordination for such Class A Certificates.

Amounts distributed to holders of Subordinated Certificates will not be available to cover delinquencies or Realized Losses in respect of subsequent Distribution Dates.

Allocation of Losses

Realized Losses on the Mortgage Loans will not be allocated to the holders of the Class A Certificates until the date on which the aggregate Principal Balance of the Subordinated Certificates has been reduced to zero (the “Subordination Depletion Date”). Prior to such time, such Realized Losses will be allocated to the Classes of Class B Certificates sequentially in reverse numerical order, until the Principal Balance of each such Class has been reduced to zero.

The allocation of the principal portion of a Realized Loss (other than a Debt Service Reduction) of a Mortgage Loan will be effected through the adjustment of the Principal Balance of the most subordinate Class of Class B Certificates then outstanding in such amount as is necessary to cause the Aggregate Principal Balance to equal the Adjusted Pool Amount.

Allocations to the Classes of Class B Certificates of (i) the principal portion of Debt Service Reductions, (ii) the interest portion of Realized Losses, (iii) any shortfalls resulting from delinquencies for which the Servicer, the Master Servicer or the Trustee does not advance and (iv) any interest shortfalls resulting from the timing of the receipt of Unscheduled Principal Receipts (other than Prepayments in Full and Curtailments) with respect to Mortgage Loans will result from the priority of distributions of the Pool Distribution Amount first to the Class A Certificates and then to the Classes of Class B Certificates in numerical order as described above under “—Distributions.”

No part of the interest portion of Realized Losses will be allocated to the Servicing Fee or Master Servicing Fee.

After distributions of principal have been made on a Distribution Date, the allocation of the principal portion of Realized Losses in respect of the Mortgage Loans allocated on or after the Subordination Depletion Date will be effected through the adjustment of the Class A Principal Balance such that the Class A Principal Balance equals the Adjusted Pool Amount. The principal portion of such Realized Losses allocated to the Class A Certificates will be allocated to such outstanding Classes of Class A Certificates, pro rata, in accordance with their Principal Balances. The interest portion of any Realized Loss allocated on or after the Subordination Depletion Date will be allocated among the outstanding Classes of Class A Certificates, pro rata, in accordance with their respective Interest Accrual Amounts, without regard to any reduction pursuant to this sentence. Any such losses will be allocated among the outstanding Certificates of each such Class, pro rata, in accordance with their respective Percentage Interests.

On or after the Subordination Depletion Date, the Principal Balance of the Super Senior Support Certificates will be reduced not only by the principal portion of Realized Losses allocated to such Class as provided in the preceding paragraph but also by the portion allocated to the Super Senior Certificates.

If due to losses on the Mortgage Loans, the Pool Distribution Amount is not sufficient to cover the Class A Optimal Principal Amount on a particular Distribution Date, then the Class A Percentage on and after the next Distribution Date will be proportionately increased, thereby reducing, as a relative matter, the respective interest of the Class B Certificates in future payments of principal on the Mortgage Loans.

Notwithstanding the foregoing, the provisions relating to subordination will not be applicable in connection with a Bankruptcy Loss so long as the applicable Servicer has notified the Trustee and the Master Servicer in writing that such Servicer is diligently pursuing any remedies that may exist in connection with the representations and

 

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warranties made regarding the related Mortgage Loan and when (A) the related Mortgage Loan is not in default with regard to the payments due thereunder or (B) delinquent payments of principal and interest under the related Mortgage Loan and any premiums on any applicable Standard Hazard Insurance Policy and any related escrow payments in respect of such Mortgage Loan are being advanced on a current basis by such Servicer, in either case without giving effect to any Debt Service Reduction.

 

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DESCRIPTION OF THE MORTGAGE LOANS(1)

General

The mortgage loans to be included in the Trust Estate will be adjustable interest rate, monthly pay, fully amortizing, one- to four-family, residential first mortgage loans (the “Mortgage Loans”). Substantially all of the Mortgage Loans will have original terms to stated maturity of approximately 30 years. Some of the Mortgage Loans were made in connection with the relocation of employees of various corporate employers. Some of these corporate employers participate in Wells Fargo Bank’s relocation program. The Mortgage Loans will be secured by first liens (the “Mortgages”) on one- to four-family residential properties (the “Mortgaged Properties”) and will have the additional characteristics described herein and in the prospectus.

Each Mortgage Loan has a fixed Mortgage Interest Rate for approximately the first ten years after the origination of such Mortgage Loan. Each Mortgage Note provides for adjustments to the Mortgage Interest Rate thereon at the end of the initial fixed-rate period and annually thereafter (each, an “Adjustment Date”).

The Mortgage Interest Rate on each Mortgage Loan will adjust annually commencing on or about the tenth anniversary of the first Due Date. On each Adjustment Date, the Mortgage Interest Rate of such Mortgage Loan will adjust to the sum of the applicable Index and the number of basis points specified in the applicable Mortgage Note (the “Gross Margin”), rounded to the nearest one-eighth of one percent, subject to the limitation that with respect to each Adjustment Date, the interest rate after such adjustment may not vary from the Mortgage Interest Rate in effect prior to such adjustment by more than the amount specified in the Mortgage Note (the “Periodic Cap”). The Periodic Cap on the Mortgage Loans is generally 5.000% for the first Adjustment Date and 2.000% for every Adjustment Date thereafter. In addition, adjustments to the interest rate for each Mortgage Loan are subject to a lifetime maximum Mortgage Interest Rate (a “Rate Ceiling”). Generally, the Rate Ceiling for each Mortgage Loan will equal the Mortgage Interest Rate at origination of such Mortgage Loan plus 5.000%. The minimum Mortgage Interest Rate for each Mortgage Loan will be the Gross Margin or such higher percentage as specified in the related Mortgage Note. A substantial portion of the Mortgage Loans will require only payments of interest for a term specified in the related Mortgage Note (the “Interest Only Mortgage Loans”). On the first Due Date following each Adjustment Date for each Interest Only Mortgage Loan beginning with the Adjustment Date at the end of the interest-only period, the monthly payment for the Interest Only Mortgage Loan will be adjusted, if necessary, to an amount that will fully amortize such Interest Only Mortgage Loan at the then-current Mortgage Interest Rate over its remaining scheduled term to maturity.

If a mortgagor of an Interest Only Mortgage Loan makes a partial principal prepayment prior to the related first Adjustment Date, the monthly payment of such Interest Only Mortgage Loan will be reduced to reflect the amount of interest owed on the reduced principal balance.

The index for approximately 77.73% (by the aggregate unpaid principal balance as of the Cut-Off Date) of the Mortgage Loans will be One-Year CMT (the “One-Year CMT Index”). “One-Year CMT” is defined to be the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year, as made available by the Federal Reserve Board, published in Federal Reserve Statistical Release H.15 (519) and most

 

 

(1)

The descriptions in this prospectus supplement of the Trust Estate and the properties securing the Mortgage Loans to be included in the Trust Estate are based upon the expected characteristics of the Mortgage Loans at the close of business on the Cut-Off Date, as adjusted for the scheduled principal payments due on or before such date. Notwithstanding the foregoing, any of such Mortgage Loans may be excluded from the Trust Estate (i) as a result of principal prepayment thereof in full or (ii) if, as a result of delinquencies or otherwise, the Depositor otherwise deems such exclusion necessary or desirable. In either event, other Mortgage Loans may be included in the Trust Estate. The Depositor believes that the information set forth herein with respect to the expected characteristics of the Mortgage Loans on the Cut-Off Date is representative of the characteristics as of the Cut-Off Date of the Mortgage Loans to be included in the Trust Estate as it will be constituted at the time the Certificates are issued, although the aggregate principal balance of the Mortgage Loans included in the Trust Estate as of the Cut-Off Date, the range of Mortgage Interest Rates and maturities, and certain other characteristics of the Mortgage Loans in the Trust Estate may vary. In the event that any of the material characteristics as of the Cut-Off Date of the Mortgage Loans that constitute the Trust Estate on the date of initial issuance of the Certificates vary by 5% or more (other than as a result of scheduled payment or prepayment of the Mortgage Loans) the Depositor will file a Current Report on Form 8-K containing updated information with the Securities and Exchange Commission.

 

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recently available as of the date up to 45 days before the applicable Adjustment Date. In the event the One-Year CMT Index is no longer available, the Servicer will select a substitute index in accordance with the terms of the related mortgage note in compliance with federal and state law.

Listed below are historical average values of the One-Year CMT Index for the months and years shown. The monthly averages shown are intended only to provide a historical summary of the movement in yields on the One-Year CMT Index and may not be indicative of future rates. The source of the daily values of the One-Year CMT Index used in determining the monthly averages shown below is Bloomberg Professional Services®.

 

     Year  

Month

   2008     2007     2006     2005     2004     2003     2002  

January

   2.71 %   5.06 %   4.45 %   2.86 %   1.24 %   1.36 %   2.16 %

February

     5.05     4.68     3.03     1.24     1.30     2.23  

March

     4.92     4.77     3.30     1.19     1.24     2.57  

April

     4.93     4.90     3.32     1.43     1.27     2.48  

May

     4.91     5.00     3.33     1.78     1.18     2.35  

June

     4.96     5.16     3.36     2.12     1.01     2.20  

July

     4.96     5.22     3.64     2.10     1.12     1.96  

August

     4.47     5.08     3.87     2.02     1.31     1.76  

September

     4.14     4.97     3.85     2.12     1.24     1.72  

October

     4.10     5.01     4.18     2.23     1.25     1.65  

November

     3.50     5.01     4.33     2.50     1.34     1.49  

December

     3.26     4.94     4.35     2.67     1.31     1.45  

The index for approximately 22.27% (by the aggregate unpaid principal balance as of the Cut-Off Date) of the Mortgage Loans will be One-Year LIBOR (the “One-Year LIBOR Index” and, together with the One-Year CMT Index, an “Index”). “One-Year LIBOR” is defined to be the average of interbank offered rates for one-year U.S. dollar-denominated deposits in the London market, as published in The Wall Street Journal and most recently available as of the date up to 45 days before the applicable Adjustment Date. In the event that the One-Year LIBOR Index is no longer available, the Servicer will select a substitute index in accordance with the terms of the related mortgage note and in compliance with federal and state law.

Listed below are historical average values of the One-Year LIBOR Index for the months and years shown. The monthly averages shown are intended only to provide a historical summary of the movements in yields on the One-Year LIBOR Index and may not be indicative of future rates. The source of the daily values of the One-Year LIBOR Index used in determining the monthly averages shown below is Bloomberg Professional Services®.

 

     Year  

Month

   2008     2007     2006     2005     2004     2003     2002  

January

   3.44 %   5.37 %   4.84 %   3.22 %   1.41 %   1.48 %   2.36 %

February

     5.38     5.08     3.38     1.40     1.41     2.45  

March

     5.20     5.19     3.68     1.33     1.33     2.85  

April

     5.28     5.33     3.73     1.62     1.36     2.79  

May

     5.33     5.40     3.75     2.02     1.25     2.65  

June

     5.45     5.60     3.81     2.35     1.09     2.42  

July

     5.38     5.66     4.05     2.33     1.20     2.14  

August

     5.19     5.50     4.27     2.29     1.41     1.88  

September

     5.06     5.38     4.21     2.37     1.35     1.87  

October

     4.88     5.36     4.57     2.47     1.40     1.81  

November

     4.52     5.30     4.78     2.80     1.51     1.63  

December

     4.42     5.24     4.84     3.02     1.50     1.58  

One Mortgage Loan, representing approximately 0.25% of the Mortgage Loans (by aggregate unpaid principal balance as of the Cut-Off Date), is a loan as to which the builder makes payments of principal, interest, taxes and/or

 

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insurance on behalf of the mortgagor for a limited period of time not to exceed six months. Funds paid by the builder will be held in a custodial account by the Servicer.

Each of the Mortgage Loans is subject to a due-on-sale clause. See “Certain Legal Aspects of the Mortgage Loans—’Due-on-Sale’ Clauses” and “Servicing of the Mortgage Loans—Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans” in the prospectus.

The Mortgage Loans were selected by the Sponsor from the Sponsor’s production of first lien, adjustable-rate mortgage loans, and were chosen to conform to the characteristics of mortgage loans eligible to be securitized in the Depositor’s WFMBS securitization program. See “The Sponsor” in the prospectus.

Mortgage Loan Data Appearing in Appendix A

The Mortgage Loans were originated by Wells Fargo Bank or its affiliates or purchased from other mortgage lenders. No originator or group of affiliated originators, apart from the Sponsor or its affiliates, has originated or is expected to originate 10% or more (by aggregate unpaid principal balance as of the Cut-Off Date) of the mortgage pool.

In originating Mortgage Loans, the documentation levels vary depending upon several factors, including loan amount, Loan-to-Value Ratio and the type and purpose of the Mortgage Loan. Asset and income verifications were obtained for Mortgage Loans processed with “full documentation.” In the case of “stated income, stated assets” documentation, neither income nor asset verifications were obtained. For documentation levels with income verification, such as “full documentation” and “verified income, stated assets” documentation, income was verified by means of a form independently prepared and signed by the applicant’s employer, the applicant’s most recent pay stub and/or W-2 or, in the case of a self-employed applicant, one or more years of the applicant’s tax return. In the case of “stated income, verified assets” documentation, assets were verified either by means of a form independently prepared and signed by the applicant’s financial institution or by obtaining one or more recent bank statements. For purposes of Appendix A, Mortgage Loans originated under Wells Fargo Bank’s retention program are included in the category of “stated income, stated assets.” See “The Sponsor’s Mortgage Loan Programs—Mortgage Loan Underwriting—Retention Program Standards” in the prospectus. Eligibility for loans included in the “stated income, verified assets” and “stated income, stated assets” documentation categories is determined via a risk model assessment, or this feature may be selected by the borrower with an associated pricing adjustment. In most instances, a verification of the borrower’s employment was obtained. Loans included in the “stated income, verified assets” and “stated income, stated assets” documentation categories due to the application of the risk model assessment are categorized as such due to the relatively higher credit quality of the borrower and the relatively lower risk loan characteristics. As a result, the Depositor believes that loans for which the borrower selected the “stated income, verified assets” or “stated income, stated assets” feature are likely to experience higher rates of delinquency and default than loans categorized by the application of the risk model assessment as “stated income, verified assets” and “stated income, stated assets.”

The Mortgage Loans were originated for various purposes. In general, in the case of a Mortgage Loan made for “rate/term” refinance purposes, substantially all of the proceeds are used to pay in full the principal balance of a previous mortgage loan of the mortgagor with respect to a Mortgaged Property and to pay origination and closing costs associated with such refinancing. However, in the case of a Mortgage Loan made for “equity take out” refinance purpose, all or a portion of the proceeds are generally required by the mortgagor for uses unrelated to the Mortgaged Property. The amount of such proceeds retained by the mortgagor may be substantial.

The Mortgage Loans were originated through various channels. Mortgage Loans originated through Wells Fargo Bank’s retail channel may include Mortgage Loans originated directly by Wells Fargo Bank (including originations through Wells Fargo Bank’s Private Mortgage Banking division and Joint Ventures). See “The Sponsor’s Mortgage Loan Programs—Mortgage Loan Production Sources” in the prospectus. Mortgage Loans originated through the correspondent channel are Mortgage Loans meeting certain qualifications acquired from unaffiliated originators. See “The Sponsor’s Mortgage Loan Programs—Acquisition of Mortgage Loans from Correspondents” in the prospectus. Mortgage Loans originated through the wholesale channel include referrals from mortgage brokers and similar entities. See “The Sponsor’s Mortgage Loan Programs—Mortgage Loan Production Sources” in the prospectus.

 

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The first table appearing in Appendix A sets forth certain characteristics of the Mortgage Loans.

For purposes of Appendix A, the term “single-family dwellings” includes single family attached planned unit developments (“PUDs”), single family detached PUDs, single family townhouses and single family detached dwellings.

In addition, for purposes of Appendix A, the Loan-to-Value Ratio of a Mortgage Loan is calculated using the lesser of (i) the appraised value of the related Mortgaged Property, as established by an appraisal obtained by the originator from an appraiser generally no more than four months prior to origination (subject to exceptions set forth under “The Sponsor’s Mortgage Loan Programs — Mortgage Loan Underwriting — General Standards” in the prospectus and (ii) the sale price for such property. For the purpose of calculating the Loan-to-Value Ratio of any Mortgage Loan that is the result of the refinancing (including a refinancing for “equity take out” purposes) of an existing mortgage loan, the appraised value of the related Mortgaged Property is generally determined by reference to an appraisal. Although for purposes of applying the Underwriting Standards, the Loan-to-Value Ratio of an LOC Pledged Asset Mortgage Loan, if any, is calculated taking into account the value of the LOC, for purposes of this prospectus supplement, such Loan-to-Value Ratio is calculated without regard to the value of such LOC. See “The Trust Estates — Mortgage Loans — Pledged Asset Mortgage Loans” in the prospectus. There can be no assurance that such appraisal, which is based on the independent judgment of an appraiser and not an arms-length sales transaction, is an accurate representation of the market value of a Mortgaged Property. See “The Trust Estates — Mortgage Loans” in the prospectus. No assurance can be given that the values of the Mortgaged Properties securing the Mortgage Loans have remained or will remain at the levels used in calculating the Loan-to-Value Ratios shown in Appendix A. The Depositor has taken no action to establish the current value of any Mortgaged Property. See “Risk Factors — Real Estate Market Conditions Affect Mortgage Loan Performance” and “— Geographic Concentration May Increase Rates of Loss and Delinquency” in the prospectus.

For purposes of Appendix A, the “Combined Loan-to-Value Ratio” or “CLTV” is the ratio, expressed as a percentage, of (i) the principal amount of the Mortgage Loan at origination plus (a) any junior mortgage encumbering the related Mortgaged Property originated by the Sponsor or of which the Sponsor has knowledge at the time of the origination of the Mortgage Loan or (b) the total available amount of any home equity line of credit originated by the Sponsor or of which the Sponsor has knowledge at the time of the origination of the Mortgage Loan, over (ii) the lesser of (a) the appraised value of the related Mortgaged Property at origination or (b) the sales price for such property. There can be no assurance that all data regarding junior mortgage loans or home equity lines of credit originated by parties other than the Sponsor is known by the Sponsor and therefore accurately reflected in the table appearing in Appendix A.

Mortgage Loans with Loan-to-Value Ratios at origination greater than 80% may or may not be covered by a primary mortgage insurance policy. Certain Mortgage Loans may be covered by lender-paid primary mortgage insurance policies (each, an “LPMI Policy”) or borrower-paid primary mortgage insurance policies (each, a “BPMI Policy”). The LPMI Policies and BPMI Policies will be assigned to the Trust on the Closing Date. The Sponsor will be responsible for paying the premiums under the LPMI Policies and may assign such obligation only with the consent of each Rating Agency and the respective primary mortgage insurance policy provider. Information with respect to the Mortgage Loans covered by LPMI Policies and BPMI Policies is set forth in Appendix A.

Appendix A also contains tables of the FICO Scores for the Mortgage Loans. “FICO Scores” are statistical credit scores obtained by many mortgage lenders in connection with the loan application to help assess a borrower’s credit-worthiness. FICO Scores are generated by models developed by a third party and are made available to lenders through three national credit bureaus. The models were derived by analyzing data on consumers in order to establish patterns which are believed to be indicative of the borrower’s probability of default. The FICO Score is based on a borrower’s historical credit data, including, among other things, payment history, delinquencies on accounts, levels of outstanding indebtedness, length of credit history, types of credit, and bankruptcy experience. FICO Scores range from approximately 300 to approximately 850, with higher scores indicating an individual with a more favorable credit history compared to an individual with a lower score. However, a FICO Score purports only to be a measurement of the relative degree of risk a borrower represents to a lender, i.e., that a borrower with a higher score is statistically expected to be less likely to default in payment than a borrower with a lower score. In addition, it should be noted that FICO Scores were developed to indicate a level of default probability over a two-year period which does not correspond to the life of a mortgage loan. Furthermore, FICO Scores were not developed specifically for use in connection with mortgage loans, but for consumer loans in general. Therefore, a FICO Score does not take

 

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into consideration the effect of mortgage loan characteristics on the probability of repayment by the borrower. The FICO Scores set forth in the table appearing in Appendix A entitled Original FICO Scores (the “Original FICO Scores”) were obtained at the time of origination of the Mortgage Loans. The FICO Scores set forth in the table appearing in Appendix A entitled Recent FICO Scores are either (i) the Original FICO Scores for Mortgage Loans originated less than or equal to four months prior to the Cut-Off Date or for which Updated FICO Scores are not available or (ii) when available, the FICO Scores of the borrowers obtained on November 30, 2007 (the “Updated FICO Scores”) for Mortgage Loans originated more than four months prior to the Cut-Off Date. For a Mortgage Loan originated by the Sponsor or its affiliates the Updated FICO Score used in the table is the FICO Score for the borrower whose FICO Score was used in connection with the origination of the Mortgage Loan. For a Mortgage Loan originated by an originator other than the Sponsor or its affiliates, (i) where there is only one borrower, the Updated FICO Score used in the table is the Updated FICO Score of that borrower or (ii) where there is more than one borrower, the Updated FICO Score used in the table is the lowest Updated FICO Score of any borrower for that Mortgage Loan. Consequently, for a Mortgage Loan originated by an originator other than the Sponsor or its affiliates, the Updated FICO Score may be for a borrower other than the borrower whose FICO Score was used at the time of origination of the Mortgage Loan. In addition, the Updated FICO Score for a Mortgage Loan may not have been provided by the same credit bureau as the Original FICO Score for such Mortgage Loan. Neither the Depositor nor the Sponsor makes any representations or warranties as to any borrower’s current FICO Score, the actual performance of any Mortgage Loan or that a particular FICO Score should be relied upon as a basis for an expectation that the borrower will repay the Mortgage Loan according to its terms.

For purposes of Appendix A, “Original Total Debt-to-Income Ratio” is the ratio, expressed as a percentage, of (i) the amount of the monthly debt obligations (including the proposed new housing payment and related expenses such as, but not limited to, property taxes and insurance) over (ii) the mortgagor’s gross monthly income, as of the origination of the Mortgage Loan.

For purposes of the table appearing in Appendix A setting forth historical delinquency data with respect to the Mortgage Loans in the mortgage pool, the table shows the extent to which any Mortgage Loans, since their origination (or a period of three years, if shorter), have ever been delinquent and whether foreclosure proceedings with respect to the Mortgage Loans or bankruptcy proceedings with respect to the mortgagors of the Mortgage Loans have ever been instituted. Mortgage Loans are categorized in the most severe category they fall into for any time period, with “Ever 30-59 Days” being the least severe category and “Ever Bankruptcy” being the most severe category. Mortgage Loans are only reported in one category for any time period. The indicated categories of delinquency are based on the number of days delinquent. A mortgage was considered delinquent if a payment was not received by the end of the month in which such payment was due.

In addition, Appendix A contains a table of the months to the first Adjustment Date for the Mortgage Loans. With respect to each Mortgage Loan, “Months to First Adjustment Date” equals the number of months from the Cut-Off Date to the month in which the interest rate applicable to such Mortgage Loan is initially adjusted.

The data appearing in Appendix A may not be exact due to rounding.

See “The Sponsor’s Mortgage Loan Programs-Mortgage Loan Underwriting” in the prospectus.

Mortgage Loan Underwriting

The Mortgage Loans were generally originated in conformity with the underwriting standards described in the prospectus under the heading “The Sponsor’s Mortgage Loan Programs — Mortgage Loan Underwriting” (the “Underwriting Standards”). In certain instances, exceptions to the Underwriting Standards may have been granted by Wells Fargo Bank.

See “The Sponsor’s Mortgage Loan Programs — Mortgage Loan Underwriting” and “—Acquisition of Mortgage Loans from Correspondents” in the prospectus.

In response to current market conditions, Wells Fargo Bank has implemented various changes to tighten its underwriting standards with respect to “prime” mortgage loans. The Mortgage Loans were originated at different times and therefore different standards were applied to different Mortgage Loans. Accordingly, if the underwriting

 

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standards currently in effect were in effect at the date of the loan application, certain of the Mortgage Loans in the mortgage pool might not have been originated by Wells Fargo Bank.

Mandatory Repurchase or Substitution of Mortgage Loans

The Depositor is required, with respect to Mortgage Loans that are found by the Custodian to have defective documentation, or in respect of which the Depositor has breached a representation or warranty which materially adversely affects Certificateholders, either to repurchase such Mortgage Loans or, at the Depositor’s option, if within two years of the date of initial issuance of the Certificates, to substitute new Mortgage Loans therefor. See “Prepayment and Yield Considerations” herein and “The Pooling and Servicing Agreement — Assignment of Mortgage Loans to the Trustee” in the prospectus.

Optional Purchase of Mortgage Loans

Under certain circumstances as described in the prospectus under “The Pooling and Servicing Agreement — Optional Purchases” the Depositor may, at its sole discretion purchase certain Mortgage Loans from the Trust Estate. See “Prepayment and Yield Considerations” herein.

PREPAYMENT AND YIELD CONSIDERATIONS

General

The rate of distributions of principal to any Class of the Offered Certificates, the aggregate amount of distributions on any Class of the Offered Certificates and the Weighted Average Life and yield to maturity of any Class of the Offered Certificates purchased at a discount or premium will be directly related to the rate of payments of principal on the Mortgage Loans and the amount and timing of mortgagor defaults resulting in Realized Losses on such Mortgage Loans. Prepayments (which, as used herein, include all unscheduled payments of principal, including payments as the result of liquidations, purchases and repurchases) of the Mortgage Loans in the Trust Estate will result in distributions to Certificateholders then entitled to distributions in respect of principal in respect of such Mortgage Loans of amounts which would otherwise be distributed over the remaining terms of such Mortgage Loans. Since the rate of prepayment on the Mortgage Loans will depend on future events and a variety of factors (as described more fully below and in the prospectus under “Prepayment and Yield Considerations”), no assurance can be given as to such rate or the rate of principal payments or yield on, or Weighted Average Life of, any Class of the Offered Certificates or the aggregate amount of distributions on any Class of the Offered Certificates.

The Interest Only Mortgage Loans require only the payment of interest for a term specified in the related Mortgage Note. On the first Due Date following the end of the interest-only period, the payments on each Interest Only Mortgage Loan will be recalculated to fully amortize its unpaid principal balance over the remaining life of such loan and the mortgagor will be required to make payments of both principal and interest, which may increase the burden of the mortgagor and may increase the risk of default under such Mortgage Loan.

After origination of the Mortgage Loans, the Mortgage Interest Rates on the Mortgage Loans will be fixed for approximately the first ten years and thereafter will adjust annually and may vary significantly over time. When a Mortgage Loan begins its adjustable period, increases and decreases in the Mortgage Interest Rate on that Mortgage Loan will be based on the applicable Index in effect up to 45 days prior to the related Adjustment Date plus the applicable Gross Margin and will be limited by the applicable Periodic Cap and Rate Ceiling. The applicable Index may not rise and fall consistently with mortgage interest rates. As a result, the Mortgage Interest Rates on the Mortgage Loans at any time may not equal the prevailing mortgage interest rates for similar adjustable interest rate mortgage loans, and accordingly the prepayment rate may be lower or higher than would otherwise be anticipated. Moreover, some mortgagors who prefer the certainty provided by fixed interest rate mortgage loans may nevertheless obtain adjustable interest rate mortgage loans at a time when they regard the mortgage interest rates (and, therefore, the payments) on fixed interest rate mortgage loans as unacceptably high. These mortgagors may be induced to refinance adjustable interest rate mortgage loans when the mortgage interest rates and monthly payments on comparable fixed interest rate mortgage loans decline to levels which these mortgagors regard as acceptable, even though such mortgage interest rates and monthly payments may be significantly higher than the current

 

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Mortgage Interest Rates and monthly payments on the mortgagors’ adjustable interest rate mortgage loans. The ability to refinance a mortgage loan will depend on a number of factors prevailing at the time refinancing is desired, including, without limitation, real estate values, the mortgagor’s financial situation, prevailing mortgage interest rates, the mortgagor’s equity in the related mortgaged property, tax laws and prevailing general economic conditions.

The Pass-Through Rates on each Offered Certificate may decrease, and may decrease significantly, after the Mortgage Interest Rates on the Mortgage Loans begin to adjust as a result of, among other factors, the dates of adjustment, the Gross Margins and changes in the applicable Index. The Mortgage Interest Rates on the Mortgage Loans will not all begin to adjust on the same date. Therefore, the Mortgage Interest Rates of some of the Mortgage Loans may still be in their fixed-rate period while the Mortgage Interest Rates on other Mortgage Loans may have begun to adjust. The minimum Mortgage Interest Rate to which the Mortgage Loans may adjust will be the applicable Gross Margin or such higher percentage as specified in the related Mortgage Note. In addition, if despite increases in the applicable Index, the Mortgage Interest Rate on any Mortgage Loan cannot increase due to a Rate Ceiling or a Periodic Cap, the yield on such Offered Certificates could be adversely affected. In addition, because the Pass-Through Rate on each Offered Certificate will be based on the Net WAC (or, in the case of the Class A-1 and Class A-IO Certificates, on the Adjusted Net WAC) of the Mortgage Loans, disproportionate principal payments on the Mortgage Loans having Net Mortgage Interest Rates higher or lower than the then-current Pass-Through Rates on a Class of Offered Certificates may affect the Pass-Through Rates for such Offered Certificates for future periods and the yield on such Offered Certificates. The Interest Only Certificates will also be affected by disproportionate principal payments on the Mortgage Loans with higher Net Mortgage Interest Rates because the Pass-Through Rate for the Interest Only Certificates is equal to the difference between the Adjusted Net WAC of the Mortgage Loans and the Pass-Through Rate on the Class A-1 Certificates. For any Distribution Date on which the Pass-Through Rate on the Class A-1 Certificates is equal to the Adjusted Net WAC of the Mortgage Loans, the Interest Only Certificates will receive no interest distribution for such Distribution Date.

The rate of principal payments on the Mortgage Loans will be affected by the amortization schedules of the Mortgage Loans, the rate of principal prepayments (including partial prepayments and those resulting from refinancing) thereon by mortgagors, liquidations of, or modifications in reduction of the principal balance of, defaulted Mortgage Loans, repurchases by the Depositor of Mortgage Loans as a result of defective documentation or breaches of representations and warranties and optional purchases by the Depositor of all of the Mortgage Loans in connection with the termination of the Trust Estate. See “Description of the Mortgage Loans—Mandatory Repurchase or Substitution of Mortgage Loans” herein and “The Pooling and Servicing Agreement—Assignment of Mortgage Loans to the Trustee,” “—Optional Purchases” and “—Termination; Optional Purchase of Mortgage Loans” in the prospectus. Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part, at any time without penalty. If prevailing rates for similar mortgage loans fall below the Mortgage Interest Rates on the Mortgage Loans, the rate of prepayment would generally be expected to increase. Conversely, if interest rates on similar mortgage loans rise above the Mortgage Interest Rates on the Mortgage Loans, the rate of prepayment would generally be expected to decrease. The rate of prepayment on the Mortgage Loans may also be influenced by programs offered by mortgage loan originators (including Wells Fargo Bank), servicers (including Wells Fargo Bank) and mortgage loan brokers to encourage refinancing through such originators, servicers and brokers, including, but not limited to, general or targeted solicitations (which may be based on characteristics including, but not limited to, the mortgage loan interest rate or payment history and the geographic location of the Mortgaged Property), reduced origination fees or closing costs, pre-approved applications, waiver of pre-closing interest accrued with respect to a refinanced loan prior to the pay-off of such loan, or other financial incentives. In particular, the application of Wells Fargo Bank’s “retention program,” which enables qualifying mortgagors to refinance at greatly reduced cost, to its servicing portfolio may substantially affect the rate of prepayment on the Mortgage Loans. See “Prepayment and Yield Considerations—Refinancings” in the prospectus. In addition, the Sponsor or third parties may enter into agreements with borrowers providing for the bi-weekly payment of principal and interest on the related mortgage loan, thereby accelerating payment of the mortgage loan resulting in partial prepayments.

For further information regarding historical delinquency, cumulative loss and prepayment experience of the Sponsor’s prior residential mortgage loan securitizations, see “Static Pool Information” in this prospectus supplement.

 

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Other factors affecting prepayment of mortgage loans include changes in mortgagors’ housing needs, job transfers, unemployment or substantial fluctuations in income, significant fluctuations in real estate values and adverse economic conditions either generally or in particular geographic areas, mortgagors’ equity in the Mortgaged Properties, including the use of the properties as second or vacation homes, and servicing decisions, such as, without limitation, the decision as to whether to foreclose on a Mortgage Loan or to modify the terms of the related Mortgage Note and decisions as to the timing of any foreclosure. Furthermore, certain characteristics of mortgage loans may be more likely to affect prepayments. These characteristics include, but are not limited to, principal balance, loan-to-value ratio, borrower credit quality and current interest rate higher than prevailing interest rates. No representation is made as to the rate of prepayment on the Mortgage Loans included in the Trust Estate having any particular characteristic. In addition, all of the Mortgage Loans contain due-on-sale clauses which will be exercised upon the sale of the related Mortgaged Properties and enforced to the extent described in the prospectus under “Servicing of the Mortgage Loans — Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans.” Consequently, acceleration of mortgage payments as a result of any such sale will affect the level of prepayments on the Mortgage Loans. The extent to which defaulted Mortgage Loans are assumed by transferees of the related Mortgaged Properties or are refinanced will also affect the rate of principal payments. The rate of prepayment and, therefore, the yield to maturity of the Offered Certificates will be affected by, among other things, the extent to which (i) the Depositor elects to repurchase, rather than substitute for, Mortgage Loans which are found by the Custodian to have defective documentation or with respect to which the Depositor has breached a representation or warranty, (ii) a substitute Mortgage Loan has an unpaid principal balance less than the Mortgage Loan for which it is substituted or (iii) a Servicer may take certain actions to mitigate losses on a defaulted Mortgage Loan which may include, but are not limited to, selling the Mortgaged Property of such Mortgage Loan for less than its unpaid principal balance or modifying the payment terms of such Mortgage Loan. See “Servicing of the Mortgage Loans — Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans” in the prospectus.

As described herein under “Description of the Certificates—Principal (Including Prepayments),” all or a disproportionate percentage of principal prepayments on the Mortgage Loans (including liquidations and repurchases of Mortgage Loans) will be distributed to the holders of the Class A Certificates then entitled to distributions in respect of principal during the eleven years beginning on the first Distribution Date.

The yield to maturity of the Offered Certificates will be sensitive in varying degrees to the rate and timing of principal payments (including prepayments, which may be made at any time without penalty) on the Mortgage Loans. Investors in the Offered Certificates should consider the associated risks, including, in the case of Offered Certificates purchased at a discount, the risk that a slower than anticipated rate of payments in respect of principal (including prepayments) on the Mortgage Loans will have a negative effect on the yield to maturity of such Certificates and, in the case of Offered Certificates purchased at a premium, or the Interest Only Certificates, the risk that a faster than anticipated rate of payments in respect of principal (including prepayments) on the Mortgage Loans will have a negative effect on the yield to maturity of such Certificates. Investors purchasing Offered Certificates at a premium or the Interest Only Certificates should also consider the risk that a rapid rate of payments in respect of principal (including prepayments) on the Mortgage Loans could result in the failure of such investors to fully recover their initial investments. An investor is urged to make an investment decision with respect to any Class of Offered Certificates based on the anticipated yield to maturity of such Class resulting from its purchase price and such investor’s own determination as to anticipated Mortgage Loan principal payment rates under a variety of scenarios. In considering the rate of principal payments on the Mortgage Loans, investors should consider that a substantial portion of the Mortgage Loans are Interest Only Mortgage Loans. With respect to an Interest Only Mortgage Loan, no scheduled payments of principal will be made by the mortgagor during the applicable interest-only period.

The timing of changes in the rate of prepayment on the Mortgage Loans may significantly affect the actual yield to maturity experienced by an investor who purchases an Offered Certificate at a price other than par, even if the average rate of principal payments experienced over time is consistent with such investor’s expectation. In general, the earlier a prepayment of principal on the Mortgage Loans, the greater the effect on such investor’s yield to maturity. As a result, the effect on such investor’s yield of principal payments occurring at a rate higher (or lower) than the rate anticipated by the investor during the period immediately following the issuance of the Offered Certificates would not be fully offset by a subsequent like reduction (or increase) in the rate of principal payments.

 

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The yield to maturity on the Classes of Class B Certificates with higher numerical designations will generally be more sensitive to losses than the Classes with lower numerical designations because the entire amount of such losses will be allocable to the Classes of Class B Certificates in reverse numerical order, except as provided herein. To the extent not covered by Periodic Advances, delinquencies on Mortgage Loans will also have a relatively greater effect on the yield to maturity on the Classes of Class B Certificates with higher numerical designations because amounts otherwise distributable on the Class B Certificates will be made available to protect the Class A Certificates against interruptions in distributions due to such unadvanced mortgagor delinquencies. Such unadvanced delinquencies, even if subsequently cured, may affect the timing of the receipt of distributions on the Class B Certificates.

On and after the Subordination Depletion Date, the yield to maturity on the Super Senior Support Certificates will be more sensitive to losses than the other Class A Certificates because while they are outstanding the Super Senior Support Certificates will bear not only their share of losses but also the share allocated to the Super Senior Certificates. See “Description of the Certificates—Allocation of Losses.”

The actual yield to maturity experienced by an investor may also be affected by the occurrence of interest shortfalls resulting from Unscheduled Principal Receipts to the extent, if any, that such interest shortfalls are not covered by Compensating Interest or subordination. See “Description of the Certificates — Interest” herein and “Servicing of the Mortgage Loans — Changes in Servicing” in the prospectus.

The yield to maturity on the Offered Certificates and more particularly on the Class B-1, Class B-2 and Class B-3 Certificates, may be affected by the geographic concentration of the Mortgaged Properties securing the Mortgage Loans. Certain regions in the United States have experienced or may experience significant fluctuations in housing prices. In addition, certain regions have experienced or may experience natural disasters, including earthquakes, fires, floods, hurricanes and tornadoes, which may adversely affect property values. See “Description of the Mortgage Loans” herein. Any deterioration in housing prices in the regions in which there is a significant concentration of Mortgaged Properties, as well as other regions in which the Mortgaged Properties are located, and any deterioration of economic conditions in such regions which adversely affects the ability of borrowers to make payments on the Mortgage Loans, may increase the likelihood of losses on the Mortgage Loans. Such losses, if they occur, may have an adverse effect on the yield to maturity of the Offered Certificates and more particularly on the Class B-1, Class B-2 and Class B-3 Certificates.

As to Mortgaged Properties in regions that have recently experienced natural disasters, neither the Depositor nor the Sponsor has undertaken the physical inspection of such Mortgaged Properties. As a result, there can be no assurance that material damage to any Mortgaged Property in an affected region has not occurred. In the Pooling and Servicing Agreement, the Depositor will represent and warrant that, as of the date of issuance of the Certificates, each Mortgaged Property is undamaged by flood, water, fire, earthquake or earth movement, wind-storm, tornado or similar casualty (excluding casualty from the presence of hazardous wastes or hazardous substances, as to which the Depositor makes no representation) in a manner which would adversely affect the value of such Mortgaged Property as security for such Mortgage Loan or the use for which such premises was intended. In the event of a breach of such representation with respect to a Mortgaged Property which materially and adversely affects the interests of Certificateholders in the related Mortgage Loan, the Depositor will be obligated to repurchase or substitute for such Mortgage Loan, as described under “The Pooling and Servicing Agreement—Assignment of Mortgage Loans to the Trustee” and “—Representations and Warranties” in the prospectus. Repurchase of any such Mortgage Loan will affect in varying degrees the yields and Weighted Average Lives of the related Classes of Offered Certificates and could adversely affect the yield of any related Offered Certificates purchased at a premium.

No representation is made as to the rate of principal payments on the Mortgage Loans or as to the yield to maturity of any Class of Offered Certificates.

An investor should consider the risk that rapid rates of prepayments on the Mortgage Loans and therefore of amounts distributable in reduction of principal balance of the related Offered Certificates, may coincide with periods of low prevailing interest rates. During such periods, the effective interest rates on securities in which an investor may choose to reinvest amounts distributed in reduction of the principal balance of such investor’s Offered Certificate may be lower than the applicable Pass-Through Rate or expected yield. Conversely, slower rates of prepayments on the Mortgage Loans and therefore of amounts distributable in reduction of principal balance of the related Offered Certificates, may coincide with periods of high prevailing interest rates. During such periods, the

 

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amount of principal distributions available to an investor for reinvestment at such high prevailing interest rates may be relatively small.

Investors in the Floating Rate Certificates should understand that if the Pass-Through Rate formula set forth in the table beginning on page S-6 results in a rate greater than or equal to the Adjusted Net WAC of the Mortgage Loans, the Pass-Through Rate of the Class A-1 Certificates will remain at their maximum rate. However, to minimize the effect of the Pass-Through Rate for the Class of Floating Rate Certificates being subject to the maximum rate, the Class A-1 Certificates will receive amounts payable under the Yield Maintenance Agreement. See “Description of the Certificates — The Yield Maintenance Agreement.” Investors in the Floating Rate Certificates should also consider the risk that if LIBOR is lower than anticipated, the actual yields to such investors could be lower than anticipated yields. Conversely, investors in the Inverse Floating Rate Certificates should consider the risk that if LIBOR is higher than anticipated, the actual yields to such investors could be significantly lower than the anticipated yields. Further, based on Structuring Assumptions, high constant rates of LIBOR, especially when combined with certain high constant prepayment rates, are expected to produce a negative yield to investors in the Inverse Floating Rate Certificates which are also Interest Only Certificates. Investors in the Class A-IO Certificates should also understand that if the Pass-Through Rate formula for the Class A-1 Certificates set forth in the table on page S-6 results in a rate greater than or equal to the Adjusted Net WAC of the Mortgage Loans, the Class A-IO Certificates will receive no interest distribution.

On or prior to the Distribution Date in December 2017, investors in the Class A-1 and Class A-IO Certificates will be entitled to receive, to the extent described herein, amounts payable under the Yield Maintenance Agreement in addition to the applicable Interest Accrual Amount on their respective Certificates. See “Description of the Certificates — The Yield Maintenance Agreement” and “— The Reserve Fund.” Investors in the Class A-1 and Class A-IO Certificates should understand that the timing of changes in LIBOR may affect the actual yields to such investors even if the average rate of LIBOR is consistent with such investors’ expectations. Each investor must make an independent decision as to the appropriate LIBOR assumptions to be used in deciding whether to purchase the Class A-1 or Class A-IO Certificates.

In addition, there can be no assurance that LIBOR will correlate with the levels of prevailing mortgage interest rates, therefore it is possible that lower prevailing mortgage rates, which might be expected to result in faster prepayments, could occur concurrently with an increase in LIBOR. However, if, as generally expected, higher mortgage rates and, accordingly, lower prepayment rates, were to occur concurrently with an increase in LIBOR, the Pass-Through Rate of a Class of Inverse Floating Rate Certificates would be reduced at the same time that the rate of reduction of the Notional Amount of such Class may be reduced. In such circumstances, investors in the Inverse Floating Rate Certificates could have a significantly lower yielding instrument with a longer Weighted Average Life than anticipated. See “—Sensitivities of Certain Classes of Certificates” below.

Investors in the Floating Rate Certificates and Inverse Floating Rate Certificates should understand that the timing of changes in LIBOR may affect the actual yields to such investors even if the average rate of LIBOR is consistent with such investors’ expectations. Each investor must make an independent decision as to the appropriate LIBOR assumptions to be used in deciding whether to purchase a Floating Rate Certificate or Inverse Floating Rate Certificate.

Due to the special tax treatment of residual interests, the after-tax return of the Residual Certificates may be significantly lower than would be the case if the Residual Certificates were taxed as debt instruments, or may be negative. See “Federal Income Tax Considerations” herein.

As referred to herein, the “Weighted Average Life” of a Class of Offered Certificates, other than the Interest Only Certificates, refers to the average amount of time that will elapse from the date of issuance of such Class until each dollar in reduction of the Principal Balance of such Class is distributed to the investor. The Weighted Average Life of a Class of Interest Only Certificates is equal to the average amount of time that will elapse between the date of issuance of such Class and the date on which each dollar reduction in the Notional Amount of such Class occurs.

Prepayments on mortgage loans are commonly measured relative to a prepayment standard or model. The model used in this prospectus supplement, the Constant Prepayment Rate (“CPR”), represents an assumed rate of prepayment each month relative to the then-outstanding principal balance of a pool of new mortgage loans for the life of such mortgage loans. A prepayment assumption of 10% CPR assumes constant prepayment rates of 10% per

 

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annum of the then-outstanding principal balance of such mortgage loans. As used in the tables appearing in the appendices, “0% CPR” assumes prepayment rates equal to 0% of CPR, i.e., no prepayments. Correspondingly, “25% CPR” assumes prepayment rates equal to 25% of CPR, and so forth. CPR does not purport to be 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.

Appendix C sets forth the decrement tables for the Offered Certificates. The tables appearing in Appendix C have been prepared assuming, among other things, the following (the “Structuring Assumptions”):

(i) the Trust Estate consists of the “Assumed Mortgage Loans” with the characteristics set forth in Appendix B of this prospectus supplement;

(ii) the scheduled payment in each month for each Assumed Mortgage Loan has been based on its outstanding balance as of the first day of the month preceding the month of such payment, its Mortgage Interest Rate and its remaining term to stated maturity, so that such scheduled payments (beginning with the scheduled payment after the interest-only period in the case of the Assumed Mortgage Loans with Original Interest Only Months greater than zero) would amortize the remaining balance over its remaining amortization term to maturity;

(iii) scheduled monthly payments of principal and interest on the Assumed Mortgage Loans will be timely received on the first day of each month (with no defaults), commencing in March 2008;

(iv) the Depositor does not repurchase any of the Assumed Mortgage Loans and the Depositor does not exercise its option to purchase the Assumed Mortgage Loans and thereby cause a termination of the Trust Estate;

(v) principal payments on the Assumed Mortgage Loans representing principal prepayments in full of individual mortgage loans will be received on the last day of each month commencing in February 2008 at the respective constant percentages of CPR set forth in the tables and there are no Curtailments, Prepayment Interest Shortfalls or Relief Act Shortfalls;

(vi) the Certificates will be issued on the Closing Date;

(vii) distributions to Certificateholders will be made on the 25th day of each month, commencing in March 2008;

(viii) the One-Year CMT Index remains constant at 2.029% and the One-Year LIBOR Index remains constant at 2.749%, as applicable;

(ix) the Assumed Mortgage Loans adjust on the first Adjustment Date and annually on each anniversary thereof;

(x) the Master Servicing Fee Rate will be 0.010% per annum for each Assumed Mortgage Loan; and

(xi) the initial Principal Balance (or Notional Amount) of each Class of Certificates will be as set forth in the table beginning on page S-6 of this prospectus supplement.

It is highly unlikely that the Mortgage Loans will prepay at any constant rate, that all of the Mortgage Loans will prepay at the same rate or that the Mortgage Loans will not experience any losses. In addition, there will be differences between the characteristics of the Mortgage Loans ultimately included in the Trust Estate and the characteristics which are assumed in preparing the tables, as described above. Any difference may have an effect upon the actual percentages of initial Principal Balances (or, initial Notional Amount, in the case of a Class of Interest Only Certificates) of the Classes of Certificates outstanding, the actual Weighted Average Lives of the Classes of Certificates and the date on which the Principal Balance (or, initial Notional Amount, in the case of a Class of Interest Only Certificates) of any Class of Certificates is reduced to zero.

Based upon the foregoing assumptions, the tables appearing in Appendix C indicate the Weighted Average Life of each Class of Offered Certificates, and set forth the percentages of the initial Principal Balance (or, initial Notional Amount, in the case of the Interest Only Certificates) of each such Class of Offered Certificates that would be outstanding after each of the dates shown at constant percentages of CPR presented.

 

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Interest accrued on the Offered Certificates will be reduced by the amount of any interest portions of Realized Losses allocated to such Certificates as described under “Description of the Certificates — Interest” herein. The yield on the Offered Certificates (other than the Floating Rate and Inverse Floating Rate Certificates) will be less than the yield otherwise produced by their respective Pass-Through Rates, if any, and the prices at which such Certificates are purchased because the interest which accrues on the Mortgage Loans during each month will not be passed through to Certificateholders until the 25th day of the month following the end of such month (or if such 25th day is not a business day, the following business day).

Sensitivities of Certain Classes of Certificates

The Interest Only Certificates will be highly sensitive to the rate and timing of principal payments (including prepayments) on the Mortgage Loans, which rate may fluctuate significantly from time to time. See “—General” above. An investor in the Interest Only Certificates should fully consider the associated risks, including the risk that a rapid rate of principal payments (including prepayments) could result in the failure of such investor to fully recover its initial investment. The Interest Only Certificates which are also Inverse Floating Rate Certificates are also highly sensitive to the rate of LIBOR. See “—General” above.

The table appearing in Appendix D indicates the sensitivities to various rates of prepayment on the Mortgage Loans, and changes in LIBOR, of the pre-tax yields to maturity on a semi-annual corporate bond equivalent (“CBE”) basis of the Interest Only Certificates.

The table has been prepared on the basis of the Structuring Assumptions, and the additional assumptions that (1) the Class A-IO Certificates will be purchased on the Closing Date at a purchase price equal to 7.950% of their initial Notional Amount plus accrued interest from the first day of the initial Interest Accrual Period to (but not including) the Closing Date and (2) beginning with the Distribution Date in April 2008, and for each Distribution Date thereafter, LIBOR is at the level specified.

The pre-tax yields to maturity set forth in the table appearing in Appendix D were calculated by (i) determining the monthly discount rates which, when applied to the assumed streams of cash flows to be paid on the designated Class of Certificates, would cause the discounted present value of such assumed streams of cash flows to equal the assumed purchase price for the Interest Only Certificates set forth above and (ii) converting such monthly rates to CBE rates. Such calculations do not take into account the interest rates at which investors may be able to reinvest funds received by them as distributions on the Certificates and consequently do not purport to reflect the return on any investment in the Certificates when such reinvestment rates are considered.

Notwithstanding the assumed prepayment rates reflected in the table appearing in Appendix D, it is highly unlikely that the Mortgage Loans will prepay at a constant rate until maturity, that all of the Mortgage Loans will prepay at the same rate or that the Mortgage Loans will not experience any losses. It is also highly unlikely that LIBOR will remain constant. In addition, there will be differences between the characteristics of the Mortgage Loans ultimately included in the Trust Estate and the Assumed Mortgage Loans. As a result of these factors, the pre-tax yield to maturity on the Interest Only Certificates is likely to differ from those shown in the table, even if all of the Mortgage Loans prepay at the indicated percentages of CPR.

The table relating to the Class of Inverse Floating Rate Certificates do not constitute a representation as to the correlation of any level of LIBOR with any rate of prepayments on the Mortgage Loans. Each investor must make an independent decision as to the appropriate combination of prepayment and LIBOR assumptions to be used in deciding whether or not to purchase an Inverse Floating Rate Certificate.

POOLING AND SERVICING AGREEMENT

General

The Certificates will be issued pursuant to a Pooling and Servicing Agreement to be dated as of the Closing Date (the “Pooling and Servicing Agreement”) among the Depositor, the Master Servicer and the Trustee. Reference is made to the prospectus for important additional information regarding the terms and conditions of the Pooling and Servicing Agreement and the Certificates beyond the summaries below of certain provisions specific to

 

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this transaction. See “Description of the Certificates,” “Servicing of the Mortgage Loans” and “The Pooling and Servicing Agreement” in the prospectus.

The Trust Estate created pursuant to the Pooling and Servicing Agreement will consist of (i) the Mortgage Loans, (ii) such assets as from time to time are identified as deposited in any account held for the benefit of the Certificateholders, (iii) any Mortgaged Properties acquired on behalf of the Certificateholders by foreclosure or by deed in lieu of foreclosure after the Closing Date and (iv) the rights of the Trustee to receive the proceeds of all insurance policies and performance bonds, if any, required to be maintained pursuant to the Pooling and Servicing Agreement.

Compensation and Payment of Expenses of the Master Servicer, Servicer and Trustee

The primary compensation payable to the Master Servicer will be the “Master Servicing Fee” payable monthly equal to 1/12th of the master servicing fee rate set forth in the table below (the “Master Servicing Fee Rate”). The Master Servicing Fee for each Distribution Date will accrue on the aggregate scheduled principal balance of the Mortgage Loans as of the first day of the preceding month.

The primary compensation payable to the Servicer is the aggregate of the Servicing Fees applicable to the related Mortgage Loans. The Servicer will be entitled to a “Servicing Fee” payable monthly equal to 1/12th of the servicing fee rate set forth in the table below (the “Servicing Fee Rate”). The Servicing Fee for each Distribution Date will accrue on the scheduled principal balance of the Mortgage Loans serviced by the Servicer as of the first day of the preceding month.

The Master Servicing Fee Rate, the Servicing Fee Rate and the Trustee Fee Rate will be the per annum rate set forth in the table below:

Fees Payable From the Trust Estate(1)

 

Master Servicing Fee Rate

 

Servicing Fee Rate

 

Trustee Fee Rate

0.010% (2)

  0.250%(2)   (3)

 

(1) Certain expenses incurred by the Master Servicer and the Trustee are reimbursable from the Trust Estate as described under “Servicing of the Mortgage Loans—The Master Servicer-General” and “The Pooling and Servicing Agreement—The Trustee” in the prospectus.
(2) The Master Servicing Fee Rate and Servicing Fee Rate may not be changed without the consent of Certificateholders if such change adversely affects the interests of Certificateholders.
(3) The fees of the Trustee, other than the initial acceptance/legal fees of the Trustee which are paid by the Depositor, incurred in connection with its responsibilities under the Pooling and Servicing Agreement will be payable by the Master Servicer without reimbursement from the Trust Estate.

The Master Servicing Fee and Servicing Fee for the Mortgage Loans are payable out of the interest payments on the Mortgage Loans, prior to any payments to Certificateholders. The Master Servicer is also entitled to additional compensation, as described under “Servicing of the Mortgage Loans—The Master Servicer” in the prospectus. The Servicer is entitled to additional servicing compensation, as described under “Servicing of the Mortgage Loans—Fixed Retained Yield, Servicing Compensation and Payment of Expenses” in the prospectus.

In the event that the Trustee succeeds to the role of the Master Servicer, it will be entitled to compensation for such duties not to exceed the compensation received by the predecessor master servicer. In addition, if the Trustee appoints a successor master servicer under the Pooling and Servicing Agreement, the Trustee may make arrangements for the compensation of such successor master servicer, such compensation not to exceed the compensation received by the predecessor master servicer. All costs of a transfer of master servicing will be

 

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reimbursed to the party who incurred such costs as described under “Servicing of the Mortgage Loans—The Master Servicer” in the prospectus.

In the event that the Master Servicer or the Trustee succeeds, or another party is appointed to succeed, to the role of Servicer, such entity will be entitled to compensation for such duties, not to exceed the compensation received by the predecessor Servicer. All costs of a transfer of servicing will be reimbursed to the party who incurred such costs as described under “Servicing of the Mortgage Loans—The Servicers” in the prospectus.

The Master Servicer will pay certain administrative expenses, including fees of the Trustee incurred in connection with its responsibilities under the Pooling and Servicing Agreement. Some of these expenses of the Master Servicer are subject to rights of reimbursement as described under “Servicing of the Mortgage Loans—The Master Servicer” in the prospectus. The fees of any co-trustee whose appointment is necessary or advisable for (i) conforming to any legal requirement, restriction or condition in any state in which any Mortgaged Property or any portion of the Trust Estate is located, will be paid by the Master Servicer, without reimbursement from the Trust Estate and (ii) any reason other than contemplated by clause (i), will be paid by the Trustee, without reimbursement from the Trust Estate. Expenses incurred by a co-trustee are reimbursable from the Trust Estate to the same extent as expenses of the Trustee are reimbursable from the Trust Estate. See “The Pooling and Servicing Agreement—The Trustee” in the prospectus.

The Depositor, the Master Servicer and the Trustee are also entitled to indemnification from the Trust Estate under certain circumstances described under “The Depositor,” “Servicing of the Mortgage Loans—The Master Servicer—General” and “The Pooling and Servicing Agreement—The Trustee” in the prospectus.

For so long as the Master Servicer and the Paying Agent are the same entity, the Paying Agent will not be entitled to a separate fee for its services. If the Master Servicer and the Paying Agent are no longer the same entity, the Master Servicer will pay the fees of the Paying Agent without reimbursement from the Trust.

The servicing fees and other expenses of each REMIC will be allocated to the holders of the Class A-R Certificates. See “Federal Income Tax Considerations” herein and “Certain Federal Income Tax Consequences—Federal Income Tax Consequences for REMIC Certificates — Limitations on Deduction of Certain Expenses” in the prospectus.

Optional Termination of the Trust

On any Distribution Date on which the aggregate Scheduled Principal Balance of the Mortgage Loans is less than 10% of the aggregate unpaid principal balance of the Mortgage Loans as of the Cut-Off Date, the Depositor may, subject to certain conditions, purchase all outstanding Mortgage Loans in the mortgage pool and thereby effect early retirement of the Certificates. See “The Pooling and Servicing Agreement—Termination; Optional Purchase of Mortgage Loans” in the prospectus. The exercise of this option will be in the Depositor’s sole discretion. Without limitation, the Depositor may enter into agreements with third parties to (i) exercise such option at the direction of a third party or (ii) forebear from the exercise of such option.

Voting

With respect to any provisions of the Pooling and Servicing Agreement providing for the action, consent or approval of the holders of all Certificates evidencing specified Voting Interests in the Trust Estate, each Class of Interest Only Certificates will be entitled to 1% of the aggregate Voting Interest represented by all Certificates and each remaining Class of Certificates will be entitled to a pro rata portion of the remaining Voting Interest based on the outstanding Principal Balance of such Class. With respect to any provisions of the Pooling and Servicing Agreement providing for action, consent or approval of each Class of Certificates or specified Classes of Certificates, each Certificateholder of a Class will have a Voting Interest equal to the product of the Voting Interest to which such Class is collectively entitled and the Percentage Interest in such Class represented by such holder’s Certificates. Unless Definitive Certificates are issued as described under “Description of the Certificates — Book-Entry Form” in the prospectus, Beneficial Owners of Book-Entry Certificates may exercise their voting rights only through DTC Participants.

 

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Fixed Retained Yield

No Fixed Retained Yield (as defined in the prospectus) will be retained with respect to any of the Mortgage Loans. See “Servicing of the Mortgage Loans—Fixed Retained Yield, Servicing Compensation and Payment of Expenses” in the prospectus for further information regarding Fixed Retained Yield.

FEDERAL INCOME TAX CONSIDERATIONS

General

In the opinion of Cadwalader, Wickersham & Taft LLP, the following discussion, together with the discussion under “Certain Federal Income Tax Consequences” in the prospectus, summarizes the material federal income tax consequences of the purchase, ownership and disposition of the Offered Certificates.

The Trust Estate will include two segregated asset groupings, each of which will qualify as a REMIC for federal income tax purposes. One REMIC (the “Lower-Tier REMIC”) will issue certain uncertificated interests (each, a “Lower-Tier REMIC Regular Interest”), each of which will be designated as a regular interest in the Lower-Tier REMIC, and the Class A-LR Interest, which will be designated as the residual interest in the Lower-Tier REMIC. The assets of the Lower-Tier REMIC will include the Mortgage Loans, together with the amounts held by the Master Servicer in a separate account in which collections on the Mortgage Loans will be deposited (the “Certificate Account”), the hazard insurance policies and primary mortgage insurance policies, if any, relating to the Mortgage Loans and any property that secured a Mortgage Loan that is acquired by foreclosure or deed in lieu of foreclosure.

The second REMIC (the “Upper-Tier REMIC”) will issue all Classes of the Class A Certificates (other than the portion of the Class A-R Certificates representing the Class A-LR Interest and the portion of the Class A-1 and Class A-IO Certificates representing the Basis Risk Arrangements) and all Class B Certificates. Each Class of Offered Certificates (other than the Class A-R Certificates and the portion of the Class A-1 and Class A-IO Certificates representing the Basis Risk Arrangements), together with each Class of Certificates not offered hereby (collectively, the “Regular Certificates”) will be designated as regular interests in the Upper-Tier REMIC, and the Class A-R Interest will be designated as the residual interest in the Upper-Tier REMIC. For tax purposes, the Class A-R Certificates represent the beneficial ownership of both residual interests (the “Class A-R Interest” and the “Class A-LR Interest”). The Class A-R Certificates are “Residual Certificates” for purposes of the prospectus. The assets of the Upper-Tier REMIC will include the uncertificated Lower-Tier REMIC Regular Interests and a separate account in which distributions on the uncertificated Lower-Tier REMIC Regular Interests will be deposited. The aggregate amount distributed to the Regular Certificates and the Class A-R Interest, payable from such separate account, will be equal to the aggregate distributions on the uncertificated Lower-Tier REMIC Regular Interests. The Yield Maintenance Agreement and the Reserve Fund will not be assets of either the Upper-Tier REMIC or the Lower-Tier REMIC.

The Offered Certificates will be treated as “loans . . . secured by an interest in real property which is . . . residential real property” for a domestic building and loan association, “real estate assets” for a real estate investment trust and, other than the Residual Certificates, “qualified mortgages” for a REMIC to the extent described in the prospectus. The Class A-1 and Class A-IO Certificates, to the extent that they represent rights or obligations under the Basis Risk Arrangements, will not qualify for the foregoing treatments. Consequently, the Class A-1 and Class A-IO Certificates will not be suitable assets for a REMIC. See “Certain Federal Income Tax Consequences – Federal Income Tax Consequences for REMIC Certificates – Status of REMIC Certificates” in the prospectus.

Regular Certificates

The Regular Certificates generally will be treated as newly originated debt instruments for federal income tax purposes. Beneficial Owners (or in the case of Definitive Certificates, holders) of the Regular Certificates will be required to report income on such Certificates in accordance with the accrual method of accounting.

It is anticipated that:

 

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The Class A-2, Class B-1, Class B-2 and Class B-3 Certificates will be issued with original issue discount equal to the excess of their initial Principal Balances (plus three days of accrued interest) over their respective issue prices (including accrued interest from the first day of the initial Interest Accrual Period);

 

   

The Class A-IO Certificates will be issued with original issue discount equal to the excess of all distributions of interest expected to be received on those Certificates over their issue price (including accrued interest from the first day of the initial Interest Accrual Period); and

 

   

The Class A-1 Certificates will be issued without discount or premium.

It is also anticipated that the Class B-4, Class B-5 and Class B-6 Certificates, which are not offered hereby, will be issued with original issue discount.

See “Certain Federal Income Tax Consequences—Federal Income Tax Consequences for REMIC Certificates—Taxation of Regular Certificates” in the prospectus.

The Prepayment Assumption (as defined in the prospectus) that the Master Servicer intends to use in determining the rate of accrual of original issue discount and whether the original issue discount is considered de minimis, and that may be used by Beneficial Owners (or holders) to amortize premium, will be calculated using 25% CPR. No representation is made as to the actual rate at which the Mortgage Loans will prepay.

If the method for computing original issue discount results in a negative amount for any period with respect to any holder of Offered Certificates, the amount of original issue discount allocable to that period would be zero. The holder would be permitted to offset the negative amount only against future original issue discount, if any, attributable to his or her Certificates. Although the matter is not free from doubt, a holder of an Interest Only Certificate may be permitted to deduct a loss to the extent that its remaining basis in the Certificate exceeds the maximum amount of future payments to which the holder is entitled, assuming no further prepayments on the Mortgage Loans. Any loss might be treated as a capital loss.

Residual Certificates

The holders of the Class A-R Certificates must include the taxable income or loss of the Upper-Tier REMIC and the Lower-Tier REMIC in determining their federal taxable income. In making such determination, the holders of the Class A-R Certificates must account separately for their interest in each REMIC and generally cannot offset income from one REMIC with losses from another REMIC. The Residual Certificates will remain outstanding for federal income tax purposes until there are no Certificates of any other Class outstanding. Prospective investors are cautioned that the Residual Certificateholders’ REMIC taxable income and the tax liability thereon may exceed, and may substantially exceed, cash distributions to such holders during certain periods, in which event, the holders thereof must have sufficient alternative sources of funds to pay such tax liability. Furthermore, it is anticipated that all or a substantial portion of the taxable income of the Upper-Tier REMIC and Lower-Tier REMIC includible by the holders of the Class A-R Certificates will be treated as “excess inclusion” income, resulting in (i) the inability of such holders to use net operating losses to offset such income from the REMICs, (ii) the treatment of such income as “unrelated business taxable income” to certain holders who are otherwise tax-exempt and (iii) the treatment of such income as subject to 30% withholding tax to certain non-U.S. investors, with no exemption or treaty reduction.

The Residual Certificates will be considered “noneconomic residual interests,” with the result that transfers thereof would be disregarded for federal income tax purposes if any significant purpose of the transferor was to impede the assessment or collection of tax. Accordingly, the Residual Certificates are subject to certain restrictions on transfer and any prospective transferee thereof will be required to furnish to the Master Servicer an affidavit as described under “Certain Federal Income Tax Consequences—Federal Income Tax Consequences for REMIC Certificates—Taxation of Residual Certificates—Tax-Related Restrictions on Transfer of Residual Certificates—Noneconomic Residual Interests” in the prospectus. See also “Certain Federal Income Tax Consequences—Federal Income Tax Consequences for REMIC Certificates—Taxation of Residual Certificates—Limitations on Offset or Exemption of REMIC Income” in the prospectus.

 

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An individual, trust or estate that holds a Residual Certificate (whether such Certificate is held directly or indirectly through certain pass-through entities) also may have additional gross income with respect to, but may be subject to limitations on the deductibility of, Servicing Fees on the Mortgage Loans and other administrative expenses of the REMICs in computing such holder’s regular tax liability, and may not be able to deduct such fees or expenses to any extent in computing such holder’s alternative minimum tax liability. In addition, some portion of a purchaser’s basis, if any, in a Residual Certificate may not be recovered until termination of the REMICs.

Due to the special tax treatment of residual interests, the effective after-tax return of the Residual Certificates may be significantly lower than would be the case if the Residual Certificates were taxed as debt instruments, or may be negative.

See “Certain Federal Income Tax Consequences” in the prospectus.

Taxation of the Class A-1 and Class A-IO Certificates

General

The portion of the Class A-1 and Class A-IO Certificates representing the related REMIC regular interest will be treated as discussed above under “— Regular Certificates.” In addition, holders of the Class A-1 Certificates will be treated for federal income tax purposes as having entered into a notional principal contract pursuant to their right to receive payments from the Reserve Fund on the date they purchase their respective Certificates. Holders of the Class A-IO Certificates will be treated as (i) having entered into a notional principal contract (i.e., the Yield Maintenance Agreement) with the Counterparty and (ii) having written the notional principal contract described in the preceding sentence benefiting the Class A-1 Certificates. The right of the holders of the Class A-1 Certificates to receive such payments and the rights and obligations of the holders of the Class A-IO Certificates to receive or make such payments (each, a “Basis Risk Arrangement”) are beneficially owned by holders of the Class A-1 and Class A-IO Certificates in the portion of the Trust Estate, exclusive of the REMICs, which is treated as a grantor trust for federal income tax purposes. The Internal Revenue Service (the “IRS”) has issued final regulations under Section 446 of the Code relating to notional principal contracts (the “Swap Regulations”).

In general, the holders of the Class A-1 Certificates must allocate the price they pay for the Class A-1 Certificates between their REMIC regular interest and the related Basis Risk Arrangement based on their relative fair market values. To the extent the right to receive payments is determined to have a value on the Closing Date that is greater than zero, a portion of such purchase price will be allocable to such right, and such portion will be treated as a cap premium (the “Cap Premium”) paid by the holders of the Class A-1 Certificates. Holders of the Class A-1 Certificates will be required to amortize the Cap Premium under a level payment method as if the Cap Premium represented the present value of a series of equal payments made over the life of the Basis Risk Arrangement (adjusted to take into account decreases in notional principal amount), discounted at a rate equal to the rate used to determine the amount of the Cap Premium (or some other reasonable rate). Prospective purchasers of the Class A-1 Certificates should consult their own tax advisors regarding the appropriate method of amortizing any Cap Premium. The Swap Regulations treat a nonperiodic payment made under a contract as a loan for federal income tax purposes if the payment is “significant.” It is not known whether any Cap Premium would be treated in part as a loan under the Swap Regulations.

Likewise, the holders of the Class A-IO Certificates must allocate the price they pay for the Class A-IO Certificates among their REMIC regular interest, the Basis Risk Arrangement entered into with the Counterparty and the Basis Risk Arrangement entered into with the holders of the Class A-1 Certificates. Any Cap Premium deemed paid by the holders of the Class A-1 Certificates, as described in the preceding paragraph, will be deemed paid to the holders of the Class A-IO Certificates, and holders of the Class A-IO Certificates must include the Cap Premium in income in a manner analogous to the amortization method described above. Holders of the Class A-IO Certificates must account in a similar manner for the Cap Premium they are deemed to pay to the Counterparty under the related Basis Risk Arrangement.

Under the Swap Regulations (i) all taxpayers must recognize periodic payments with respect to a notional principal contract under the accrual method of accounting, and (ii) any periodic payments received (or paid) under the Basis Risk Arrangement must be netted against payments, if any, deemed made (or received) as a result of the Cap Premiums over the recipient’s taxable year, rather than accounted for on a gross basis. Net income or deduction

 

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with respect to net payments under a notional principal contract for a taxable year should constitute ordinary income or ordinary deduction. The IRS could contend the amount is capital gain or loss, but such treatment is unlikely, at least in the absence of further regulations. Any regulations requiring capital gain or loss treatment presumably would apply only prospectively. Individuals may be limited in their ability to use any such deduction and should consult their tax advisors prior to investing in the Class A-1 or Class A-IO Certificates.

Any amount of proceeds from the sale, redemption or retirement of a Class A-1 or Class A-IO Certificate that is considered to be allocated to rights under the related Basis Risk Arrangement would be considered a “termination payment” under the Swap Regulations. It is anticipated that the Master Servicer will account for any termination payments for reporting purposes in accordance with the Swap Regulations as described below.

Termination Payments

Any amount of sales proceeds that is considered to be allocated to the selling beneficial owner’s rights under the related Basis Risk Arrangement in connection with the sale or exchange of a Class A-1 or Class A-IO Certificate would be considered a “termination payment” under the Swap Regulations allocable to the Class A-1 or Class A-IO Certificate, as applicable. A holder will have gain or loss from such a termination of the applicable Basis Risk Arrangement equal to (i) any (A) termination payment or (B) unamortized portion of any Cap Premium it received (or is deemed to have received) upon entering into or acquiring its interest in the Basis Risk Arrangement minus (ii) any (X) termination payment or (Y) unamortized portion of any Cap Premium it paid (or is deemed to have paid) upon entering into or acquiring its interest in the Basis Risk Arrangement. Gain or loss realized upon the termination of the applicable Basis Risk Arrangement will generally be treated as capital gain or loss. Moreover, in the case of a bank or thrift institution, Code Section 582(c) would likely not apply to treat such gain or loss as ordinary.

ERISA CONSIDERATIONS

The Residual Certificates may not be purchased by or transferred to a Plan or a person acting on behalf of or investing the assets of a Plan. See “Description of the Certificates—Restrictions on Transfer of the Residual Certificates” herein.

Accordingly, the following discussion applies to the Offered Certificates (other than the Residual Certificates) and does not purport to discuss the considerations under ERISA, Code Section 4975 or Similar Law with respect to the purchase, acquisition or resale of a Residual Certificate.

As described in the prospectus under “ERISA Considerations,” ERISA and the Code impose certain duties and restrictions on ERISA Plans and certain persons who perform services for ERISA Plans. Comparable duties and restrictions may exist under Similar Law on governmental plans and certain persons who perform services for governmental plans. For example, unless exempted, investment by a Plan in the Offered Certificates may constitute a prohibited transaction under ERISA, the Code or Similar Law. There are certain exemptions issued by the United States Department of Labor (the “DOL”) that may be applicable to an investment by an ERISA Plan in the Offered Certificates, including the individual administrative exemptions described below. For a further discussion of the individual administrative exemption, including the necessary conditions to its applicability, and other important factors to be considered by an ERISA Plan contemplating investing in the Offered Certificates, see “ERISA Considerations” in the prospectus.

The DOL issued an Underwriter Exemption to Lehman Brothers Inc. (“Lehman Brothers”). This Underwriter Exemption might apply to the acquisition, holding and resale of the Underwritten Certificates by an ERISA Plan, provided that specified conditions are met.

Among the conditions which would have to be satisfied for the Underwriter Exemption to apply to the acquisition by an ERISA Plan of the Underwritten Certificates is the condition that the ERISA Plan investing in the Underwritten Certificates be an “accredited investor” as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”).

 

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If an Offered Certificate has not been underwritten by the Underwriter, it will not be eligible to be purchased by ERISA Plans under the Underwriter Exemption. However, in the event that such Offered Certificate is subsequently underwritten or placed by the Underwriter, or by another underwriter that has obtained an individual exemption similar to the Underwriter Exemption, such Offered Certificate generally may be acquired under the same conditions as are described above and in the prospectus under “ERISA Considerations.”

Before purchasing an Offered Certificate, a fiduciary of an ERISA Plan should make its own determination as to the availability of the exemptive relief provided in the Underwriter Exemption or the availability of any other prohibited transaction exemptions, and whether the conditions of any such exemption will be applicable to the Offered Certificates, and a fiduciary of a governmental plan should make its own determination as to the need for and availability of any exemptive relief under Similar Law. Any fiduciary of an ERISA Plan considering whether to purchase an Offered Certificate should also carefully review with its own legal advisors the applicability of the fiduciary duty and prohibited transaction provisions of ERISA and the Code to such investment. See “ERISA Considerations” in the prospectus.

LEGAL INVESTMENT

The Class A and Class B-1 Certificates will constitute “mortgage related securities” for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended (“SMMEA”) so 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 and Class B-3 Certificates will not constitute “mortgage related securities” under SMMEA.

Prospective purchasers, particularly those whose investment activities are subject to legal investment laws and regulations, regulatory capital requirements or review by regulatory authorities, may be subject to restrictions on investment in the Offered Certificates and should consult their own legal, tax, financial and accounting advisors in determining the suitability of and consequences to them of the purchase, ownership and disposition of the Offered Certificates. See “Legal Investment” in the prospectus.

SECONDARY MARKET

There will not be any market for the Offered Certificates prior to the issuance thereof. The Underwriter intends to act as a market maker in the Underwritten Certificates, subject to applicable provisions of federal and state securities laws and other regulatory requirements, but is under no obligation to do so. There can be no assurance that a secondary market in the Offered Certificates will develop or, if such a market does develop, that it will provide holders of Offered Certificates with liquidity of investment at any particular time or for the life of the Offered Certificates.

PLAN OF DISTRIBUTION

Subject to the terms and conditions of the underwriting agreement dated February 15, 2006 and the terms agreement dated January 23, 2008 (together, the “Underwriting Agreement”), in each case among Wells Fargo Bank, the Depositor and Lehman Brothers, as underwriter, (the “Underwriter”), the Class A Certificates (the “Underwritten Certificates”) are being purchased from the Depositor by the Underwriter upon issuance thereof. The Underwriter, which is not an affiliate of the Depositor, is committed to purchase all of the Underwritten Certificates. The Underwriter has advised the Depositor that it proposes to offer the Underwritten Certificates, from time to time, for sale in negotiated transactions or otherwise at prices determined at the time of sale. Proceeds to the Depositor from the sale of the Underwritten Certificates are expected to be approximately $214,892,023, plus accrued interest thereon from the Cut-Off Date to (but not including) the Closing Date before deducting expenses payable by the Depositor estimated to be $205,000. The underwriting compensation of the Underwriter will consist of the difference between the amount paid by the Underwriter to the Depositor for the Underwritten Certificates and the aggregate amount received by the Underwriter upon sale by it of the Underwritten Certificates to investors. The Offered Certificates (other than the Underwritten Certificates) will be directly placed by the Depositor with the Sponsor as partial consideration for the purchase of the Mortgage Loans by the Depositor from the Sponsor. Any dealers that participate with the Underwriter in the distribution of the Underwritten Certificates will be underwriters,

 

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and any discounts or commissions received by them and any profit on the resale of the Underwritten Certificates by them may be deemed to be underwriting discounts or commissions under the Securities Act.

The Underwriting Agreement provides that the Depositor or the Sponsor will indemnify the Underwriter against certain civil liabilities under the Securities Act or contribute to payments which the Underwriter may be required to make in respect thereof.

LEGAL MATTERS

The legality of the Offered Certificates and certain tax matters with respect thereto will be passed upon for the Depositor by Cadwalader, Wickersham & Taft LLP, New York, New York. Certain legal matters will be passed upon for the Underwriter by Stroock & Stroock & Lavan LLP, New York, New York.

USE OF PROCEEDS

The net proceeds to be received from the sale of the Underwritten Certificates will be applied by the Depositor, along with the Offered Certificates (other than the Underwritten Certificates), to the purchase from the Sponsor of the Mortgage Loans underlying the Certificates.

RATINGS

It is a condition to the issuance of the Offered Certificates that each such class will have received at least the rating set forth in the table beginning on page S-6 from Fitch Ratings (“Fitch”) and Moody’s Investors Service Inc. (“Moody’s,” and together with Fitch, the “Rating Agencies”). A security rating is not a recommendation to buy, sell or hold securities or to undertake any investment strategy with respect to any security and may be subject to revision or withdrawal at any time by the assigning rating agency. Each security rating should be evaluated independently of any other security rating. The ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor (including without limitation, any accounting, tax and/or regulatory treatment).

The ratings of Fitch on mortgage pass-through certificates address the likelihood of the receipt by certificateholders of all distributions to which such certificateholders are entitled. Fitch’s rating opinions address the structural and legal aspects associated with the certificates, including the nature of the underlying mortgage loans. Fitch’s ratings on mortgage pass-through certificates do not represent any assessment of the likelihood or rate of principal prepayments and consequently any adverse effect the timing of such prepayments could have on an investor’s anticipated yield.

The ratings of Moody’s on mortgage pass-through certificates address the likelihood of the receipt by certificateholders of all distributions of principal and interest to which such certificateholders are entitled. Moody’s rating opinions address the structural, legal and issuer aspects associated with the certificates, including the nature of the underlying mortgage loans and the credit quality of the credit support provider, if any. Moody’s ratings on mortgage pass-through certificates do not represent any assessment of the likelihood that principal prepayments may differ from those originally anticipated and consequently any adverse effect the timing of such prepayments could have on an investor’s anticipated yield.

The ratings of Fitch and Moody’s also do not address the possibility that, as a result of principal prepayments, a holder of an Interest Only Certificate may not fully recover its initial investment. In addition, the ratings of Fitch and Moody’s do not address the payment of any Yield Maintenance Agreement Payments.

The Depositor has not requested a rating on the Offered Certificates of any Class by any rating agency other than Fitch and Moody’s, although data with respect to the Mortgage Loans may have been provided to other rating agencies solely for their informational purposes. There can be no assurance that any rating assigned by any other rating agency to the Offered Certificates will be as high as those assigned by Fitch and Moody’s. In addition, the Rating Agencies will monitor the initial ratings of the Offered Certificates for so long as they remain outstanding.

 

S-62


Table of Contents

INDEX OF PROSPECTUS SUPPLEMENT DEFINITIONS

 

Adjusted Net WAC

   S-32

Adjusted Pool Amount

   S-33

Adjustment Date

   S-43

Aggregate Principal Balance

   S-33

Assumed Mortgage Loans

   S-53

Basis Risk Arrangement

   S-59

BPMI Policy

   S-46

Cap Premium

   S-59

CBE

   S-54

Certificate Account

   S-57

Certificates

   S-30

Class A Certificates

   S-30

Class A Optimal Principal Amount

   S-36

Class A Percentage

   S-37

Class A Prepayment Percentage

   S-37

Class A Principal Balance

   S-33

Class A Principal Distribution Amount

   S-36

Class A-LR Interest

   S-57

Class A-R Interest

   S-57

Class B Certificates

   S-30

Class B Optimal Principal Amount

   S-36

Class B Percentage

   S-38

Class B Prepayment Percentage

   S-38

Class B Principal Balance

   S-33

Class B Principal Distribution Amount

   S-36

Class Percentage

   S-37

Class Prepayment Percentage

   S-37

CLTV

   S-46

Code

   S-40

Combined Loan-to-Value Ratio

   S-46

Counterparty

   S-34

CPR

   S-52

Current Fractional Interest

   S-39

Custodial Agreement

   S-29

Custodian

   S-29

Delinquency and Loss Tests

   S-37

Depositor

   S-26

DOL

   S-60

ERISA

   S-40

ERISA Plan

   S-40

FICO Scores

   S-46

Fitch

   S-62

FSMA

   S-5

Gross Margin

   S-43

Guarantor

   S-34

HSBC Bank

   S-27

Index

   S-44

Interest Accrual Amount

   S-32

Interest Accrual Period

   S-32

Interest Only Mortgage Loans

   S-43

Interest Shortfall Amount

   S-34

IRS

   S-59

Lehman Brothers

   S-60

LIBOR Based Interest Accrual Period

   S-32

Lower-Tier REMIC

   S-57

Lower-Tier REMIC Regular Interest

   S-57

LPMI Policy

   S-46

Master Servicer

   S-27

Master Servicing Fee

   S-55

Master Servicing Fee Rate

   S-55

Moody’s

   S-62

Mortgage Loans

   S-43

Mortgaged Properties

   S-43

Mortgages

   S-43

Net Mortgage Interest Rate

   S-33

Net WAC

   S-32

Non-Supported Interest Shortfalls

   S-34

Notional Amount

   S-32

Offered Certificates

   S-30

One-Year CMT

   S-43

One-Year CMT Index

   S-43

One-Year LIBOR

   S-44

One-Year LIBOR Index

   S-44

Original Class B Principal Balance

   S-37

Original FICO Scores

   S-47

Original Fractional Interest

   S-39

Original Total Debt-to-Income Ratio

   S-47

Pass-Through Rate

   S-32

Paying Agent

   S-28

Payment Account

   S-28

Percentage Interest

   S-32

Periodic Advance

   S-40

Periodic Cap

   S-43

Plan

   S-40

Pool Balance

   S-37

Pool Distribution Amount

   S-30

Pool Distribution Amount Allocation

   S-31

Pooling and Servicing Agreement

   S-54

Principal Balance

   S-33

PUDs

   S-46

Rate Ceiling

   S-43

Rating Agencies

   S-62

Record Date

   S-30

Regular Certificates

   S-57

Regular Interest Accrual Period

   S-32

Regulation AB

   S-35

Relevant Implementation Date

   S-4

Relevant Member State

   S-4

Relevant Persons

   S-5

Relief Act Shortfalls

   S-34

Reserve Fund

   S-35

Residual Certificates

   S-57

Securities Act

   S-60

Servicer

   S-28

 

S-63


Table of Contents

Servicer Modification

   S-38

Servicing Fee

   S-55

Servicing Fee Rate

   S-55

Similar Law

   S-40

SMMEA

   S-61

Structuring Assumptions

   S-53

Subordinated Certificates

   S-30

Subordinated Percentage

   S-38

Subordinated Prepayment Percentage

   S-38

Subordination Depletion Date

   S-41

Swap Regulations

   S-59

Trust

   S-26

Trustee

   S-27

Underlying Servicing Agreement

   S-28

Underwriter

   S-61

Underwriting Agreement

   S-61

Underwriting Standards

   S-47

Underwritten Certificates

   S-61

Updated FICO Scores

   S-47

Upper-Tier REMIC

   S-57

Weighted Average Life

   S-52

Wells Fargo Bank

   S-25

Wells Fargo Underlying Servicing Agreement

   S-28

Yield Maintenance Agreement

   S-34

Yield Maintenance Agreement Payment

   S-35

 

S-64


Table of Contents

APPENDIX A

 

SELECTED MORTGAGE LOAN DATA

(as of the Cut-Off Date)

 

     All Mortgage
Loans

Number of Mortgage Loans

   390

Aggregate Unpaid Principal Balance

   $219,865,953

Aggregate Original Unpaid Principal Balance

   $220,692,139

Range of Unpaid Principal Balances

   $42,000 to $2,800,000

Average Unpaid Principal Balance

   $563,759

Range of Current Mortgage Interest Rates

   5.250% to 8.000%

Weighted Average Current Mortgage Interest Rate

   6.664%

Weighted Average Current Net Mortgage Interest Rate

   6.404%

Range of Remaining Terms to Stated Maturity

   338 to 359 Months

Weighted Average Remaining Term to Stated Maturity

   357 Months

Range of Loan Ages

   1 to 22 Months

Weighted Average Loan Age

   3 Months

Range of Original Loan-to-Value Ratios

   24.39% to 95.00%

Weighted Average Original Loan-to-Value Ratio

   72.51%

Range of Original Combined Loan-to-Value Ratios

   24.39% to 100.00%

Weighted Average Original Combined Loan-to-Value Ratio

   78.22%

Number of Mortgage Loans with Original Loan-to-Value Ratios greater than 80% not covered by Primary Mortgage Insurance

   0

Mortgage Loans with Original Loan-to-Value Ratios greater than 80% not covered by Primary Mortgage Insurance as a Percentage of Aggregate Unpaid Principal Balance

   0.00%

Number of Mortgage Loans covered by an LPMI Policy

   7

Mortgage Loans covered by an LPMI Policy as a Percentage of Aggregate Unpaid Principal Balance

   1.29%

Number of Mortgage Loans covered by a BPMI Policy

   22

Mortgage Loans covered by a BPMI Policy as a Percentage of Aggregate Unpaid Principal Balance

   4.31%

Number of Interest Only Mortgage Loans(1)

   309

Interest Only Mortgage Loans(1) as a Percentage of Aggregate Unpaid Principal Balance

   75.17%

Range of Remaining Interest Only Terms for Interest Only Mortgage Loans(1)

   98 to 119 Months

Weighted Average Remaining Interest Only Term for Interest Only Mortgage Loans(1)

   117 Months

Range of Original Total Debt-to-Income Ratios(2)

   4.80% to 66.90%

Weighted Average Original Total Debt-to-Income Ratio(2)

   36.65%

Weighted Average Original Loan-to-Value Ratio of Mortgage Loans with Original Principal Balances greater than $600,000

   69.55%

Maximum Original Loan-to-Value Ratio of Mortgage Loans with Original Principal Balances greater than $600,000

   94.78%

(1)   For a description of Interest Only Mortgage Loans, see “The Trust Estates—Mortgage Loans” in the prospectus.
(2)   Does not include the Mortgage Loans for which Original Total Debt-to-Income Ratios are not available.

 

A-1


Table of Contents

APPENDIX A (Continued)

 

SELECTED MORTGAGE LOAN DATA (Continued)

(as of the Cut-Off Date)

 

     All Mortgage
Loans

Geographic Concentration of Mortgaged Properties Securing Mortgage Loans in Excess of 5% of the Aggregate Unpaid Principal Balance

    

California

   31.62%

New York

   13.24%

Maryland

   7.64%

Florida

   6.75%

Virginia

   6.43%

New Jersey

   5.14%

Maximum Five-Digit Zip Code Concentration

   2.36%

Earliest Origination Month

   March 2006

Latest Origination Month

   December 2007

Latest Stated Maturity Date

   January 1, 2038

Number of Buy-Down Loans(3)

   22

Buy-Down Loans(3) as a Percentage of Aggregate Unpaid Principal Balance

   4.83%

Range of Gross Margins

   2.250% to 2.750%

Weighted Average Gross Margin

   2.639%

Range of Rate Ceilings

   10.250% to 13.000%

Weighted Average Rate Ceiling

   11.664%

Range of Months to First Adjustment Date

   98 to 119 Months

Weighted Average Months to First Adjustment Date

   117 Months

Number of Relocation Mortgage Loans(4)

   7

Relocation Mortgage Loans(4) as a Percentage of Aggregate Unpaid Principal Balance

   2.56%

Number of Subsidy Loans(5)

   0

Subsidy Loans(5) as a Percentage of Aggregate Unpaid Principal Balance

   0.00%

Number of Self-Employed Borrower Loans

   83

Self-Employed Borrower Loans as a Percentage of Aggregate Unpaid Principal Balance

   26.34%

Number of Home Asset ManagementSM Account Loans(6)

   28

Home Asset ManagementSM Account Loans (6) as a Percentage of Aggregate Unpaid Principal Balance

   7.58%

Number of LOC Pledged Asset Mortgage Loans(7)

   0

LOC Pledged Asset Mortgage Loans(7) as a Percentage of Aggregate Unpaid Principal Balance

   0.00%

Range of Original FICO Scores(8)

   625 to 811

Weighted Average Original FICO Score(8)

   749

Range of Recent FICO Scores(8)

   577 to 811

Weighted Average Recent FICO Score(8)

   748

Number of Balloon Loans(9)

   0

Balloon Loans(9) as a Percentage of Aggregate Unpaid Principal Balance

   0.00%

Number of Leasehold Loans(10)

   2

Leasehold Loans(10) as a Percentage of Aggregate Unpaid Principal Balance

   0.27%

(3)   For a description of Buy-Down Loans, see “The Trust Estates—Mortgage Loans ” in the prospectus.
(4)   A Relocation Mortgage Loan is a mortgage loan originated in connection with the purchase of a residence of a relocated employee of various corporate employers that participated in the relocation program of Wells Fargo Bank and of various non-participant employers.
(5)   For a description of Subsidy Loans, see “The Trust Estates—Mortgage Loans” in the prospectus.

(6)

 

For a description of Home Asset ManagementSM Account Loans, see “The Sponsor's Mortgage Loan Programs—Mortgage Loan Underwriting” in the prospectus.

(7)   For a description of LOC Pledged Asset Mortgage Loans, see “The Trust Estates—Mortgage Loans” in the prospectus.
(8)   Does not include the Mortgage Loans for which FICO Scores are not available.
(9)   For a description of Balloon Loans, see “The Trust Estates—Mortgage Loans” in the prospectus.
(10)   For a discussion of leasehold mortgages, see “Certain Legal Aspects of the Mortgage Loans—Leaseholds” in the prospectus.

 

A-2


Table of Contents

APPENDIX A (Continued)

 

MORTGAGE LOAN DATA

 

CURRENT MORTGAGE INTEREST RATES

 

Range of Current

Mortgage

Interest Rates


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

5.250% to 5.499%

  3   $ 1,743,968.86   0.79 %

5.500% to 5.749%

  3     1,370,630.98   0.62  

5.750% to 5.999%

  8     3,856,638.51   1.75  

6.000% to 6.249%

  18     12,418,969.33   5.65  

6.250% to 6.499%

  59     34,209,457.29   15.56  

6.500% to 6.749%

  132     69,354,556.86   31.54  

6.750% to 6.999%

  89     51,917,625.16   23.61  

7.000% to 7.249%

  41     22,421,481.48   10.20  

7.250% to 7.499%

  26     16,406,807.78   7.46  

7.500% to 7.749%

  8     4,607,291.01   2.10  

7.750% to 7.999%

  2     1,059,539.69   0.48  

8.000% to 8.000%

  1     498,985.80   0.23  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

DOCUMENTATION LEVELS

 

Documentation Level


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance

 

Full Documentation

  86   $ 61,619,323.28   28.03 %

Verified Income, Stated Assets

  3     998,188.13   0.45  

Stated Income, Verified Assets

               

Determined by Risk Model

  137     73,344,264.04   33.36  

Chosen by Borrower

  46     33,362,103.55   15.17  

Stated Income, Stated Assets

               

Determined by Risk Model

  118     50,542,073.75   22.99  

Chosen by Borrower

  0     0   0  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

REMAINING TERMS TO STATED

MATURITY

 

Remaining Stated

Term (Months)


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid

Principal
Balance

 

338

  1   $ 313,000.00   0.14 %

347

  1     268,640.90   0.12  

349

  1     307,700.00   0.14  

350

  2     1,217,163.27   0.55  

351

  1     239,863.00   0.11  

352

  4     1,355,383.66   0.62  

353

  66     18,156,687.93   8.26  

354

  72     22,215,118.38   10.10  

355

  6     4,213,789.02   1.92  

356

  11     6,840,940.35   3.11  

357

  12     8,444,034.14   3.84  

358

  116     84,951,120.76   38.64  

359

  97     71,342,511.34   32.45  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

YEARS OF ORIGINATION

 

Year of Origination


  Number

  Aggregate
Unpaid

Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal

Balance

 

2006

  2   $ 581,640.90   0.26 %

2007

  388     219,284,311.85   99.74  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 


 

A-3


Table of Contents

APPENDIX A (Continued)

 

MORTGAGE LOAN DATA

 

PROPERTY TYPES

 

Property Type


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal

Balance

 

Single-family dwellings

  286   $ 167,278,535.63   76.08 %

Two-to four-family units

  19     8,462,870.54   3.85  

Condominiums

               

High-rise (greater than four stories)

  34     25,170,909.82   11.45  

Low-rise (four stories or less)

  51     18,953,636.76   8.62  

Cooperative Units

  0     0.00   0.00  

Manufactured Homes

  0     0.00   0.00  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

APPRAISAL TYPES

 

Appraisal Type


  Number

  Aggregate
Unpaid

Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

Full Appraisal

  390   $ 219,865,952.75   100.00 %
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

ORIGINATION CHANNELS

 

Origination Channel


  Number

  Aggregate
Unpaid

Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

Correspondent

  13   $ 6,796,052.29   3.09 %

Retail

  311     165,502,227.24   75.27  

Wholesale

  66     47,567,673.22   21.63  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

GEOGRAPHIC AREAS

 

Geographic Area


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total

Aggregate
Unpaid
Principal

Balance

 

Alabama

  2   $ 553,640.90   0.25 %

Arizona

  10     3,536,682.60   1.61  

California

  114     69,513,438.63   31.62  

Colorado

  11     7,244,761.61   3.30  

Connecticut

  2     3,015,539.69   1.37  

Delaware

  1     599,837.50   0.27  

District of Columbia

  9     5,893,945.69   2.68  

Florida

  37     14,844,522.61   6.75  

Georgia

  15     5,765,133.84   2.62  

Hawaii

  3     2,131,259.83   0.97  

Idaho

  1     337,259.28   0.15  

Illinois

  10     5,539,658.11   2.52  

Iowa

  2     559,250.00   0.25  

Maryland

  31     16,790,688.37   7.64  

Massachusetts

  4     3,089,704.88   1.41  

Minnesota

  2     952,448.97   0.43  

Nevada

  3     1,015,650.20   0.46  

New Hampshire

  1     708,213.74   0.32  

New Jersey

  18     11,291,391.42   5.14  

New Mexico

  1     200,000.00   0.09  

New York

  41     29,113,210.91   13.24  

North Carolina

  8     3,915,199.61   1.78  

Ohio

  1     628,800.70   0.29  

Oregon

  5     2,272,714.78   1.03  

Pennsylvania

  6     2,660,362.31   1.21  

Rhode Island

  1     305,000.00   0.14  

South Carolina

  4     2,293,840.00   1.04  

South Dakota

  1     535,523.54   0.24  

Tennessee

  2     754,105.53   0.34  

Texas

  4     3,083,830.91   1.40  

Utah

  2     2,499,000.00   1.14  

Virginia

  27     14,143,790.33   6.43  

Washington

  11     4,077,546.26   1.85  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 


 

A-4


Table of Contents

APPENDIX A (Continued)

 

MORTGAGE LOAN DATA

 

 

ORIGINAL LOAN-TO-VALUE RATIOS

 

Range of

Original

Loan-to-Value

Ratios


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

50.00% or less

  22   $ 13,383,744.08   6.09 %

50.01% to 55.00%

  11     10,019,658.60   4.56  

55.01% to 60.00%

  20     13,914,080.78   6.33  

60.01% to 65.00%

  14     12,575,897.94   5.72  

65.01% to 70.00%

  29     24,009,679.39   10.92  

70.01% to 75.00%

  38     22,760,030.32   10.35  

75.01% to 80.00%

  227     110,877,847.00   50.43  

80.01% to 85.00%

  4     1,324,842.66   0.60  

85.01% to 90.00%

  16     7,018,859.92   3.19  

90.01% to 95.00%

  9     3,981,312.06   1.81  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

ORIGINAL COMBINED

LOAN-TO-VALUE RATIOS

 

Range of

Original Combined

Loan-to-Value

Ratios


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

50.00% or less

  20   $ 12,133,806.58   5.52 %

50.01% to 55.00%

  10     7,169,658.60   3.26  

55.01% to 60.00%

  13     7,796,219.37   3.55  

60.01% to 65.00%

  10     9,171,580.87   4.17  

65.01% to 70.00%

  25     22,805,537.28   10.37  

70.01% to 75.00%

  20     13,198,646.04   6.00  

75.01% to 80.00%

  107     70,116,613.68   31.89  

80.01% to 85.00%

  7     2,293,142.10   1.04  

85.01% to 90.00%

  83     43,457,682.33   19.77  

90.01% to 95.00%

  36     15,835,804.75   7.20  

95.01% to 100.00%

  59     15,887,261.15   7.23  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

HISTORICAL LOAN DELINQUENCY DATA

 

Delinquency


  Past
0-12
Months

  Past
13-24
Months


  Past
25-36
Months


Ever 30-59 Days

  $ 6,472,912.05   $ 0.00   $ 0.00

Ever 60-89 Days

    0.00     0.00     0.00

Ever 90-119 Days

    0.00     0.00     0.00

Ever 120-149 Days

    0.00     0.00     0.00

Ever 150-179 Days

    0.00     0.00     0.00

Ever 180-359 Days

    0.00     0.00     0.00

Ever 2 Years

    0.00     0.00     0.00

Ever 3 Years

    0.00     0.00     0.00

Ever 3+ Years

    0.00     0.00     0.00

Ever Foreclosure

    0.00     0.00     0.00

Ever Bankruptcy

    0.00     0.00     0.00
   

 

 

Total

  $ 6,472,912.05   $ 0.00   $ 0.00
   

 

 

 

ORIGINAL PRINCIPAL BALANCES

 

Range of Original

Principal Balances


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

Less than or equal to $50,000

  1   $ 42,000.00   0.02 %

$50,001 to $100,000

  2     180,792.00   0.08  

$100,001 to $150,000

  9     1,170,579.60   0.53  

$150,001 to $200,000

  21     3,877,746.18   1.76  

$200,001 to $250,000

  25     5,513,863.83   2.51  

$250,001 to $300,000

  32     8,926,980.90   4.06  

$300,001 to $350,000

  29     9,414,952.06   4.28  

$350,001 to $400,000

  20     7,485,829.81   3.40  

$400,001 to $450,000

  15     6,293,489.75   2.86  

$450,001 to $500,000

  28     13,153,083.94   5.98  

$500,001 to $550,000

  29     15,259,419.80   6.94  

$550,001 to $600,000

  33     19,311,269.75   8.78  

$600,001 to $650,000

  39     24,532,253.06   11.16  

$650,001 to $700,000

  13     8,807,115.89   4.01  

$700,001 to $750,000

  16     11,726,352.50   5.33  

$750,001 to $800,000

  15     11,607,255.57   5.28  

$800,001 to $850,000

  5     4,173,197.59   1.90  

$850,001 to $900,000

  6     5,276,906.46   2.40  

$900,001 to $950,000

  4     3,749,837.90   1.71  

$950,001 to $1,000,000

  31     30,840,504.67   14.03  

$1,000,001 to $1,500,000

  9     11,652,332.39   5.30  

$1,500,001 to $2,000,000

  6     11,570,189.10   5.26  

$2,000,001 to $2,500,000

  1     2,500,000.00   1.14  

$2,500,001 to $3,000,000

  1     2,800,000.00   1.27  

Over $3,000,000

  0     0.00   0.00  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

ORIGINATORS

 

Originator


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

Wells Fargo Bank or Affiliate

  377   $ 213,069,900.46   96.91 %

Other Originators

  13     6,796,052.29   3.09  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

PURPOSES

 

Purpose


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

Purchase

  271   $ 147,750,727.12   67.20 %

Equity Take Out Refinance

  46     25,044,598.31   11.39  

Rate/Term Refinance

  73     47,070,627.32   21.41  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 


 

A-5


Table of Contents

APPENDIX A (Continued)

 

MORTGAGE LOAN DATA

 

OCCUPANCY TYPES

 

Occupancy Type


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

Investment Property

  14   $ 4,725,719.38   2.15 %

Primary Residence

  347     196,206,747.22   89.24  

Second Home

  29     18,933,486.15   8.61  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

MONTHS TO FIRST ADJUSTMENT DATE

 

Months to First

Adjustment Date


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

98

  1   $ 313,000.00   0.14 %

107

  1     268,640.90   0.12  

109

  1     307,700.00   0.14  

110

  2     1,217,163.27   0.55  

111

  1     239,863.00   0.11  

112

  4     1,355,383.66   0.62  

113

  66     18,156,687.93   8.26  

114

  72     22,215,118.38   10.10  

115

  6     4,213,789.02   1.92  

116

  11     6,840,940.35   3.11  

117

  12     8,444,034.14   3.84  

118

  116     84,951,120.76   38.64  

119

  97     71,342,511.34   32.45  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

RATE CEILINGS

 

Range of

Rate Ceilings


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

10.250% to 10.499%

  3   $ 1,743,968.86   0.79 %

10.500% to 10.749%

  3     1,370,630.98   0.62  

10.750% to 10.999%

  8     3,856,638.51   1.75  

11.000% to 11.249%

  18     12,418,969.33   5.65  

11.250% to 11.499%

  59     34,209,457.29   15.56  

11.500% to 11.749%

  132     69,354,556.86   31.54  

11.750% to 11.999%

  89     51,917,625.16   23.61  

12.000% to 12.249%

  41     22,421,481.48   10.20  

12.250% to 12.499%

  26     16,406,807.78   7.46  

12.500% to 12.749%

  8     4,607,291.01   2.10  

12.750% to 12.999%

  2     1,059,539.69   0.48  

13.000% to 13.000%

  1     498,985.80   0.23  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

GROSS MARGINS

 

Range of

Gross Margins


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

2.250% to 2.499%

  76   $ 48,962,806.23   22.27 %

2.500% to 2.749%

  0     0.00   0.00  

2.750% to 2.750%

  314     170,903,146.52   77.73  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

REMAINING INTEREST ONLY TERMS

 

Remaining Interest
Only Term

(Months)


   Number

   Aggregate
Unpaid
Principal
Balance

   Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

0

   81    $ 54,596,293.66    24.83 %

98

   1      313,000.00    0.14  

107

   1      268,640.90    0.12  

109

   1      307,700.00    0.14  

110

   2      1,217,163.27    0.55  

111

   1      239,863.00    0.11  

112

   4      1,355,383.66    0.62  

113

   66      18,156,687.93    8.26  

114

   70      21,074,692.39    9.59  

115

   4      3,580,130.28    1.63  

116

   7      5,609,213.00    2.55  

117

   9      7,573,894.51    3.44  

118

   80      59,738,351.65    27.17  

119

   63      45,834,938.50    20.85  
    
  

  

Total

   390    $ 219,865,952.75    100.00 %
    
  

  


 

A-6


Table of Contents

APPENDIX A (Continued)

 

MORTGAGE LOAN DATA

 

ORIGINAL TOTAL DEBT-TO-INCOME RATIOS

 

Range of

Original Total

Debt-to-Income

Ratios


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


 

0.01% to 20.00%

  20   $ 13,437,558.14   6.11 %

20.01% to 25.00%

  17     11,798,664.81   5.37  

25.01% to 30.00%

  41     24,943,913.45   11.35  

30.01% to 35.00%

  65     36,360,559.53   16.54  

35.01% to 40.00%

  88     50,150,319.14   22.81  

40.01% to 45.00%

  80     43,645,475.85   19.85  

45.01% to 50.00%

  57     27,405,210.24   12.46  

50.01% to 55.00%

  15     8,650,908.28   3.93  

55.01% to 60.00%

  6     3,137,049.51   1.43  

60.01% to 65.00%

  0     0.00   0.00  

65.01% to 70.00%

  1     336,293.80   0.15  

Over 70.00%

  0     0.00   0.00  

Not Available

  0     0.00   0.00  
   
 

 

Total

  390   $ 219,865,952.75   100.00 %
   
 

 

 

ORIGINAL FICO SCORES

 

Range of

Original

FICO Scores


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


    Weighted
Average
Original
Loan-to-
Value
Ratio


 

300 to 350

  0   $ 0.00   0.00 %   0.00 %

351 to 400

  0     0.00   0.00     0.00  

401 to 450

  0     0.00   0.00     0.00  

451 to 500

  0     0.00   0.00     0.00  

501 to 550

  0     0.00   0.00     0.00  

551 to 600

  0     0.00   0.00     0.00  

601 to 650

  4     2,076,586.97   0.94     80.86  

651 to 700

  61     29,480,154.94   13.41     75.76  

701 to 750

  119     65,961,477.86   30.00     72.93  

751 to 800

  184     109,506,463.50   49.81     71.62  

801 to 850

  21     11,005,351.53   5.01     68.92  

Not Available

  1     1,835,917.95   0.84     70.00  
   
 

 

 

Total/Weighted Average

  390   $ 219,865,952.75   100.00 %   72.51 %
   
 

 

 

 

RECENT FICO SCORES

 

Range of

Recent

FICO Scores


  Number

  Aggregate
Unpaid
Principal
Balance

  Percentage
of Total
Aggregate
Unpaid
Principal
Balance


    Weighted
Average
Original
Loan-to-
Value
Ratio


 

300 to 350

  0   $ 0.00   0.00 %   0.00 %

351 to 400

  0     0.00   0.00     0.00  

401 to 450

  0     0.00   0.00     0.00  

451 to 500

  0     0.00   0.00     0.00  

501 to 550

  0     0.00   0.00     0.00  

551 to 600

  1     219,871.00   0.10     80.00  

601 to 650

  17     5,395,647.78   2.45     78.71  

651 to 700

  60     30,442,225.89   13.85     75.30  

701 to 750

  107     60,379,619.47   27.46     73.34  

751 to 800

  183     110,068,981.74   50.06     70.92  

801 to 850

  21     11,523,688.92   5.24     73.33  

Not Available

  1     1,835,917.95   0.84     70.00  
   
 

 

 

Total/Weighted Average

  390   $ 219,865,952.75   100.00 %   72.51 %
   
 

 

 


 

A-7


Table of Contents

APPENDIX B

 

ASSUMED MORTGAGE LOAN CHARACTERISTICS

 

Loan


  Principal
Balance
as of the
Cut-Off Date

   Current
Mortgage
Interest Rate


    Servicing
Fee Rate


    Remaining
Amortization
Term to
Maturity

(in Months)*

  Original
Amortization
Term to
Maturity

(in Months)*

   Original
Interest
Only Term
(In Months)


   Original
Balloon
Term
(in Months)


   Months to
First
Adjustment
Date


   Rate
Ceiling


    Index**

   Gross
Margin


    Minimum
Mortgage
Interest
Rate


    Initial
Cap


    Periodic
Cap after
the Initial
Adjustment
Date


 

1.

  $ 132,925,111.18    6.5692540388 %   0.250 %   357   360    120    N/A    117    11.56925 %   CMT    2.75000 %   2.75000 %   5.00000 %   2.00000 %

2.

  $ 32,344,547.91    6.7803478982 %   0.250 %   357   360    120    N/A    117    11.78035 %   LBR    2.25000 %   2.25861 %   5.00000 %   2.00000 %

3.

  $ 37,978,035.34    6.7250139729 %   0.250 %   358   360    0    N/A    118    11.72501 %   CMT    2.75000 %   2.75000 %   5.00000 %   2.00000 %

4.

  $ 16,618,258.32    7.0611931672 %   0.250 %   358   360    0    N/A    118    12.06119 %   LBR    2.25000 %   2.25000 %   5.00000 %   2.00000 %

  *   Inclusive of interest-only period, if any.
**   The One-Year LIBOR Index is designated as “LBR” and the One-Year CMT Index is designated as “CMT.”

 

B-1


Table of Contents

APPENDIX C

 

Percentage of Initial Principal Balance Outstanding For:

 

    Class A-1, Class A-2 and Class A-IO(1)
Certificates at the
Following Percentages of

CPR

  Class A-R
Certificates at the
Following Percentages of
CPR


Distribution Date


  0%

  10%

  25%

  35%

  50%

  60%

  75%

  0%

  10%

  25%

  35%

  50%

  60%

  75%

Initial

  100   100   100   100   100   100   100   100   100   100   100   100   100   100

February 2009

  100   89   74   63   48   38   23   0   0   0   0   0   0   0

February 2010

  99   80   54   40   23   14   5   0   0   0   0   0   0   0

February 2011

  99   71   40   25   11   5   1   0   0   0   0   0   0   0

February 2012

  99   63   30   16   5   2   *   0   0   0   0   0   0   0

February 2013

  98   56   22   11   3   1   *   0   0   0   0   0   0   0

February 2014

  98   50   17   7   1   *   *   0   0   0   0   0   0   0

February 2015

  98   45   12   4   1   *   *   0   0   0   0   0   0   0

February 2016

  97   40   9   3   *   *   *   0   0   0   0   0   0   0

February 2017

  97   36   7   2   *   *   *   0   0   0   0   0   0   0

February 2018

  96   32   5   1   *   *   *   0   0   0   0   0   0   0

February 2019

  93   28   4   1   *   *   *   0   0   0   0   0   0   0

February 2020

  90   24   3   *   *   *   *   0   0   0   0   0   0   0

February 2021

  86   21   2   *   *   *   *   0   0   0   0   0   0   0

February 2022

  83   18   1   *   *   *   *   0   0   0   0   0   0   0

February 2023

  79   16   1   *   *   *   *   0   0   0   0   0   0   0

February 2024

  76   13   1   *   *   *   *   0   0   0   0   0   0   0

February 2025

  72   11   1   *   *   *   0   0   0   0   0   0   0   0

February 2026

  67   10   *   *   *   *   0   0   0   0   0   0   0   0

February 2027

  63   8   *   *   *   *   0   0   0   0   0   0   0   0

February 2028

  59   7   *   *   *   *   0   0   0   0   0   0   0   0

February 2029

  54   6   *   *   *   *   0   0   0   0   0   0   0   0

February 2030

  49   5   *   *   *   *   0   0   0   0   0   0   0   0

February 2031

  43   4   *   *   *   *   0   0   0   0   0   0   0   0

February 2032

  38   3   *   *   *   *   0   0   0   0   0   0   0   0

February 2033

  32   2   *   *   *   0   0   0   0   0   0   0   0   0

February 2034

  26   2   *   *   *   0   0   0   0   0   0   0   0   0

February 2035

  19   1   *   *   *   0   0   0   0   0   0   0   0   0

February 2036

  13   1   *   *   *   0   0   0   0   0   0   0   0   0

February 2037

  6   *   *   *   *   0   0   0   0   0   0   0   0   0

February 2038

  0   0   0   0   0   0   0   0   0   0   0   0   0   0

Weighted Average
Life (years)(2)

  20.82   7.95   3.34   2.24   1.40   1.06   0.70   0.08   0.08   0.08   0.08   0.08   0.08   0.08

(1)   With respect to the Class A-IO Certificates, percentages are expressed as a percentage of Initial Notional Amount.
(2)   The Weighted Average Life of an Offered Certificate is determined by (i) multiplying the amount of net reduction of Principal Balance or Notional Amount, as the case may be, by the number of years from the date of the issuance of such Certificate to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the aggregate net reduction of Principal Balance or Notional Amount, as the case may be, referred to in clause (i).
*   Indicates a percentage greater than zero but less than 0.5% of the initial Principal Balance or Notional Amount, as the case may be, of such Class.

 

C-1


Table of Contents

APPENDIX C (Continued)

 

Percentage of Initial Principal Balance Outstanding For:

 

    Class B-1, Class B-2 and Class B-3
Certificates at the
Following Percentages of
CPR


Distribution Date


  0%

  10%

  25%

  35%

  50%

  60%

  75%

Initial

  100   100   100   100   100   100   100

February 2009

  100   100   100   100   100   93   75

February 2010

  99   99   99   93   73   59   38

February 2011

  99   99   91   75   52   37   19

February 2012

  99   99   68   48   26   15   5

February 2013

  98   98   51   31   13   6   1

February 2014

  98   98   38   20   6   2   *

February 2015

  98   94   28   13   3   1   *

February 2016

  97   84   21   8   2   *   *

February 2017

  97   75   16   5   1   *   *

February 2018

  96   67   12   4   *   *   *

February 2019

  93   58   9   2   *   *   *

February 2020

  90   51   6   1   *   *   *

February 2021

  86   44   4   1   *   *   *

February 2022

  83   38   3   1   *   *   *

February 2023

  79   33   2   *   *   *   *

February 2024

  76   28   2   *   *   *   *

February 2025

  72   24   1   *   *   *   0

February 2026

  67   20   1   *   *   *   0

February 2027

  63   17   1   *   *   *   0

February 2028

  59   14   *   *   *   *   0

February 2029

  54   12   *   *   *   *   0

February 2030

  49   10   *   *   *   *   0

February 2031

  43   8   *   *   *   *   0

February 2032

  38   6   *   *   *   0   0

February 2033

  32   5   *   *   *   0   0

February 2034

  26   3   *   *   *   0   0

February 2035

  19   2   *   *   *   0   0

February 2036

  13   1   *   *   *   0   0

February 2037

  6   1   *   *   0   0   0

February 2038

  0   0   0   0   0   0   0

Weighted Average
Life (years)(1)

  20.82   13.41   6.08   4.56   3.25   2.65   1.95

(1) The Weighted Average Life of an Offered Certificate is determined by (i) multiplying the amount of net reduction of Principal Balance by the number of years from the date of the issuance of such Certificate to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the aggregate net reduction of Principal Balance referred to in clause (i).
*   Indicates a percentage greater than zero but less than 0.5% of the initial Principal Balance of such Class.

 

C-2


Table of Contents

APPENDIX D

 

Sensitivity of the Pre-Tax Yield to Maturity

of the Class A-IO Certificates to Prepayments

at an Assumed Purchase Price of 7.950%

of the Initial Notional Amount (plus Accrued Interest)

 

     Percentages of CPR

 

Level of LIBOR


   0%

    10%

    25%

    35%

    50%

    60%

    75%

 

1.111%

   62.07 %   48.70 %   27.28 %   11.69 %   (14.42 )%   (34.43 )%   (71.93 )%

2.111%

   47.10 %   34.39 %   14.15 %   (0.59 )%   (25.28 )%   (44.23 )%   (79.85 )%

3.111%

   31.89 %   19.87 %   0.88 %   (12.98 )%   (36.20 )%   (54.02 )%   (87.60 )%

4.111%

   14.59 %   3.40 %   (14.16 )%   (27.01 )%   (48.53 )%   (65.04 )%   (96.16 )%

5.111%

   (8.79 )%   (18.82 )%   (34.41 )%   (45.85 )%   (65.00 )%   (79.69 )%   * *

6.111%

   (66.41 )%   (73.43 )%   (84.28 )%   (92.25 )%   * *   * *   * *

7.111% and above

   * *   * *   * *   * *   * *   * *   * *

**   The Pre-Tax yield to maturity will be less than (99.99%).

 

D-1


Table of Contents

PROSPECTUS

Wells Fargo Asset Securities Corporation

Depositor

Wells Fargo Bank, N.A.

Sponsor

Mortgage Pass-Through Certificates (Issuable in Series)

 

 

You should carefully consider the risk factors beginning on page 11 of this prospectus.

Except as otherwise described in the applicable prospectus supplement, neither the certificates of any series nor the related underlying mortgage loans will be insured or guaranteed by any governmental agency or instrumentality or any other entity.

The certificates of each series will represent interests in the related issuing entity only and will not represent interests in or obligations of the depositor, the sponsor or any other entity.

This prospectus may be used to offer and sell any series of certificates only if accompanied by the prospectus supplement for that series.

Each Issuing Entity—

 

 

will issue a series of mortgage pass-through certificates, which will consist of one or more classes of certificates; and

 

 

will own a pool or pools of fixed or adjustable interest rate, mortgage loans which are secured by a first lien on a one- to four-family residential property.

Each Pool of Mortgage Loans—

 

 

will be sold to the related issuing entity by the depositor, who will have in turn purchased the mortgage loans from the sponsor;

 

 

will be underwritten to the sponsor’s standards or such other standards as described in this prospectus and the applicable prospectus supplement; and

 

 

will be serviced by the sponsor individually or together with other servicers.

Each Series of Certificates—

 

 

will represent interests in the related issuing entity;

 

 

may provide credit support for certain classes by “subordinating” certain classes to other classes of certificates; any subordinate classes will be entitled to payment subject to the payment of more senior classes and may bear losses before more senior classes;

 

 

may be entitled to the benefit of one or more of the other types of credit support or derivative instruments described in this prospectus and in more detail in the applicable prospectus supplement; and

 

 

will be paid only from the assets of the related issuing entity.

Neither the SEC nor any state securities commission has approved the certificates or determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

 

The date of this prospectus is February 25, 2008


Table of Contents

TABLE OF CONTENTS

PROSPECTUS

 

     Page

Important Notice About Information Presented in This Prospectus and the Applicable prospectus supplement

   5

Summary of Prospectus

   6

Risk Factors

   11

Limited Liquidity for Certificates

   11

Limited Assets for Payment of Certificates

   11

Certificates May Not Be Appropriate For Certain Individual Investors

   11

Credit Enhancement is Limited in Amount and Coverage

   12

The Ratings of Your Certificates May Be Lowered or Withdrawn Which May Adversely Affect the Liquidity or Market Value of Your Certificates

   12

Real Estate Market Conditions Affect Mortgage Loan Performance

   13

Geographic Concentration May Increase Rates of Loss and Delinquency

   13

Rate of Prepayment on Mortgage Loans May Adversely Affect Average Lives and Yields on Certificates

   14

Modification of a Mortgage Loan May Adversely Affect the Certificates

   14

There Is a Risk that Interest Payments on the Mortgage Loans May Be Insufficient to Pay Interest on Your Certificates

   15

Increase in Index May Adversely Affect Yield on Certain Certificates of a Series

   15

The Weighted Average Life of a Companion Certificate is Particularly Sensitive to Prepayments

   15

Subordination of Super Senior Support Certificates and Subordinated Certificates Increases Risk of Loss

   15

There Are Risks Relating to Second Lien Mortgage Loans

   16

The Inclusion of “Negative Amortization” Mortgage Loans in a Series May Adversely Affect Yield of Related Certificates

   16

The Inclusion of Subsidy Mortgage Loans in a Series May Adversely Affect Yield of the Related Certificates

   17

The Inclusion of Buy-Down Mortgage Loans in a Series May Adversely Affect Yield of the Related Certificates

   18

Balloon Loans May Have a Greater Default Risk at Maturity

   18

Collateral Securing Cooperative Loans May Diminish in Value

   18

Leaseholds May Be Subject to Default Risk on the Underlying Lease

   18

Exercise of Rights Under Special Servicing Agreements May Be Adverse to Other Certificateholders

   19

Special Powers of the FDIC in the Event of Insolvency of the Sponsor Could Delay or Reduce Distributions on the Certificates

   19

Insolvency of the Depositor May Delay or Reduce Collections on Mortgage Loans

   20

Book-Entry Certificates May Experience Decreased Liquidity and Payment Delay

   21

Cash Flow Agreements and External Credit Enhancements are Subject to Third Party Risk

   21

Servicing Transfer Following Event of Default May Result in Payment Delays or Losses

   21

Consumer Protection Laws May Limit Remedies

   22

The Recording of the Mortgages of a Series in the Name of MERS May Affect the Yield on the Certificates

   22

The Trust Estates

   23

General

   23

Mortgage Loans

   23

Cash Flow Agreements

   28

General

   28

Guaranteed Investment Contract

   28

Yield Maintenance Agreements

   29

Swap Agreements

   29

The Sponsor

   29

The Sponsor’s Mortgage Loan Programs

   32

Mortgage Loan Production Sources

   32

Acquisition of Mortgage Loans from Correspondents

   33

 

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Mortgage Loan Underwriting

   33

General Standards

   33

Retention Program

   37

Non-Agency Conduit Program

   38

Role of Loan Underwriter Discretion

   38

Static Pool Information

   38

The Depositor

   39

Description of the Certificates

   41

General

   41

Definitive Form

   41

Book-Entry Form

   42

General

   42

Secondary Market Trading

   45

Certain U.S. Federal Income Tax Documentation Requirements of Book-Entry Certificates

   47

Distributions to Certificate holders

   47

General

   47

Unscheduled Principal Receipts

   49

Distributions of Interest

   49

Distributions of Principal

   51

Categories of Classes of Certificates

   51

Principal Types

   51

Interest Types

   53

Pass-Through Rates Based on LIBOR

   54

General

   54

Determination of LIBOR

   54

Subordination

   54

Other Credit Enhancement

   56

General

   56

Limited Guarantee

   56

Financial Guaranty Insurance Policy or Surety Bond

   56

Letter of Credit

   57

Pool Insurance Policy

   57

Special Hazard Insurance Policy

   58

Mortgagor Bankruptcy Bond

   59

Reserve Fund

   59

Cross Collateralization

   59

Overcollateralization

   59

Excess Interest

   60

Exchangeable Certificates

   60

General

   60

Exchanges

   61

Procedures

   62

Prepayment and Yield Considerations

   62

Pass-Through Rates

   62

Scheduled Delays in Distributions

   63

Effect of Principal Prepayments

   63

Weighted Average Life of Certificates

   63

Refinancings

   65

Servicing of the Mortgage Loans

   66

The Master Servicer

   66

General

   66

Master Servicing Experience and Procedures of Wells Fargo Bank

   68

The Servicers

   69

Servicing Experience and Procedures of Wells Fargo Bank

   70

Servicing Experience

   70

Servicing Procedures

   71

Payments on Mortgage Loans

   72

Periodic Advances and Limitations Thereon

   75

PMI Advances

   76

Collection and Other Servicing Obligations

   76

Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans

   77

Insurance Policies

   79

Standard Hazard Insurance Policies

   79

Primary Mortgage Insurance Policies

   80

Fixed Retained Yield, Servicing Compensation and Payment of Expenses

   80

Evidence as to Compliance

   81

Changes in Servicing

   82

Changes in Timing of Remittances of Unscheduled Principal Receipts in Full and Elimination of Month End Interest

   82

Changes in Unscheduled Principal Receipt Period

   82

Servicer Defaults

   82

The Pooling and Servicing Agreement

   82

Assignment of Mortgage Loans to the Trustee

   82

Representations and Warranties

   85

Optional Purchases

   86

Reports to Certificateholders

   86

List of Certificateholders

   88

Events of Default

   88

Rights Upon Event of Default

   88

Amendment

   89

Termination; Optional Purchase of Mortgage Loans

   90

The Trustee

   91

The Custodian

   92

Special Servicing Agreements

   92

Certain Legal Aspects of the Mortgage Loans

   92

General

   92

 

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Condominiums

   93

Cooperatives

   93

Foreclosure

   93

Foreclosure on Shares of Cooperatives

   94

Leaseholds

   95

Rights of Redemption

   96

Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on Lenders

   96

Forfeiture for Drug, RICO and Money

  

Laundering Violations

   98

Homeowners Protection Act of 1998

   98

Texas Home Equity Loans

   98

Servicemembers Civil Relief Act and Similar Laws

   99

Environmental Considerations

   99

“Due-on-Sale” Clauses

   101

Applicability of Usury Laws

   102

Enforceability of Certain Provisions

   102

Certain Federal Income Tax Consequences

   102

Federal Income Tax Consequences for REMIC Certificates

   103

General

   103

Status of REMIC Certificates

   103

Qualification as a REMIC

   104

Taxation of Regular Certificates

   105

Taxation of Residual Certificates

   111

Taxes That May Be Imposed on the REMIC Pool

   118

Liquidation of the REMIC Pool

   119

Administrative Matters

   119

Limitations on Deduction of Certain Expenses

   119

Taxation of Certain Foreign Investors

   120

Backup Withholding

   121

Reporting Requirements

   121

Federal Income Tax Consequences for Certificates as to Which No REMIC Election Is Made

   122

General

   122

Tax Status

   122

Premium and Discount

   123

Premium

   123

Original Issue Discount

   123

Market Discount

   123

Recharacterization of Servicing Fees

   124

Sale or Exchange of Certificates

   124

Stripped Certificates

   125

General

   125

Status of Stripped Certificates

   126

Taxation of Stripped Certificates

   126

Reporting Requirements and Backup Withholding

   127

Taxation of Certain Foreign Investors

   128

Federal Income Tax Consequences for Exchangeable Certificates

   128

Tax Status

   128

Exchangeable Certificates Representing Proportionate Interests in Two or More Exchangeable REMIC Certificates

   128

Exchangeable Certificates Representing Disproportionate Interests in Exchangeable REMIC Certificates

   129

Sales, Exchanges and Other Dispositions of Exchangeable Certificates

   129

ERISA Considerations

   130

General

   130

Certain Requirements Under ERISA

   130

General

   130

Parties in Interest/Disqualified

  

Persons

   130

Delegation of Fiduciary Duty

   130

Administrative Exemptions

   131

Individual Administrative

  

Exemptions

   131

PTE 83-1

   132

Exempt Plans

   133

Unrelated Business Taxable Income—Residual Certificates

   133

Legal Investment

   133

Accounting Considerations

   135

Plan of Distribution

   135

Use of Proceeds

   136

Legal Matters

   136

Rating

   136

Reports to Certificateholders

   137

Where You Can Find More Information

   137

Incorporation of Certain Information by Reference

   138

Index of Prospectus Definitions

   139

 

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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS

PROSPECTUS AND THE APPLICABLE PROSPECTUS SUPPLEMENT

Information is provided to you about the certificates in two separate documents that progressively provide more detail: (a) this prospectus, which provides general information, some of which may not apply to a particular series of certificates, including your series, and (b) the applicable prospectus supplement, which will describe the specific terms of your series of certificates, including:

 

   

the principal balances and/or interest rates of each class;

 

   

the timing and priority of interest and principal payments;

 

   

statistical and other information about the mortgage loans;

 

   

information about credit enhancement, if any, for each class;

 

   

the ratings for each class; and

 

   

the method for selling the certificates.

You should rely only on the information provided in this prospectus and the applicable prospectus supplement including the information incorporated by reference. No one has been authorized to provide you with different information. The certificates are not being offered in any state where the offer is not permitted. The depositor does not claim the accuracy of the information in this prospectus or the applicable prospectus supplement as of any date other than the dates stated on their respective covers.

Cross-references are included in this prospectus and in the applicable prospectus supplement to captions in these materials where you can find further related discussions. The foregoing table of contents and the table of contents included in the applicable prospectus supplement provide the pages on which these captions are located.

You can find a listing of the pages where capitalized terms used in this prospectus are defined under the caption “Index of Prospectus Definitions” beginning on page 139 in this prospectus.

The depositor’s principal executive office is located at 5325 Spectrum Drive, Frederick, Maryland 21703, and the depositor’s telephone number is (240) 586-5999.

 

 

 

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SUMMARY OF PROSPECTUS

 

 

This summary highlights selected information from this document, but does not contain all of the information that you should consider in making your investment decision. To understand all of the terms of a series of certificates, please read this entire document and the applicable prospectus supplement carefully.

 

 

This summary provides an overview of certain calculations, cash flows and other information to aid your understanding of the terms of the certificates and is qualified by the full description of these calculations, cash flows and other information in this prospectus and the applicable prospectus supplement.

RELEVANT PARTIES FOR EACH SERIES OF CERTIFICATES

Issuing Entity

Each series of certificates will be issued by a separate common law trust. Each trust will be formed, and each series of certificates will be issued, under a separate pooling and servicing agreement among the depositor, the master servicer and the trustee specified in the applicable prospectus supplement.

Sponsor

Wells Fargo Bank, N.A. will be the sponsor of each series of certificates. The mortgage loans will either be originated by the sponsor or purchased by the sponsor from various entities that originated the mortgage loans to the sponsor’s underwriting standards or as otherwise specified in the prospectus supplement. The sponsor will sell the mortgage loans to the depositor on the closing date specified in the applicable prospectus supplement by means of a mortgage loan purchase agreement between the sponsor and the depositor.

Depositor

Wells Fargo Asset Securities Corporation will act as depositor for each series of certificates. The depositor will acquire the mortgage loans from the sponsor and will transfer the mortgage loans to each trust. The depositor is a direct, wholly-owned subsidiary of the sponsor which is an indirect, wholly-owned subsidiary of Wells Fargo & Company. It is not expected that the depositor will have any business operations other than offering certificates and related activities.

Master Servicer

The sponsor will act as master servicer of each trust and will supervise the servicers and perform certain other administrative and reporting duties with respect to each series of certificates. In addition, the master servicer will generally be required to make advances with respect to the mortgage loans in each trust to the extent that a servicer (other than Wells Fargo Bank, N.A.) fails to make a required advance.

Servicers

The sponsor and, if specified in the applicable prospectus supplement, one or more other entities will service the mortgage loans in each trust. Each servicer will perform certain servicing functions with respect to the mortgage loans serviced by it pursuant to a related servicing agreement.

Trustee

A trustee for each trust will be named in the applicable prospectus supplement. The trustee generally will be responsible under each pooling and servicing agreement for providing general administrative services on behalf of the trust for a series. To the extent specified in the applicable prospectus supplement, a securities administrator may perform certain of the duties of the trustee.

Paying Agent

A paying agent for each trust will be named in the applicable prospectus supplement. The paying agent generally will be responsible under each pooling and servicing agreement for making distributions to certificateholders of a series.

Custodian

The sponsor or another entity (which may be the trustee) named in the applicable prospectus supplement will act as custodian for each series of certificates. Generally, the custodian will be responsible for holding and safeguarding the mortgage notes and other contents of the mortgage file on behalf of the certificateholders of a series.

 

 

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THE MORTGAGE LOANS

Each trust will own the related mortgage loans (other than the fixed retained yield which is the portion of the mortgage interest rate, if any, not contained in the trust) and certain other related property, as specified in the applicable prospectus supplement.

The mortgage loans in each trust estate:

 

 

will be fixed or adjustable interest rate, mortgage loans secured by first liens on one- to four-family residential properties;

 

 

will have been acquired by the depositor from the sponsor;

 

 

will have been originated by the sponsor or an affiliate or will have been acquired by the sponsor directly or indirectly from other mortgage loan originators; and

 

 

will have been underwritten either to the sponsor’s standards or to other standards specified in the applicable prospectus supplement.

See “The Trust Estates” and “The Sponsor’s Mortgage Loan Programs—Mortgage Loan Underwriting.”

You should refer to the applicable prospectus supplement for the precise characteristics or expected characteristics of the mortgage loans included in a particular trust estate.

DISTRIBUTIONS ON THE CERTIFICATES

Each series of certificates will include one or more classes. A class of certificates will be entitled, to the extent of funds available, to receive distributions from collections on the related mortgage loans and, to the extent specified in the applicable prospectus supplement, from any credit enhancements or cash flow agreements described in this prospectus.

Interest Distributions

With respect to each series of certificates, interest on the related mortgage loans at the weighted average of their mortgage interest rates after deducting servicing fees and certain other amounts as described in this prospectus or in the applicable prospectus supplement, will be passed through to holders of the related classes of certificates in accordance with the particular terms of each class of certificates. The terms of each class of certificates will be described in the applicable prospectus supplement. See “Description of the Certificates—Distributions to Certificateholders—Distributions of Interest.”

Except as otherwise specified in the applicable prospectus supplement, interest on each class of certificates of each series will accrue at the pass-through rate for each class indicated in the applicable prospectus supplement on their outstanding principal balance or notional amount.

Principal Distributions

With respect to a series of certificates, principal payments (including prepayments) on the related mortgage loans will be passed through to holders of the related certificates or otherwise applied in accordance with the related pooling and servicing agreement on each distribution date. Distributions in reduction of principal balance will be allocated among the classes of certificates of a series in the manner specified in the applicable prospectus supplement. See “Description of the Certificates—Distributions to Certificateholders—Distributions of Principal.”

Distribution Dates

Distributions on the certificates will be made on each distribution date which is generally the 25th day of each month, or, if such day is not a business day, the business day following the 25th day. If so specified in the applicable prospectus supplement, distributions on certificates may be made on a different day of each month or may be made quarterly, or semi-annually, on the dates specified in such prospectus supplement. The cut-off date for each series will be the date specified in the applicable prospectus supplement.

Record Dates

Distributions will be made on each distribution date to certificateholders of record at the close of business on the last business day of the month preceding the month in which such distribution date occurs (unless a different date is specified in the applicable prospectus supplement).

CREDIT ENHANCEMENT

Subordination

A series of certificates may include one or more classes of senior certificates and one or more classes of subordinated certificates. The rights of the holders

 

 

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of subordinated certificates of a series to receive distributions will be subordinated to such rights of the holders of the senior certificates of the same series to the extent and in the manner specified in the applicable prospectus supplement.

Subordination is intended to enhance the likelihood of the timely receipt by the senior certificateholders of their proportionate share of scheduled monthly principal and interest payments on the related mortgage loans and to protect them from losses. This protection will be effected by:

 

 

the preferential right of the senior certificateholders to receive, prior to any distribution being made in respect of the related subordinated certificates on each distribution date, current distributions on the related mortgage loans of principal and interest due them on each distribution date out of the funds available for distributions on such date;

 

 

the right of such holders to receive future distributions on the mortgage loans that would otherwise have been payable to the holders of subordinated certificates; and/or

 

 

the prior allocation to the subordinated certificates of all or a portion of losses realized on the underlying mortgage loans.

Other Types of Credit Enhancement

If so specified in the applicable prospectus supplement, the certificates of any series, or any one or more classes of a series, may, in addition to or in lieu of subordination, be entitled to the benefits of one or more of the following types of credit enhancement:

 

 

limited guarantee

 

 

financial guaranty

 

 

insurance policy

 

 

surety bond

 

 

mortgage pool insurance policy

 

 

letter of credit

 

 

reserve fund

 

 

cross-collateralization

 

 

overcollateralization

 

 

excess interest

See “Description of the Certificates—Other Credit Enhancement.” In addition, if specified in the applicable prospectus supplement, amounts received under any cash flow agreement described under “The Trust Estate—Cash Flow Agreements” may also be used to provide credit enhancement for one or more classes of certificates.

PERIODIC ADVANCES ON DELINQUENT PAYMENTS

In the event that a payment on a mortgage loan is delinquent, the servicer of the mortgage loan will be obligated, to the extent specified in the related servicing agreement, to make cash advances if the servicer determines that it will be able to recover such amounts from future payments and collections on the mortgage loan. A servicer who makes periodic advances will be reimbursed for these as described in this prospectus and in the applicable prospectus supplement. If the servicer fails to make a required principal or interest advance, the master servicer or trustee will be required to make these advances from its own funds, unless such party determines that it will not be able to recover those amounts from future payments and collections on the mortgage loans.

See “Servicing of the Mortgage Loans—Periodic Advances and Limitations Thereon.”

FORMS OF CERTIFICATES

The certificates will be issued either:

 

 

in book-entry form through the facilities of DTC; or

 

 

in fully registered, certificated form.

If you own book-entry certificates, you will not receive a physical certificate representing your ownership interest in such book-entry certificates, except under extraordinary circumstances which are discussed in “Description of the Certificates—Book-Entry Form” in this prospectus. Instead, DTC will effect payments and transfers by means of its electronic record keeping services, acting through certain participating organizations. This may result in certain delays in your receipt of distributions and may restrict your ability to pledge your securities. Your rights with respect to book-entry certificates may generally only be exercised through DTC and its participating organizations.

See “Description of the Certificates—Book-Entry Form.”

OPTIONAL PURCHASE OF CERTAIN MORTGAGE LOANS

If so specified in the prospectus supplement for a series, the depositor may, subject to the terms of the applicable pooling and servicing agreement, purchase from the related trust:

 

 

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any defaulted mortgage loan during the periods specified under “The Pooling and Servicing Agreement—Optional Purchases”; and

 

 

any defaulted mortgage loan or mortgage loan as to which default is reasonably foreseeable as to which the originator of such mortgage loan breached a representation or warranty to the sponsor regarding the characteristics of such mortgage loan.

See “Pooling and Servicing Agreement—Optional Purchases.”

OPTIONAL PURCHASE OF ALL MORTGAGE LOANS AND TERMINATION OF THE TRUST

If so specified in the prospectus supplement with respect to a series, all of the mortgage loans in the related trust (or one or more groups of mortgage loans, if specified in the applicable prospectus supplement) and any property acquired with respect to such mortgage loans may be purchased by the depositor, the sponsor or such other party as is specified in the applicable prospectus supplement. Any such purchase must be made in the manner and at the price specified in such prospectus supplement.

In the event that an election is made to treat the related trust estate or one or more segregated pools of assets in the trust estate as a REMIC, any such purchase will be effected only pursuant to a “qualified liquidation,” as defined under Section 860F(a)(4)(A) of the Internal Revenue Code of 1986, as amended.

Exercise of the right of purchase will effect the early retirement of the certificates of that series.

See “Prepayment and Yield Considerations.”

ERISA LIMITATIONS

If you are a fiduciary of any employee benefit plan subject to the fiduciary responsibility or prohibited transaction provisions of ERISA, you should carefully review with your own legal advisors whether the purchase or holding of certificates could give rise to a transaction prohibited or otherwise impermissible under ERISA or other similar rules or regulations.

See “ERISA Considerations.”

TAX STATUS

The treatment of the certificates for federal income tax purposes will depend on:

 

 

whether a REMIC election is made with respect to a series of certificates; and

 

 

if a REMIC election is made, whether the certificates are regular interests or residual interests.

If one or more REMIC elections are made, certificates that are regular interests will be treated as newly issued debt instruments of the REMIC and must be accounted for under an accrual method of accounting. Certificates that are residual interests are not treated as debt instruments, but rather must be treated according to the rules prescribed in the Internal Revenue Code for REMIC residual interests, including restrictions on transfer and the reporting of net income or loss of the REMIC, including the possibility of a holder of such certificate having taxable income without a corresponding distribution of cash to pay taxes currently due.

If the certificates represent interests in a grantor trust, beneficial owners of certificates generally are treated as owning an undivided beneficial interest in the mortgage loans that are assets of the trust.

See “Certain Federal Income Tax Consequences.”

LEGAL INVESTMENT

The applicable prospectus supplement will specify whether the class or classes of certificates offered will constitute “mortgage related securities” for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended. If your investment authority is subject to legal restrictions you should consult your own legal advisors to determine whether and to what extent such certificates constitute legal investments for you.

See “Legal Investment” in this prospectus and in the applicable prospectus supplement.

RATING

Certificates of any series will not be offered pursuant to this prospectus and a prospectus supplement unless each offered class is rated in one of the four highest rating categories by at least one nationally recognized statistical rating organization.

 

 

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A security rating is not a recommendation to buy, sell or hold the certificates of any series and is subject to revision or withdrawal at any time by the assigning rating agency.

 

 

Ratings do not address the effect of prepayments on the yield you may anticipate when you purchase your certificates.

 

 

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RISK FACTORS

You should consider, among other things, the following factors in connection with the purchase of certificates.

Limited Liquidity for Certificates

The liquidity of your certificates may be limited. You should consider that:

 

   

a secondary market for the certificates of any series may not develop, or if it does, it may not provide you with liquidity of investment, or it may not continue for the life of the certificates of any series;

 

   

the prospectus supplement for any series of certificates may indicate that an underwriter intends to establish a secondary market in such certificates, but no underwriter will be obligated to do so; and

 

   

unless specified in the applicable prospectus supplement, the certificates will not be listed on any securities exchange.

In addition to these considerations, the secondary market for mortgage-backed securities has experienced periods of illiquidity and may do so in the future. Illiquidity means that there may not be any purchasers for your class of certificates. Although any class of certificates may experience illiquidity, it is more likely that classes of certificates that are more sensitive to prepayment, credit or interest rate risk will experience illiquidity. You should consider that illiquidity may also result from legal or regulatory changes, or from the adoption or change of accounting rules, which affect the certificates generally or particular types of certificateholders.

Limited Assets for Payment of Certificates

Except for any related insurance policies and any reserve fund or credit enhancement described in the applicable prospectus supplement:

 

   

mortgage loans included in the related trust estate will be the sole source of payments on the certificates of a series;

 

   

the certificates of any series will not represent an interest in or obligation of the depositor, the sponsor, the master servicer, the paying agent, any servicer, the trustee or any of their affiliates, except for the depositor’s limited obligations with respect to certain breaches of its representations and warranties, limited obligations of a servicer with respect to its servicing obligations and limited obligations of the master servicer with respect to its master servicing obligations; and

 

   

neither the certificates of any series nor the related mortgage loans will be guaranteed or insured by any governmental agency or instrumentality, the depositor, the sponsor, the master servicer, the paying agent, any servicer, the trustee, any of their affiliates or any other person.

Consequently, in the event that payments on the mortgage loans underlying your series of certificates are insufficient or otherwise unavailable to make all payments required on your certificates, there will be no recourse to the depositor, the sponsor, the master servicer, any servicer, the trustee, the paying agent or, except as specified in the applicable prospectus supplement, any other entity.

Certificates May Not Be Appropriate For Certain Individual Investors

If you are an individual investor who does not have sufficient resources or expertise to evaluate the particular characteristics of a series of certificates, the series of certificates may not be an appropriate investment for you. This may be the case because, among other things:

 

   

if you purchase your certificates at a price other than par, your yield to maturity will be sensitive to the uncertain rate and timing of principal prepayments on the applicable mortgage loans;

 

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the rate of principal distributions on, and the weighted average life of, the certificates will be sensitive to the uncertain rate and timing of principal prepayments on the applicable mortgage loans and the priority of principal distributions among the classes of certificates of such series, and, as such, the certificates may be inappropriate investments for you if you require a distribution of a particular amount of principal on a specific date or an otherwise predictable stream of distributions;

 

   

you may not be able to reinvest amounts distributed in respect of principal on your certificates (which distributions in general, are expected to be greater during periods of relatively low interest rates) at a rate at least as high as the applicable pass-through rate or your expected yield;

 

   

a secondary market for the certificates may not develop or provide you with liquidity of investment; and

 

   

you must report interest as well as original issue discount, if any, on the accrual method of accounting, even if you are otherwise using the cash method of accounting.

If you are an individual investor considering the purchase of a certificate of a series, you should carefully consider other risk factors discussed in this prospectus and the applicable prospectus supplement.

Credit Enhancement is Limited in Amount and Coverage

With respect to each series of certificates, credit enhancement may be provided in limited amounts to cover certain types of losses on the underlying mortgage loans. Credit enhancement will be provided in one or more of the forms referred to in this prospectus, including: subordination of other classes of certificates of the same series; a limited guarantee; a financial guaranty insurance policy; a surety bond; a letter of credit; a pool insurance policy; a special hazard insurance policy; a mortgagor bankruptcy bond; a reserve fund; cross-collateralization; overcollateralization; excess interest; and any combination of the preceding types of credit enhancement. See “Description of the Certificates—Other Credit Enhancement.”

Regardless of the form of credit enhancement provided:

 

   

the amount of coverage will be limited in amount and in most cases will be subject to periodic reduction in accordance with a schedule or formula;

 

   

may provide only very limited coverage as to certain types of losses, and may provide no coverage as to certain other types of losses; and

 

   

all or a portion of the credit enhancement for any series of certificates will generally be permitted to be reduced, terminated or substituted for, in the sole discretion of the master servicer or the depositor, if each applicable rating agency indicates that the then-current ratings will not be adversely affected.

In the event losses exceed the amount of coverage provided by any credit enhancement or losses of a type not covered by any credit enhancement occur, such losses will be borne by the holders of the related certificates (or certain classes).

None of the depositor, the sponsor, the master servicer, any servicer, the paying agent nor any of their affiliates will have any obligation to replace or supplement any credit enhancement, or to take any other action to maintain any rating of any class of certificates.

See “Description of the Certificates—Other Credit Enhancement.”

The Ratings of Your Certificates May Be Lowered or Withdrawn Which May Adversely Affect the Liquidity or Market Value of Your Certificates

It is a condition to the issuance of the certificates of a series offered by a prospectus supplement that the certificates be rated in one of the four highest rating categories by a nationally recognized statistical rating agency. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time. No person is obligated to maintain the rating on any certificate, and accordingly, there can

 

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be no assurance to you that the ratings assigned to any certificate on the date on which the certificate is originally issued will not be lowered or withdrawn by a rating agency at any time thereafter. The rating(s) of any series of certificates by any applicable rating agency may be lowered following the initial issuance of the certificates as a result of the downgrading of the obligations of any applicable credit support provider, or as a result of losses on the related mortgage loans in excess of the levels contemplated by the rating agency at the time of its initial rating analysis. Neither the depositor nor the sponsor nor any of their respective affiliates will have any obligation to replace or supplement any credit support, or to take any other action to maintain any rating(s) of any series of certificates. If any rating is revised or withdrawn, the liquidity or the market value of your certificate may be adversely affected.

Real Estate Market Conditions Affect Mortgage Loan Performance

An investment in securities such as the certificates, which generally represent interests in pools of residential mortgage loans, may be affected by a decline in real estate values and changes in the mortgagor’s financial condition. There is no assurance that the values of the mortgaged properties securing the mortgage loans underlying any series of certificates have remained or will remain at their levels on the dates of origination of the related mortgage loans.

If the residential real estate market should experience an overall decline in property values such that the outstanding balances of the mortgage loans contained in a particular trust estate and any secondary financing on the mortgaged properties, become equal to or greater than the value of the mortgaged properties, delinquencies, foreclosures and losses could be higher than those now generally experienced in the mortgage lending industry and those experienced in Wells Fargo Bank, N.A.’s or other servicers’ servicing portfolios.

To the extent that losses on mortgage loans underlying a series are not covered by credit enhancement, certificateholders of the series will bear all risk of loss resulting from default by mortgagors and will have to look primarily to the value of the mortgaged properties for recovery of the outstanding principal and unpaid interest on the defaulted mortgage loans. See “The Trusts Estates—Mortgage Loans” and “The Sponsor’s Mortgage Loan Programs—Mortgage Loan Underwriting.”

Geographic Concentration May Increase Rates of Loss and Delinquency

In addition to risk factors related to the residential real estate market generally, certain geographic regions of the United States from time to time will experience weaker regional economic conditions and housing markets or be directly or indirectly affected by natural disasters or civil disturbances such as earthquakes, hurricanes, floods, eruptions or riots. Mortgage loans in such areas will experience higher rates of loss and delinquency than on mortgage loans generally. Although mortgaged properties located in certain identified flood zones will be required to be covered by flood insurance, to the minimum amount required by the sponsor, as described under “Servicing of the Mortgage Loans—Insurance Policies,” such amount may be significantly smaller than the unpaid principal balance of the related mortgage loan. In addition, no mortgaged properties will otherwise be required to be insured against earthquake damage or any other loss not covered by standard hazard insurance policies, as described under “Servicing of the Mortgage Loans—Insurance Policies.”

The ability of mortgagors to make payments on the mortgage loans may also be affected by factors which do not necessarily affect property values, such as adverse economic conditions generally, in particular geographic areas or industries, or affecting particular segments of the borrowing community (such as mortgagors relying on commission income and self-employed mortgagors). Such occurrences may accordingly affect the actual rates of delinquencies, foreclosures and losses with respect to any trust estate.

The mortgage loans underlying certain series of certificates may be concentrated in certain regions. Such concentration may present risk considerations in addition to those generally present for similar mortgage-backed securities without such concentration. See “The Sponsor’s Mortgage Loan Programs—Mortgage Loan Underwriting.”

 

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Rate of Prepayment on Mortgage Loans May Adversely Affect Average Lives and Yields on Certificates

The yield of the certificates of each series will depend in part on the rate of principal payment on the mortgage loans (including prepayments, liquidations due to defaults and mortgage loan repurchases). Such yield may be adversely affected, depending upon whether a particular certificate is purchased at a premium or a discount, by a higher or lower than anticipated rate of prepayments on the related mortgage loans. In particular:

 

   

the yield on classes of certificates entitling their holders primarily or exclusively to payments of interest, such as interest only certificates, or primarily or exclusively to payments of principal, such as principal only certificates, will be extremely sensitive to the rate of prepayments on the related mortgage loans; and

 

   

the yield on certain classes of certificates may be relatively more sensitive to the rate of prepayment of specified mortgage loans than other classes of certificates.

The rate of prepayments on mortgage loans is influenced by a number of factors, including:

 

   

prevailing mortgage market interest rates;

 

   

local and national economic conditions;

 

   

homeowner mobility; and

 

   

the ability of the borrower to obtain refinancing.

In addition, your yield may be adversely affected by interest shortfalls which may result from the timing of the receipt of prepayments or liquidations to the extent that such interest shortfalls are not covered by aggregate compensating interest or other mechanisms specified in the applicable prospectus supplement. Your yield will be also adversely affected to the extent that losses on the mortgage loans in the related trust estate are allocated to your certificates and may be adversely affected to the extent of unadvanced delinquencies on the mortgage loans in the related trust. Classes of certificates identified in the applicable prospectus supplement as subordinated certificates are more likely to be affected by delinquencies and losses than other classes of certificates.

If you are purchasing certificates at a discount, and specifically if you are purchasing principal only certificates, you should consider the risk that if principal payments on the mortgage loans, or, in the case of any ratio strip certificates, the related mortgage loans, occur at a rate slower than you expected, your yield will be lower than you expected. Further information relating to yield on those certificates will be included in the applicable prospectus supplement, including a table demonstrating the particular sensitivity of any class of principal only certificates to the rate of prepayments.

If you are purchasing certificates at a premium, or are purchasing an interest only certificate, you should consider the risk that if principal payments on the mortgage loans or, in the case of any interest only certificates entitled to a portion of interest paid on certain mortgage loans with higher mortgage interest rates, those mortgage loans, occur at a rate faster than you expected, your yield may be lower than you expected. If you are purchasing interest only certificates, you should consider the risk that a rapid rate of principal payments on the applicable mortgage loans could result in your failure to recover your initial investment. Further information relating to yield on those certificates will be included in the applicable prospectus supplement, including, in the case of interest only certificates, a table demonstrating the particular sensitivity of those interest only certificates to the rate of prepayments.

Modification of a Mortgage Loan May Adversely Affect the Certificates

In instances in which a mortgage loan is in default, or if default is reasonably foreseeable, the applicable servicer, if it determines it is in the best interests of the certificateholders in the aggregate for the related series, may permit a modification of the mortgage loan rather than proceeding with foreclosure. Modification may have the effect of reducing the interest rate on the mortgage loan, forgiving the payment of principal or interest or extending the final maturity date of the mortgage loan (though not beyond the final scheduled distribution date for the related certificates as set forth in the applicable prospectus supplement). Any modification of a mortgage loan to reduce the

 

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interest rate or forgive principal or interest will result in reduced collections from that mortgage loan and, to the extent not covered by the related credit support, reduced distributions or losses on one or more classes of the related certificates.

There Is a Risk that Interest Payments on the Mortgage Loans May Be Insufficient to Pay Interest on Your Certificates

When a mortgage loan is prepaid in full, the mortgagor pays interest on the amount prepaid only to the date of prepayment. Liquidation proceeds and amounts received in settlement of insurance claims are also likely to include interest only to the time of payment or settlement. When a mortgage loan is prepaid in full or in part, an interest shortfall may result depending on the timing of the receipt of the prepayment and the timing of when those prepayments are passed through to certificateholders. To partially mitigate this reduction in yield, the master servicer is required to cover a portion of the shortfall in interest collections that are attributable to prepayments in full on the mortgage loans, but only up to the amount of compensating interest for such distribution date as described under “Description of the Certificates—Distributions to Certificateholders—Distributions of Interest” in this prospectus. To the extent these shortfalls from the mortgage loans are not covered by the amount of compensating interest or other mechanisms specified in the applicable prospectus supplement, they will be allocated among the classes of interest bearing certificates as described in the applicable prospectus supplement under “Description of the Certificates—Interest.” No comparable interest shortfall coverage will be provided by the master servicer for partial prepayments or with respect to liquidations of any mortgage loans. Any interest shortfall arising from liquidations will be covered by means of the subordination of the rights of subordinate certificateholders or any other credit support arrangements described in this prospectus. Any interest shortfall arising from partial prepayments will be allocated among the classes of interest bearing certificates as described in the applicable prospectus supplement under “Description of the Certificates—Interest.”

Increase in Index May Adversely Affect Yield on Certain Certificates of a Series

Certain series of certificates may contain inverse floating rate certificates. If you are purchasing inverse floating rate certificates of a series, you should consider the risk that a high rate of the applicable index may result in a lower actual yield than you expected or a negative yield. In particular, you should consider the risk that high constant rates of the applicable index or high constant prepayment rates on the mortgage loans may result in the failure to recover your initial investment.

The particular sensitivities of the inverse floating rate certificates are separately displayed in tables in an Appendix to the applicable prospectus supplement.

See “Prepayment and Yield Considerations” in the applicable prospectus supplement.

The Weighted Average Life of a Companion Certificate is Particularly Sensitive to Prepayments

Because on any distribution date companion certificates will not receive principal distributions until the planned amortization certificates, targeted amortization certificates or scheduled certificates they support have been paid to their planned, targeted or scheduled balances, and will receive all principal distributions in excess of those required to pay the planned amortization certificates, targeted amortization certificates or scheduled certificates to their planned, targeted or scheduled balances, the weighted average life of a companion certificate of a series is particularly sensitive to principal prepayments on the mortgage loans of such series.

Subordination of Super Senior Support Certificates and Subordinated Certificates Increases Risk of Loss

Certain series of certificates may contain super senior support certificates. If you purchase a class of super senior support certificates of a series, you should consider the risk that after the aggregate principal balance of the subordinated certificates of the series has been reduced to zero, the principal portion of realized losses allocated to the related class of super senior certificates of a series will be borne by your class of super senior support certificates (in addition to the principal portion of realized losses allocated to such class of super senior support certificates) and not by the related class of super senior certificates so long as the principal balance of such class of super senior

 

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support certificates remains outstanding. See “Description of the Certificates” in the applicable prospectus supplement.

The rights of the holders of each class of subordinated certificates of a series to receive distributions will be subordinated to such rights of the holders of the senior certificates of the series and the holders of the lower-numbered classes of subordinated certificates of the series, if any. In addition, realized losses will be allocated to the subordinated certificates of a series in the reverse order in which they are entitled to distributions of principal before being allocated to the senior certificates of a series. Accordingly, if you are purchasing subordinated certificates, you will be more likely to experience losses as a result of the occurrence of losses or interest shortfalls on the mortgage loans of the related series. See “Description of the Certificates” in the applicable prospectus supplement.

There Are Risks Relating to Second Lien Mortgage Loans

With respect to certain of the mortgage loans of a series, at the time of origination of the first lien mortgage loan, the originator or another lender may have originated a second lien mortgage loan. With respect to mortgage loans that have second lien mortgage loans encumbering the same mortgaged property, foreclosure frequency may be increased relative to mortgage loans that do not have second lien mortgage loans behind them because mortgagors have less equity in the mortgaged property. Investors should also note that any mortgagor may obtain second lien mortgage loans at any time subsequent to the date of origination of their first lien mortgage loan from the originator or from any other lender. See table with the heading “Original Combined Loan-To-Value Ratios” in Appendix A of the prospectus supplement. To the extent known by the Depositor, information relating to any second lien mortgage loans relating to the mortgage loans for a series will be specified in an appendix to the applicable prospectus supplement containing mortgage loan information for the related series.

The Inclusion of “Negative Amortization” Mortgage Loans in a Series May Adversely Affect Yield of Related Certificates

If so specified in the applicable prospectus supplement, a trust estate may contain “negative amortization” mortgage loans. The mortgage interest rates on mortgage loans that allow for “negative amortization” will adjust monthly but their monthly payments and amortization schedules adjust annually and are subject to payment caps. During a period of rising interest rates, as well as prior to the annual adjustment to the monthly payment made by the mortgagor, the amount of interest accruing on the principal balance of such mortgage loans may exceed the amount of the scheduled monthly payment. As a result, a portion of the accrued interest on such a mortgage loan may become “deferred interest” which will be added to the principal balance of such mortgage loan and will also bear interest at the applicable mortgage interest rate. The excess, if any, of the aggregate amount of any deferred interest on such mortgage loans over the aggregate amount of partial and full prepayments received from mortgagors on the mortgage loans in the related trust estate in any month will reduce the amount of interest distributable on the classes of certificates of such series identified in the applicable prospectus supplement. Because partial and full prepayments received from mortgagors on the mortgage loans in the related trust estate will be used to pay deferred interest to certain classes of certificates of a series, principal distributions on the certificates of such series may occur at a slower rate than if all deferred interest on the mortgage loans was allocated in reduction of current interest distributions on such certificates. In addition, due to the priority of distributions, a class of subordinate certificates may fail to receive all or part of the deferred interest allocable to it if full and partial prepayments on such mortgage loans otherwise available for such purpose are required to pay interest (other than as a result of negative amortization of such mortgage loans) or principal on more senior classes of certificates of such series due, for example, to unadvanced delinquencies or losses on the related mortgage loans.

If the mortgage interest rates on “negative amortization” mortgage loans decrease prior to their annual adjustment in monthly payment, a larger portion of the monthly payment will be applied to the unpaid principal balance of such mortgage loans, which may cause the related classes of certificates to amortize more quickly. Conversely, if the mortgage interest rates on “negative amortization” mortgage loans increase prior to their annual adjustment in monthly payment, a smaller portion of the monthly payment will be applied to the unpaid principal balance of such mortgage loans, which may cause the related classes of certificates to amortize more slowly. If the unpaid principal balance of a “negative amortization” mortgage loan exceeds the original balance of the mortgage loan by the maximum 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

 

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mortgage loan to be paid in full at its maturity. In addition, on the fifth adjustment date of a “negative amortization” mortgage loan, and every fifth adjustment date thereafter and the last adjustment date prior to such mortgage loan’s maturity, 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 at its maturity by the payment of equal monthly installments. These features may affect the rate at which principal on these mortgage loans is paid and may create a greater risk of default if the borrowers are unable to pay the monthly payments on the related increased principal balances.

On each distribution date, the deferred interest on any “negative amortization” mortgage loans will be allocated to the related classes of certificates as described in the applicable prospectus supplement. Any such allocation of deferred interest could, as a result, affect the maturity of the affected classes of certificates of such series. The amount of deferred interest, if any, with respect to such mortgage loans for a given month will reduce the amount of interest collected on these mortgage loans and available to be distributed to the related classes of certificates of such series. The resulting reduction in interest collections on such mortgage loans will be offset, in part or in whole, by applying principal prepayments received on such mortgage loans to interest distributions on the related classes of certificates. For any distribution date, the deferred interest on such mortgage loans, net of the amount of any offsetting prepayments, will be deducted from the interest payable to the related certificates as described in the applicable prospectus supplement. The amount of the reduction of accrued interest distributable to each related class of certificates attributable to net deferred interest will be added to the principal balance of that class of certificates. Only the amount by which the principal prepayments received on such mortgage loans exceed the amount of deferred interest on the such mortgage loans will be distributed as principal to the related classes of certificates of such series in accordance with the priorities described in the applicable prospectus supplement.

For a description of “negative amortization” mortgage loans and deferred interest, see “The Trust Estates—Mortgage Loans.”

The effects on the yield of any class of certificates of a series due to the inclusion of any “negative amortization” mortgage loans in the related trust estate will be further described in the related prospectus supplement.

The Inclusion of Subsidy Mortgage Loans in a Series May Adversely Affect Yield of the Related Certificates

If so specified in the applicable prospectus supplement, a trust estate may contain subsidy loans. The monthly payments made by the related mortgagors of a subsidy loan will be less than the scheduled monthly payments on such mortgage loans with the present value of the resulting difference in payment being provided by the employer of the mortgagor.

Generally, employers may terminate subsidy programs in the event of (i) the mortgagor’s death, retirement, resignation or termination of employment, (ii) the full prepayment of the subsidy loan by the mortgagor, (iii) the sale or transfer by the mortgagor of the related mortgaged property as a result of which the mortgagee is entitled to accelerate the subsidy loan pursuant to the “due-on-sale” clause contained in the mortgage, or (iv) the commencement of foreclosure proceedings or the acceptance of a deed in lieu of foreclosure. In addition, some subsidy programs provide that if prevailing market rates of interest on mortgage loans similar to a subsidy loan are less than the mortgage interest rate of such subsidy loan, the employer may request that the mortgagor refinance such subsidy loan and may terminate the related subsidy agreement if the mortgagor fails to do so. In the event that the mortgagor refinances a subsidy loan, the new loan will not be included in the trust estate and the resulting prepayment in full of the subsidy loan may adversely affect the yield on one or more classes of certificates of the related series, particularly interest only certificates or certificates purchased at a premium over their principal balance. In the event a subsidy agreement is terminated, the amount remaining in the related subsidy account will be returned to the employer, and the mortgagor will be obligated to make the full amount of all remaining scheduled payments, if any. If the related mortgagor is unable to make the full amount of all remaining scheduled payments, the yield on the related classes of certificates may be adversely affected.

For a description of subsidy loans, see “The Trust Estates—Mortgage Loans” herein.

 

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The Inclusion of Buy-Down Mortgage Loans in a Series May Adversely Affect Yield of the Related Certificates

If so specified in the applicable prospectus supplement, a trust estate may contain mortgage loans subject to temporary buy-down plans pursuant to which the monthly payments made by the mortgagor during the early years of the mortgage loan will be less than the scheduled monthly payments on such mortgage loan. The resulting difference in payment will be compensated for from an amount contributed by the seller of the related mortgaged property or another source, including the originator of the mortgage loan (generally on a present value basis) and placed in a custodial account by the related servicer. If the mortgagor of a mortgage loan subject to a temporary buy-down plan is unable to make the increased monthly payment after the buy-down funds are exhausted, the yield on the related class of certificates may be adversely affected.

Balloon Loans May Have a Greater Default Risk at Maturity

If so specified in the applicable prospectus supplement, certain of the mortgage loans underlying a series of certificates may provide for a lump-sum payment of the unamortized principal balance of the mortgage loan at maturity. See “Description of the Mortgage Loans” in the applicable prospectus supplement.

Because borrowers under this type of mortgage loan are required to make a relatively large single payment upon maturity, it is possible that the default risk associated with such mortgage loans is greater than that associated with fully-amortizing mortgage loans. The ability of a mortgagor on this type of mortgage loan to repay the mortgage loan upon maturity frequently depends upon the mortgagor’s ability:

 

   

to refinance the mortgage loan, which will be affected by a number of factors, including, without limitation, the level of mortgage interest rates available in the primary mortgage market at the time, the mortgagor’s equity in the related mortgaged property, the financial condition of the mortgagor, the condition of the mortgaged property, tax law, general economic conditions and the general willingness of financial institutions and primary mortgage bankers to extend credit; or

 

   

to sell the related mortgaged property at a price sufficient to permit the mortgagor to make the lump-sum payment.

Collateral Securing Cooperative Loans May Diminish in Value

If specified in the applicable prospectus supplement, certain of the mortgage loans may be cooperative loans. There are certain risks that differentiate cooperative loans from other types of mortgage loans. Ordinarily, the cooperative incurs a blanket mortgage in connection with the construction or purchase of the cooperative’s apartment building and the underlying land. The interests of the occupants 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. 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 the collateral securing the cooperative loans.

Leaseholds May Be Subject to Default Risk on the Underlying Lease

If specified in the applicable prospectus supplement, certain of the mortgage loans may be secured by leasehold mortgages. Leasehold mortgages are subject to certain risks not associated with mortgage loans secured by a fee estate of the mortgagor. The most significant of these risks is that the ground lease creating the leasehold estate could terminate, leaving the leasehold mortgagee without its security. The ground lease may terminate, if among other reasons, the ground lessee breaches or defaults in its obligations under the ground lease or there is a bankruptcy of the ground lessee or the ground lessor. Any leasehold mortgages underlying a series of certificates will contain provisions protective of the mortgagee as described under “The Trust Estates — Mortgage Loans,” such

 

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as the right of the leasehold mortgagee to receive notices from the ground lessor of any defaults by the mortgagor and to cure those defaults, with adequate cure periods; if a default is not susceptible of cure by the leasehold mortgagee, the right to acquire the leasehold estate through foreclosure or otherwise; the ability of the ground lease to be assigned to and by the leasehold mortgagee or purchaser at a foreclosure sale and for the simultaneous release of the ground lessee’s liabilities under the new lease; and the right of the leasehold mortgagee to enter into a new ground lease with the ground lessor on the same terms and conditions as the old ground lease upon a termination.

Exercise of Rights Under Special Servicing Agreements May Be Adverse to Other Certificateholders

The pooling and servicing agreement for a series will permit the master servicer at the direction of the depositor to enter into a special servicing agreement with an unaffiliated holder of a class of Class B Certificates or a class of securities representing interests in one or more classes of Class B Certificates and/or other subordinated mortgage pass-through certificates, pursuant to which the holder may instruct the master servicer to instruct the servicer, to the extent provided in the related underlying servicing agreement, to commence or delay foreclosure proceedings with respect to delinquent mortgage loans. This right is intended to permit the holder of a class of certificates that is highly sensitive to losses on the mortgage loans to attempt to mitigate losses by exercising limited power of direction over servicing activities which accelerate or delay realization of losses on the mortgage loans. Such directions may, however, be adverse to the interest of those classes of senior certificates that are more sensitive to prepayments than to losses on the mortgage loans. In particular, accelerating foreclosure will adversely affect the yield to maturity on interest only certificates, while delaying foreclosure will adversely affect the yield to maturity of principal only certificates.

Special Powers of the FDIC in the Event of Insolvency of the Sponsor Could Delay or Reduce Distributions on the Certificates

The mortgage loans will be originated or acquired by the sponsor, a national bank whose deposits are insured to the applicable limits by the FDIC. If the sponsor becomes insolvent, is in an unsound condition or engages in violations of its bylaws or regulations applicable to it or if similar circumstances occur, the FDIC could act as conservator and, if a receiver were appointed, would act as a receiver for the sponsor. As receiver, the FDIC would have broad powers to:

 

   

require the trust, as assignee of the depositor, to go through an administrative claims procedure to establish its rights to payments collected on the mortgage loans; or

 

   

request a stay of proceedings to liquidate claims or otherwise enforce contractual and legal remedies against the sponsor; or

 

   

repudiate without compensation the sponsor’s ongoing master servicing obligations under the related pooling and servicing agreement and the sponsor’s ongoing servicing obligations under the applicable underlying servicing agreement, such as its duty to collect and remit payments or otherwise service the mortgage loans.

If the FDIC were to take any of those actions, distributions on the certificates could be delayed or reduced.

By statute, the FDIC as conservator or receiver of the sponsor is authorized to repudiate any “contract” of the sponsor upon payment of “actual direct compensatory damages.” This authority may be interpreted by the FDIC to permit it to repudiate the transfer of the mortgage loans to the depositor. Under an FDIC regulation, however, the FDIC as conservator or receiver of a bank has stated that it will not reclaim, recover or recharacterize a bank’s transfer of financial assets in connection with a securitization or participation, provided that the transfer meets all conditions for sale accounting treatment under generally accepted accounting principles, other than the “legal isolation” condition as it applies to institutions for which the FDIC may be appointed as conservator or receiver, was made for adequate consideration and was not made fraudulently, in contemplation of insolvency, or with the intent to hinder, delay or defraud the bank or its creditors. For purposes of the FDIC regulation, the term securitization means, as relevant, the issuance by a special purpose entity of beneficial interests the most senior class of which at time of issuance is rated in one of the four highest categories assigned to long-term debt or in an equivalent short-term category (within either of which there may be sub-categories or gradations indicating relative standing) by one

 

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or more nationally recognized statistical rating organizations. A special purpose entity, as the term is used in the regulation, means a trust, corporation, or other entity demonstrably distinct from the insured depository institution that is primarily engaged in acquiring and holding (or transferring to another special purpose entity) financial assets, and in activities related or incidental to these actions, in connection with the issuance by the special purpose entity (or by another special purpose entity that acquires financial assets directly or indirectly from the special purpose entity) of beneficial interests. The transactions contemplated by this prospectus and the applicable prospectus supplement will be structured so that this FDIC regulation should apply to the transfer of the mortgage loans from the sponsor to the depositor.

If a condition required under the FDIC regulation, or other statutory or regulatory requirement applicable to the transaction, were found not to have been satisfied, the FDIC as conservator or receiver might refuse to recognize the sponsor’s transfer of the mortgage loans to the depositor. In that event the depositor could be limited to seeking recovery based upon its security interest in the mortgage loans. The FDIC’s statutory authority has been interpreted by the FDIC and at least one court to permit the repudiation of a security interest upon payment of actual direct compensatory damages measured as of the date of conservatorship or receivership. These damages do not include damages for lost profits or opportunity, and no damages would be paid for the period between the date of conservatorship or receivership and the date of repudiation. The FDIC could delay its decision whether to recognize the sponsor’s transfer of the mortgage loans for a reasonable period following its appointment as conservator or receiver for the sponsor. If the FDIC were to refuse to recognize the sponsor’s transfer of the mortgage loans, distributions on the certificates could be delayed or reduced.

If the FDIC acted as receiver for the sponsor after the sponsor’s insolvency, the FDIC could prevent the termination of the sponsor as a master servicer or servicer of the mortgage loans of a series, even if a contractual basis for termination exists. This inability to terminate the sponsor as a master servicer or servicer could result in a delay or possibly a reduction in distributions on the certificates of a series to the extent the sponsor, as master servicer or servicer, received, but did not remit to the trustee or the securities administrator, mortgage loan collections before the date of insolvency or if the sponsor failed to make any required advances.

Insolvency of the Depositor May Delay or Reduce Collections on Mortgage Loans

Neither the United States Bankruptcy Code nor similar applicable state laws prohibit the depositor from filing a voluntary application for relief under these laws. However, the transactions contemplated by this prospectus and the applicable prospectus supplement will be structured so that the voluntary or involuntary application for relief under the bankruptcy laws by the depositor is unlikely. The depositor is a separate, limited purpose subsidiary, the certificate of incorporation of which contains limitations on the nature of the depositor’s business, including the ability to incur debt other than debt associated with the transactions contemplated by this prospectus, and restrictions on the ability of the depositor to commence voluntary or involuntary cases or proceedings under bankruptcy laws without the prior unanimous affirmative vote of all its directors (who are required to consider the interests of the depositor’s creditors, in addition to the depositor’s stockholders in connection the filing of a voluntary application for relief under applicable insolvency laws). Further, the transfer of the mortgage loans to the related trust will be structured so that the trustee has no recourse to the depositor, other than for breaches of representations and warranties about the mortgage loans.

If the depositor were to become the subject of a proceeding under the bankruptcy laws, a court could conclude that the transfer of the mortgage loans from the depositor to the trust should not be characterized as an absolute transfer, and accordingly, that the mortgage loans should be included as part of the depositor’s estate. Under these circumstances, the bankruptcy proceeding could delay or reduce distributions on the certificates. In addition, a bankruptcy proceeding could result in the temporary disruption of distributions on the certificates of a series.

 

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Book-Entry Certificates May Experience Decreased Liquidity and Payment Delay

Since transactions in the classes of book-entry certificates of any series generally can be effected only through DTC, DTC participants and indirect DTC participants:

 

   

your ability to pledge book-entry certificates to someone who does not participate in the DTC system, or to otherwise act with respect to such book-entry certificates, may be limited due to the lack of a physical certificate;

 

   

you may experience delays in your receipt of payments on book-entry certificates because distributions will be made by the master servicer, or a paying agent on behalf of the master servicer, to Cede, as nominee for DTC;

 

   

you may experience delays in your receipt of payments on book-entry certificates in the event of misapplication of payments by DTC, DTC participants or indirect DTC participants or bankruptcy or insolvency of those entities and your recourse will be limited to your remedies against those entities; and

 

   

the liquidity of book-entry certificates in any secondary trading market that may develop may be limited because investors may be unwilling to purchase securities for which they cannot obtain delivery of physical certificates.

See “Description of the Certificates—Book-Entry Form.”

Cash Flow Agreements and External Credit Enhancements are Subject to Third Party Risk

The assets of a trust estate may, if specified in the a