Credit-Based
Asset Servicing and Securitization LLC
Sponsor
Litton
Loan Servicing LP
Servicer
C-BASS
Mortgage Loan Asset-Backed Certificates, Series
2007-CB5
Principal
and interest payable monthly, commencing in June
2007
Carefully
consider the “Risk Factors” beginning on page S-20 of this prospectus
supplement and on page 7 of the accompanying prospectus.
The
offered certificates are not insured or guaranteed by any governmental
agency or instrumentality or any other entity.
The
offered certificates represent interests in the issuing entity only
and
will not be obligations of or represent interests in 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
-
· Three
classes of Class A Certificates.
· Nine
classes of subordinated Class M Certificates all of which are subordinate
to, and provide credit enhancement for, the Class A Certificates.
Each
class of Class M Certificates is also subordinated to and provides
credit
enhancement for each class of Class M Certificates, if any, with
a lower
number.
· One
class of subordinated Class B Certificates and the Class CE-1, Class
CE-2,
Class P, Class R and Class R-X Certificates, which are not offered
hereby.
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 -
· Closed-end,
adjustable- and fixed-rate non-prime loans secured by first-
or
second-lien mortgages or deeds of trust on residential real
properties.
Credit
Enhancement will Consist of -
· Excess
Interest - Certain excess interest received from the mortgage
loans will
be used to cover losses.
· Overcollateralization
- As of the cut-off date, the aggregate principal balance of
the assets of
the issuing entity will exceed the aggregate certificate principal
balance
of the certificates, resulting in overcollateralization. Certain
excess
interest received from the mortgage loans will also be applied
as payments
of principal on the certificates to maintain a required level
of
overcollateralization.
· Subordination
- Each class of Class M Certificates is subordinate to the
Class A
Certificates and to those classes of Class M Certificates with
lower
numerical designations. The Class B-1 Certificates are subordinate
to the
Class A and Class M Certificates.
Interest
Rate Support will Consist of -
· An
interest rate swap agreement with JPMorgan Chase Bank, N.A.
as swap
provider, for the benefit of the Class A and Class M Certificates
as
described in this prospectus supplement under “Description of the
Certificates—Interest Rate Swap Agreement.”
· An
interest rate cap agreement with JPMorgan Chase Bank, N.A.
as cap
provider, for the benefit of the Class A and Class M Certificates
as
described in this prospectus supplement under “Description of the
Certificates—Interest Rate Cap
Agreement.”
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved the offered certificates or determined that this prospectus supplement
or the accompanying prospectus is accurate or complete. Any representation
to
the contrary is a criminal offense.
The
underwriters will purchase the offered certificates from the depositor and
will
offer the offered certificates from time to time to investors in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The depositor expects that the offered certificates will be available
for
delivery to investors in book-entry form through The Depository Trust Company,
Clearstream or Euroclear on or about May 31, 2007. Total proceeds to the
depositor for the offered certificates will be approximately 100.00% of the
initial certificate principal balance of the offered certificates, before
deducting expenses payable by the depositor.
Banc
of America Securities LLC
Barclays
Capital
(Sole
Lead Manager)
(Co-Manager)
The
date
of this prospectus supplement is May 29, 2007.
TABLE
OF CONTENTS
Page
EUROPEAN
ECONOMIC AREA
S-5
UNITED
KINGDOM
S-5
NOTICE
TO UNITED KINGDOM INVESTORS
S-5
SUMMARY
OF PROSPECTUS SUPPLEMENT
S-8
RISK
FACTORS
S-20
High
combined loan-to-value ratios increase risk of loss
S-20
There
are risks involving unpredictability of prepayments and the effect
of
prepayments on yields
S-20
Adjustable
rate mortgage loan borrowers may be more likely to prepay
S-21
There
is a risk that interest payments on the mortgage loans may be insufficient
to maintain overcollateralization
S-22
Effects
of mortgage interest rates and other factors on the certificate
interest
rates of the offered certificates
S-22
There
are risks relating to alternatives to foreclosure
S-23
Nature
of non-prime mortgage loans may increase risk of loss
S-23
The
interest rate swap agreement and the swap provider
S-23
The
interest rate cap agreement is subject to counterparty
risk
S-24
Some
of the mortgage loans have an initial interest only period, which
may
result in increased delinquencies and losses or rates of
prepayment
S-24
Balloon
mortgage loans increase the risk of loss
S-25
There
are risks relating to subordinate loans
S-25
There
are risks relating to geographic concentration of the mortgage
loans
S-25
Residential
real estate values may fluctuate and adversely affect your
investment
S-26
Credits
scores may not accurately predict the likelihood of
default
S-26
There
are risks in holding subordinated certificates
S-26
Decrement
tables are based upon assumptions and models
S-27
In
the event the sponsor is not able to repurchase or replace defective
mortgage loans, you may suffer losses on your certificates
S-27
Recent
developments in the residential mortgage market may adversely affect
the
market value of your certificates
S-27
United
States military operations may increase risk of shortfalls in
interest
S-28
Conflicts
of interest between the servicer and the issuing entity
S-28
THE
MORTGAGE POOL
S-29
General
S-29
The
Index
S-32
Terms
of the Mortgage Loans
S-32
THE
ORIGINATORS
S-32
Fieldstone
Mortgage Company
S-32
General
S-32
UNDERWRITING
STANDARDS
S-33
The
Sponsor’s Underwriting Standards
S-33
Fieldstone’s
Underwriting Standards
S-34
THE
SERVICER
S-36
General
S-36
THE
SPONSOR
S-38
STATIC
POOL INFORMATION
S-39
THE
DEPOSITOR
S-39
THE
ISSUING ENTITY
S-40
THE
TRUSTEE
S-40
General
S-40
THE
CUSTODIAN
S-41
THE
SWAP PROVIDER AND CAP PROVIDER
S-41
THE
POOLING AND SERVICING AGREEMENT
S-41
General
S-41
Assignment
of the Mortgage Loans
S-42
Repurchase
or Substitution of Mortgage Loans
S-42
Payments
on Mortgage Loans; Deposits to Collection Account and Distribution
Account
S-44
Advances
S-44
Subservicers
S-45
Compensation
and Payment of Expenses of the Servicer and the Trustee
S-46
Pledge
and Assignment of Servicer’s Rights
S-47
Optional
Termination
S-47
Optional
Purchase of Defaulted Loans
S-47
Events
of Servicing Termination
S-48
Rights
upon Event of Servicing Termination
S-48
Voting
Rights
S-48
Amendment
S-48
DESCRIPTION
OF THE CERTIFICATES
S-49
General
S-49
Interest
Distributions
S-49
Principal
Distributions
S-51
Allocation
of Losses
S-57
Application
of Monthly Excess Cashflow Amounts
S-58
Distributions
from the Supplemental Interest Trust
S-62
Interest
Rate Swap Agreement
S-63
Interest
Rate Cap Agreement
S-65
Certificate
Interest Rates
S-67
Calculation
of One-Month LIBOR
S-68
YIELD,
PREPAYMENT AND MATURITY CONSIDERATIONS
S-68
Weighted
Average Lives
S-70
Final
Scheduled Distribution Dates
S-72
USE
OF PROCEEDS
S-72
FEDERAL
INCOME TAX CONSEQUENCES
S-72
General
S-72
Taxation
of Regular Interests
S-72
Taxation
of the Notional Principal Contract Arrangements
S-73
REMIC
Taxes and Reporting
S-75
S-2
ERISA
CONSIDERATIONS
S-75
LEGAL
INVESTMENT
S-78
METHOD
OF DISTRIBUTION
S-78
REPORTS
TO CERTIFICATEHOLDERS
S-79
LEGAL
MATTERS
S-79
RATINGS
S-79
INDEX
OF PROSPECTUS SUPPLEMENT DEFINITIONS
S-81
APPENDIX
A: MORTGAGE LOAN DATA
A-1
APPENDIX
B: DECREMENT TABLES
B-1
APPENDIX
C: HYPOTHETICAL MORTGAGE LOANS
C-1
APPENDIX
D: INTEREST RATE SWAP SCHEDULE
D-1
APPENDIX
E: INTEREST RATE CAP SCHEDULE
E-1
S-3
IMPORTANT
NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
The
depositor describes the 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.
If
you
have received a copy of this prospectus supplement and accompanying prospectus
in electronic format, and if the legal prospectus delivery period has not
expired, you may obtain a paper copy of this prospectus supplement and
accompanying prospectus from the Depositor or from either
underwriter.
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 location of these captions.
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-81 in this document
and under the caption “Index of Prospectus Definitions” beginning on page 131 in
the accompanying prospectus. Any capitalized terms used but not defined in
this
prospectus supplement have the meanings assigned in the accompanying
prospectus.
This
prospectus supplement and the accompanying prospectus contain forward-looking
statements relating to future economic performance or projections and other
financial items. 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 “Yield, Prepayment and
Maturity Considerations” and in the appendices. Forward-looking statements are
also found elsewhere in this prospectus supplement and the accompanying
prospectus, and may be identified by, among other things, the use of
forward-looking words such as “expects,”“intends,”“anticipates,”“estimates,”“believes,”“may” or other comparable words. These 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. Those 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 update or revise forward-looking
statements to reflect any change in the depositor’s expectations or any change
in events, conditions or circumstances on which any forward-looking statement
is
based.
S-4
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”),
each
of the underwriters 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 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
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 issuing entity
of a prospectus pursuant to Article 3 of the Prospectus Directive.
For
the
purposes of this provision, the expression an “offer of 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 certificates to be offered so as to enable
an
investor to decide to purchase or subscribe the 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.
UNITED
KINGDOM
Each
of
the underwriters 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) received by it in connection with the issue or sale of the offered
certificates in circumstances in which Section 21(1) of the Financial Services
and Markets Act does not apply to the Issuing Entity; and
(b) it
has
complied and will comply with all applicable provisions of the Financial
Services and Markets Act 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 accompanying prospectus if made
by a person who is not an authorized person under the Financial Services and
Markets Act, is being made only to, or directed only at persons who (1) are
outside the United Kingdom or (2) are persons falling within Article 49(2)(a)
through (d) (“high net worth companies, unincorporated associations, etc.”) or
19 (Investment Professionals) of the Financial Services and Market Act 2000
(Financial Promotion) Order 2005 (all such persons together being referred
to as
the “Relevant
Persons”).
This
prospectus supplement and 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 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
C-BASS
MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES
2007-CB5
Approximate.
The initial certificate principal balances of the offered certificates
may
vary by a total of plus or minus
5%.
(2)
See
“Description of the Certificates—Categories of Classes of Securities” in
the prospectus for a description of these principal and interest
types and
see “Description of the Certificates—Interest Distributions,”“—Principal
Distributions” and “—Allocation of Losses” in this prospectus supplement
for a description of the effects of
subordination.
(3)
Each
final scheduled distribution date has been calculated as described
under
“Yield, Prepayment and Maturity Considerations—Final Scheduled
Distribution Dates” in this prospectus
supplement.
(4)
The
offered certificates will not be issued unless they receive at least
the
ratings set forth in this table. See “Ratings” in this prospectus
supplement.
(5)
Interest
will accrue on these certificates during each interest accrual period
at a
per annum rate equal to the lesser of (i) the sum of one-month LIBOR
plus
the margin set forth in the table below and (ii) the rate cap as
described
under “Description of the Certificates—Certificate Interest Rates” in this
prospectus supplement. During each interest accrual period relating
to the
distribution dates after the optional termination date, the margins
will
increase to the margins set forth in the table below if the optional
termination right is not exercised. Interest will be calculated based
on
the methodology in the table below.
S-6
Class
Margin
Margin
after the Optional Termination Date
Interest
Calculations
Class
A-1
0.060
%
0.120
%
Actual/360
Class
A-2
0.170
%
0.340
%
Actual/360
Class
A-3
0.250
%
0.500
%
Actual/360
Class
M-1
0.240
%
0.360
%
Actual/360
Class
M-2
0.250
%
0.375
%
Actual/360
Class
M-3
0.280
%
0.420
%
Actual/360
Class
M-4
0.400
%
0.600
%
Actual/360
Class
M-5
0.450
%
0.675
%
Actual/360
Class
M-6
0.670
%
1.005
%
Actual/360
Class
M-7
1.150
%
1.725
%
Actual/360
Class
M-8
1.700
%
2.550
%
Actual/360
Class
M-9
2.000
%
3.000
%
Actual/360
(6)
Interest
will accrue on these certificates during each interest accrual period
at a
per annum rate equal to the lesser of (i) the pass-through rate set
forth
in the table below and (ii) the rate cap as described under “Description
of the Certificates—Certificate Interest Rates” in this prospectus
supplement. During each interest accrual period relating to the
distribution dates after the optional termination date, the pass-through
rate will increase to the pass-through rate set forth in the table
below
if the optional termination right is not exercised. Interest will
be
calculated based on the methodology in the table
below.
Class
Pass-Through
Rate
Pass-Through
Rate after the Optional Termination Date
Interest
Calculations
Class
B-1
7.000
%
7.500
%
30/360
(7)
The
Class CE-1, Class CE-2, Class P, Class R and Class R-X Certificates
are
entitled to certain distributions as specified in the pooling and
servicing agreement.
S-7
SUMMARY
OF PROSPECTUS SUPPLEMENT
Because
this is a summary, it does not contain all the information that may be important
to you. You should read the entire accompanying prospectus and this prospectus
supplement carefully before you decide to purchase a certificate. If capitalized
terms are not defined in this prospectus supplement, they are defined in the
prospectus.
Issuing
Entity
C-BASS
2007-CB5 Trust, a New York common law trust.
Title
of Series
C-BASS
Mortgage Loan Asset-Backed Certificates, Series 2007-CB5.
Sponsor
Credit-Based
Asset Servicing and Securitization LLC.
Depositor
Asset
Backed Funding Corporation.
Servicer
Litton
Loan Servicing LP.
Originators
Fieldstone
Mortgage Company, New Century Mortgage Corporation, People’s Choice Home Loan,
Inc., Wilmington Finance Inc. and various other originators that each originated
less than 10% of the aggregate unpaid principal balance of the mortgage pool
as
of the cut-off date.
On
March20, 2007, People’s Choice Home Loan, Inc. filed for Chapter 11 bankruptcy court
protection in the U.S. Bankruptcy Court in California and on April 1, 2007,
New
Century Mortgage Corporation filed for Chapter 11 bankruptcy court protection
in
the U.S. Bankruptcy Court in Delaware.
The
25th
day of
each month (or if not a business day, the next business day) beginning June25,2007.
Determination
Date
The
sixteenth day of each month in which a distribution date occurs (or, if not
a
business day, the immediately succeeding business day).
Record
Date
For
the
offered certificates, the business day immediately preceding a distribution
date; provided, however, that if a certificate becomes a definitive certificate,
the record date for that certificate will be the last business day of the month
immediately preceding the month in which the related distribution date
occurs.
Collection
Period
The
period from the second day of the calendar month preceding the month in which
a
distribution date occurs through the first day of the calendar month in which
such distribution date occurs.
Prepayment
Period
The
period commencing on the 16th
day of
the calendar month preceding the calendar month in which a distribution date
occurs (or, in the case of the first distribution date, on the cut-off date)
and
ending on the 15th
day of
the calendar month in which that distribution date occurs.
S-8
The
Transaction Parties
Prior
to
the closing date, the sponsor purchased the mortgage loans from the originators.
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, dated
as
of the cut-off date, among the sponsor, the depositor, the servicer and the
trustee. The servicer will service the mortgage loans in accordance with the
pooling and servicing agreement and provide the information to the trustee
necessary for the trustee to calculate distributions and other information
regarding the certificates.
The
transfers of the mortgage loans from the sponsor to the depositor to the issuing
entity in exchange for the certificates is illustrated below:
S-9
The
Certificates
A
summary
table of the initial certificate principal balances, principal types,
certificate interest rates, interest types, denominations, certificate forms,
final scheduled distribution dates and ratings of the certificates is set forth
in the table beginning on page S-6.
The
certificates represent all of the beneficial ownership interests in the
trust.
On
the
closing date, the issuing entity will acquire a pool of fixed- and
adjustable-rate non-prime mortgage loans secured by first- and second-lien
mortgages or deeds of trust on residential real properties.
The
mortgage loans were purchased by the sponsor from Fieldstone Mortgage Company,
New Century Mortgage Corporation, People’s Choice Home Loan, Inc. and Wilmington
Finance Inc. and various other originators that each originated less than 10%
of
the aggregate unpaid principal balance of the mortgage pool as of the cut-off
date.
S-10
Total
Mortgage Loan Statistics
The
total
mortgage pool had the following approximate aggregate characteristics as of
the
cut-off date (percentages are based on the aggregate principal balance of the
mortgage loans in the mortgage pool):
Range,
Total or Percentage
Weighted
Average
Number
of Mortgage Loans
1,667
—
Aggregate
Outstanding Principal Balance
$355,973,433
—
Outstanding
Principal Balance
$12,563
to $997,646
$213,541
Original
Principal Balance
$12,600
to $999,999
$213,909
Current
Mortgage Interest Rate
5.625%
to 14.500%
8.228%
Remaining
Term to Maturity
163
to 478 months
355
months
Original
Term to Maturity
180
to 480 months
359
months
Original
Combined Loan-to-Value Ratio
9.51%
to 100.00%
81.19%
Debt-to-Income
Ratio(1)
2.40%
to 59.98%
42.29%
Credit
Scores
500
to 819
638
Latest
Maturity Date
March
1, 2047
—
Percentage
of Fixed-Rate Mortgage Loans
27.96%
—
Percentage
of Adjustable-Rate Mortgage Loans
72.04%
—
Percentage
of Second Lien Mortgage Loans
2.60%
—
Percentage
of Balloon Loans
36.71%
—
Percentage
of Interest Only Mortgage Loans
17.02%
—
Percentage
of Dual Amortization Loans
3.13%
—
Percentage
with Prepayment Charges
84.31%
—
Maximum
Single Five-Digit Zip Code Concentration
0.51%
(20772)
—
Geographic
Concentration of Mortgaged Properties in Excess
of
5.00% of the Aggregate Outstanding
Principal Balance:
California
26.34%
—
Florida
16.51%
—
Washington
5.73%
—
Texas
5.28%
—
For
the Adjustable-Rate Mortgage Loans Only:
Gross
Margin
2.000%
to 9.910%
6.139%
Minimum
Mortgage Interest Rate(2)
5.625%
to 12.850%
8.236%
Maximum
Mortgage Interest Rate
11.950%
to 19.990%
14.584%
Initial
Periodic Rate Cap
1.000%
to 6.000%
2.575%
Subsequent
Periodic Rate Cap
1.000%
to 8.000%
1.151%
Months
to First or Next Adjustment Date
1
to 58 months
24
months
(1)
Excluding
the mortgage loans for which no Debt-to-Income Ratio was
calculated.
(2)
Excluding
the mortgage loans that do not have specified Minimum Mortgage Interest
Rates.
The
characteristics of the mortgage pool may change because:
·
Before
the closing date, the depositor may remove mortgage loans from the
mortgage pool. The depositor also may substitute new mortgage loans
for
mortgage loans in the mortgage pool prior to the closing
date.
·
After
the certificates are issued, mortgage loans may be removed from the
issuing entity because of repurchases by the sponsor for breaches
of
representations or failure to deliver required documents. Under certain
circumstances and generally only during the two-year period following
the
closing date, the sponsor may instead make substitutions for these
mortgage loans.
See
“The
Pooling and Servicing Agreement—Repurchase or Substitution of Mortgage Loans” in
this prospectus supplement for a discussion of the circumstances under which
the
sponsor is required to repurchase or substitute for mortgage loans. These
removals and/or substitutions may result in changes in the mortgage loan
characteristics shown above. These changes may affect the weighted average
lives
and yields to maturity of the related offered certificates.
S-11
Additional
information on the mortgage pool is set forth under “The Mortgage Pool” and in
the tables in Appendix A
to this
prospectus supplement and information regarding repurchases and substitutions
of
the mortgage loans after the closing date will be available on the issuing
entity’s monthly distribution reports on Form 10-D. See “Reports to
Certificateholders” in this prospectus supplement.
Fees
and Expenses
Before
payments are made on the certificates, a monthly fee calculated as 0.50% per
annum on the total principal balance of the mortgage loans will be available
to
make payments to the servicer and the holders of the Class CE-2 Certificates.
In
addition, the trustee will be paid a monthly fee calculated as 0.01% per annum
on the total principal balance of the mortgage loans.
In
addition to the servicing fees, the servicer will be entitled to retain as
additional servicing compensation (i) all service-related fees, including
assumption fees, modification fees, extension fees, bad check fees, late payment
charges and interest paid on principal prepayments during the first fifteen
days
of a month, to the extent collected from mortgagors, (ii) any interest or other
income earned on funds held in the collection account and any escrow accounts
and (iii) any profits from the liquidation of mortgage loans.
In
addition to the trustee fees, the trustee shall be entitled to all investment
income earned on amounts on deposit in the distribution account.
The
depositor, the servicer and the trustee are entitled to indemnification and
reimbursement of certain expenses from the trust under the pooling and servicing
agreement before payments are made on the certificates as discussed in the
prospectus under the headings “Description of the Agreements—Material Terms of
the Pooling and Servicing Agreements and Underlying Servicing Agreements—Certain
Matters Regarding Servicers and the Master Servicer” and “—Certain Matters
Regarding the Trustee.”
See
“The
Pooling and Servicing Agreement—Compensation and Payment of Expenses of the
Servicer and the Trustee” in this prospectus supplement for more information
about fees and expenses of the servicer and the trustee.
The
swap
provider may be entitled to receive certain net payments as further described
under “—Interest Rate Swap Agreement.”
Distributions—General
Interest
distributions on the certificates will be made on each distribution date from
the interest portion of collections on the mortgage loans, less certain expenses
(such as servicing fees, trustee fees, reimbursements for advances made by
the
servicer and payment of other expenses and indemnities described in this
prospectus supplement) and amounts payable to the supplemental interest trust
for the benefit of the swap provider, and principal distributions on the
certificates will be made on each distribution date from the principal portion
of collections on the mortgage loans, less amounts payable to the swap provider
(to the extent not paid from the interest portion of collections), plus any
interest paid as part of the Extra Principal Distribution Amount, in the
following order of priority:
S-12
Interest
first,
from the net interest portion of collections on the mortgage loans,
to the
Class A Certificates to pay current interest and then to pay accrued
and
unpaid interest from previous distribution dates, as set forth in
this
prospectus supplement under “Description of the Certificates—Interest
Distributions”;
second,
to
each class of Class M Certificates in numerical order, beginning
with the
Class M-1 Certificates, to pay current interest;
third,
to
the Class B-1 Certificates, to pay current interest;
and
fourth,
to
be distributed as part of monthly excess
cashflow.
Principal
(Before the Stepdown Date or when a Trigger Event is in
Effect)
first,
from the net principal portion of collections on the mortgage loans
plus
any excess interest paid as part of the Extra Principal Distribution
Amount, to the Class A Certificates, to pay principal, as set forth
in
this prospectus supplement under “Description of the
Certificates—Principal Distributions”;
second,
to
each class of Class M Certificates in numerical order, beginning
with the
Class M-1 Certificates, to pay principal;
third,
to
the Class B-1 Certificates, to pay principal; and
fourth,
to
be distributed as part of monthly excess
cashflow.
Principal
(On or After the Stepdown Date and as long as no Trigger Event is
in
Effect)
first,
from the net principal portion of collections on the mortgage loans
plus
any excess interest paid as part of the Extra Principal Distribution
Amount, to the Class A Certificates, to pay principal, as set forth
in
this prospectus supplement under “Description of the
Certificates—Principal Distributions”;
second,
to
each class of Class M Certificates in numerical order, beginning
with the
Class M-1 Certificates, up to their principal distribution amounts,
to pay
principal;
third,
to
the Class B-1 Certificates, up to their principal distribution amount,
to
pay principal; and
fourth,
to
be distributed as part of monthly excess
cashflow.
On
or
after the aggregate certificate principal balance of the Subordinated
Certificates has been reduced to zero and so long as there is no
overcollateralization, all principal distributions to the Class A Certificates
will be distributed concurrently on a pro rata basis, based on the certificate
principal balance of each such class of Class A Certificates, until the
certificate principal balances of each such class has been reduced to
zero.
On
each
distribution date, the sum of remaining excess interest, remaining principal
collections and excess overcollateralization amounts will be distributed in
the
following order of priority:
S-13
Excess
Cashflow
first,
to
the Class A Certificates, pro
rata,
to pay any remaining current interest;
second,
to
the Class A Certificates, pro
rata,
to pay any interest previously earned but not paid;
third,
to
each class of Class M Certificates in numerical order, beginning
with the
Class M-1 Certificates, first to pay current interest, then to pay
interest previously earned but not paid and finally to reimburse
for
realized losses applied to that class;
fourth,
to
the Class B-1 Certificates, first to pay current interest, then to
pay
interest previously earned but not paid and finally to reimburse
for
realized losses applied to that class;
fifth, from
amounts otherwise distributable to the Class CE-1 Certificates,
to
the Class A Certificates, pro
rata,
and then to the Class M Certificates, sequentially in numerical order,
and
finally to the Class B-1 Certificates, to pay the difference between
interest accrued based on the rate cap and the lesser of (a) the
maximum
rate cap and (b) with respect to the floating rate certificates,
the sum
of one-month LIBOR and the related margin, and with respect to the
Class
B-1 Certificates, the related pass-through rate;
sixth,
from amounts otherwise distributable to the Class CE-1 Certificates,
to
the supplemental interest trust to fund any defaulted swap termination
payment;
seventh,
from amounts otherwise distributable to the Class CE-1 Certificates,
if a
40-Year Trigger Event is in effect, then the amount necessary to
increase
the actual overcollateralization amount for that distribution date
so that
a 40-Year Trigger Event is no longer in effect, if available, will
be
distributed sequentially, to the Class A-1, Class A-2, Class A-3,
Class
M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class
M-7,
Class M-8, Class M-9 and Class B-1 Certificates, in that
order;
eighth,
to
the Class CE-1, Class P, Class R and Class R-X Certificates, in the
amounts specified in the pooling and servicing
agreement.
The
Class
P Certificates will receive any prepayment charges paid by the mortgagors during
the related prepayment period. The amount of interest and principal
distributions on each class of certificates is more fully described under
“Description of the Certificates—Interest Distributions” and “—Principal
Distributions” in this prospectus supplement.
Interest
Distributions
On
each
distribution date, you will be entitled to receive interest accrued on your
certificate during the related interest accrual period, less the amount of
shortfalls allocated to your certificate due to the Servicemembers Civil Relief
Act or similar state or local laws, and any interest which you earned previously
but which you did not receive. The interest accrual period for all offered
certificates is the period from the distribution date in the prior month (or
the
closing date, in the case of the first distribution date) through the day prior
to the current distribution date. Interest will be calculated for all offered
certificates on the basis of the actual number of days in the interest accrual
period, based on a 360-day year.
There
are
certain circumstances which could reduce the amount of interest paid to you.
See
“Description of the Certificates—Interest Distributions” in this prospectus
supplement.
Principal
Distributions
On
each
distribution date you will receive a distribution of principal if there are
funds available on that date for your class of certificates. Prior to the
stepdown date and in the event (i) a six-month rolling average of loans two
months or more past due or (ii) cumulative realized losses exceed certain
thresholds described under “Description of the Certificates—Principal
Distributions,” principal distributions will be made to the Class A Certificates
and no principal will be distributed on the subordinated certificates or
distributed as part of excess cashflow until the certificate principal balances
of the Class A Certificates are reduced to zero. You should review the priority
of payments described under “Description of the Certificates—Principal
Distributions” in this prospectus supplement.
Credit
Enhancement
Credit
enhancement is intended to reduce the potential risk of loss to holders of
the
certificates as a result of shortfalls in payments received on the mortgage
loans. Credit enhancement can reduce the effect of shortfalls on all classes,
or
it can allocate shortfalls so they affect some classes before others. This
transaction employs the following forms of credit enhancement. See “Description
of the Certificates” in this prospectus supplement.
S-14
Monthly
Excess Interest
Because
more interest is expected to be paid by the mortgagors than is necessary to
pay
the interest earned on the certificates and to pay certain fees and expenses
of
the issuing entity (including any Net Swap Payment owed to the Swap Provider
and
any Swap Termination Payment owed to the Swap Provider, other than a Defaulted
Swap Termination Payment), it is expected there will be excess interest each
month. The excess interest will be used to maintain overcollateralization,
to
pay interest that was previously earned but not paid to the certificates and
to
reimburse the certificates for losses and certain shortfalls that they
experienced previously.
Overcollateralization
If
the
total assets in the issuing entity exceed the total certificate principal
balance of the certificates, there is overcollateralization.
Overcollateralization will be available to absorb losses on the mortgage loans
before such losses affect the certificates. On the closing date, the aggregate
principal balance of the mortgage loans as of the cut-off date will exceed
the
total initial certificate principal balance of the certificates by approximately
$9,588,712. This results in overcollateralization equal to approximately 2.70%
of the aggregate principal balance of the mortgage loans as of the cut-off
date.
If the level of overcollateralization falls below the targeted
overcollateralization amount for a distribution date, the excess interest for
that distribution date will be paid to the certificates as principal. This
will
have the effect of reducing the aggregate certificate principal balance of
the
certificates faster than the principal balance of the mortgage loans until
the
required level of overcollateralization is reached.
Subordination
On
each
distribution date, classes that are lower in order of payment priority will
not
receive payments until the classes that are higher in order of payment priority
have been paid. If there are insufficient funds on a distribution date to pay
all classes, the subordinated classes will be the first to forego payment.
The
chart below summarizes the relative seniority of the various classes of
certificates and indicates the initial and expected post-stepdown level of
credit support provided to the various classes of certificates. The initial
credit support percentage shown below is the sum of the aggregate initial class
certificate balance of the class or classes of certificates subordinate to
a
class or classes plus the initial overcollateralization amount as a percentage
of the initial aggregate principal balance of the mortgage loans and the
expected credit support percentage after stepdown is the sum of the expected
aggregate class certificate balance of the class or classes of certificates
subordinate to a class or classes plus the overcollateralization amount on
the
stepdown date as a percentage of the expected aggregate principal balance of
the
mortgage loans as of the end of the related collection period (after giving
effect to expected principal prepayments in the related prepayment
period).
Priority
of
Payment
Class
or Classes
Initial
Credit
Support
Percentage
Targeted
Credit Support Percentage after
Stepdown
Allocation
of
Losses
Class
A Certificates
21.40
42.80
N/A(1)
Class
M-1 Certificates
17.75
35.50
Class
M-2 Certificates
14.30
28.60
Class
M-3 Certificates
12.35
24.70
Class
M-4 Certificates
10.60
21.20
Class
M-5 Certificates
8.95
17.90
Class
M-6 Certificates
7.40
14.80
Class
M-7 Certificates
5.90
11.80
Class
M-8 Certificates
4.85
9.70
Class
M-9 Certificates
3.70
7.40
Class
B-1 Certificates
2.70
5.40
S-15
(1)
The
certificate principal balances of the Class A Certificates will
not be
reduced by realized losses; however, under certain loss scenarios,
there
will not be enough interest and principal on the mortgage loans
to pay the
Class A Certificates all interest and principal amounts to which
they are
entitled.
Application
of Realized Losses
If,
on
any distribution date after the certificate principal balances of the
certificates have been reduced by the amount of cash paid on that date, the
total certificate principal balance of the certificates is greater than the
total principal balance of the mortgage loans, the certificate principal balance
of the class of subordinated certificates that is lowest in order of payment
priority will be reduced by the amount of such excess. Once the certificate
principal balance of a class is reduced in this way by realized losses allocated
to it, the amount of such reduction will not be reinstated (except in the case
of subsequent recoveries). The certificate principal balances of the Class
A
Certificates will not be reduced by these realized losses, although these
certificates may experience losses if the credit enhancements described in
this
prospectus supplement are exhausted.
Realized
losses which are special hazard losses will be allocated as described above,
except that if the aggregate amount of such losses exceeds a certain level
specified under “Description of the Certificates—Allocation of Losses” in this
prospectus supplement, such excess will be allocated among all the outstanding
classes of Class M and Class B Certificates on a pro
rata
basis.
Interest
Rate Swap Agreement
On
the
closing date, the supplemental interest trust trustee on behalf of the
supplemental interest trust will enter into an interest rate swap agreement
with
the swap provider for the benefit of the offered certificates.
Under
the
interest rate swap agreement, with respect to the first 47 distribution dates,
the supplemental interest trust will pay to the swap provider a fixed-rate
payment (calculated
on a 30/360 basis, except for the first distribution date which will be 25
days)
at a
rate of 5.20% per annum and the swap provider will pay to the supplemental
interest trust a floating-rate payment (calculated on an actual/360 basis)
at a
rate of one-month LIBOR (as determined pursuant to the interest rate swap
agreement), in each case multiplied by the applicable notional amount set forth
on the schedule attached as Appendix
D
to this
prospectus supplement for that distribution date. To the extent that the
fixed-rate payment exceeds the floating-rate payment payable with respect to
any
of the first 47 distribution dates, amounts otherwise available for payments
on
the certificates will be applied on that distribution date to make a net payment
to the swap provider, and to the extent that the floating-rate payment exceeds
the fixed-rate payment payable with respect to any of the first 47 distribution
dates, the swap provider will owe a net payment to the supplemental interest
trust on the business day preceding that distribution date. Any net amounts
received by or paid out from the supplemental interest trust under the interest
rate swap agreement will either increase or reduce the amount available to
make
payments on the offered certificates, as described under “Description of the
Certificates—Distributions from the Supplemental Interest Trust” in this
prospectus supplement. The interest rate swap agreement is scheduled to
terminate following the distribution date in April 2011.
For
further information regarding the interest rate swap agreement, see “Description
of the Certificates—Interest Rate Swap Agreement” in this prospectus
supplement.
Interest
Rate Cap Agreement
On
the
closing date, the supplemental interest trust trustee on behalf of the
supplemental interest trust will enter into an interest rate cap agreement
with
the cap provider for the benefit of the offered certificates. All obligations
of
the issuing entity under the interest rate cap agreement will be paid on or
prior to the closing date.
In
connection with the first 60 distribution dates, the cap provider will be
obligated under the interest rate cap agreement to pay to the supplemental
interest trust on or before each distribution date an amount equal to the
product of (a) the excess, if any, of (i) the one-month LIBOR rate (as
determined pursuant to the interest rate cap agreement) over (ii) 5.32% and
(b)
an amount equal to the lower of (x) the maximum cap notional balance set forth
on the schedule attached as Appendix
E
to this
prospectus supplement for that distribution date and (y) the excess, if any,
of
(A) the aggregate outstanding principal balance of the offered certificates
(prior to taking into account any distributions on such distribution date)
over
(B) the then current notional amount set forth in the swap agreement schedule
attached as Appendix
D
to this
prospectus supplement, determined on an “actual/360” basis. The cap provider’s
obligations under the interest rate cap agreement will terminate following
the
distribution date in May 2012. Any amounts received by the supplemental interest
trust under the interest rate cap agreement will increase the amount available
to make payments on the offered certificates, as described under “Description of
the Certificates—Distributions from the Supplemental Interest Trust” in this
prospectus supplement.
S-16
For
further information regarding the interest rate cap agreement, see “Description
of the Certificates—Interest Rate Cap Agreement” in this prospectus
supplement.
Optional
Termination
The
Servicer, or an affiliate, will have the option to purchase all the mortgage
loans and any properties that the issuing entity acquired in satisfaction of
any
of the mortgage loans, subject to certain conditions described under “The
Pooling and Servicing Agreement—Optional Termination” in this prospectus
supplement. This option can be exercised when the total principal balance of
the
mortgage loans, including the mortgage loans related to REO properties, is
10%
or less of the total principal balance of the mortgage loans on the cut-off
date. Any such optional termination will be permitted only pursuant to a
“qualified liquidation” as defined in Section 860F of the Internal Revenue Code
of 1986, as amended. If the option is exercised, your certificate will be
retired earlier than it would be otherwise and you will be entitled to the
following amounts (to the extent that there is enough cash to make such
payments):
·
the
outstanding certificate principal balance of your
certificate;
·
one
month’s interest on this balance at the related certificate interest
rate;
·
any
interest previously earned but not paid;
and
·
any
“cap carryover amount,” as described in this prospectus supplement, from
all previous distribution dates.
See
“The
Pooling and Servicing Agreement—Optional Termination” in this prospectus
supplement.
Prepayment
and Yield Considerations
The
yields to maturity and weighted average lives of the offered certificates will
depend upon, among other things, the price at which such offered certificates
are purchased, the amount and timing of principal payments on the mortgage
loans, the allocation of available funds to various classes of offered
certificates, the amount and timing of mortgagor delinquencies and defaults
on
the applicable mortgage loans, the rate of liquidations and realized losses
and
the allocation of realized losses to various classes of offered certificates,
the relationship between payments made by the supplemental interest trust to
the
swap provider, if any, and payments made by the swap provider to the
supplemental interest trust, if any, and payments made by the cap provider
to
the supplemental interest trust, if any.
See
“Yield, Prepayment and Maturity Considerations” in this prospectus
supplement.
S-17
Weighted
Average Lives to Maturity (in years)(1)
ARM
PPC
0%
50%
75%
100%
125%
150%
200%
Class
FRM
PPC
0%
50%
75%
100%
125%
150%
200%
A-1
17.53
1.81
1.27
1.00
0.83
0.70
0.54
A-2
28.24
6.90
4.51
3.00
2.03
1.70
1.28
A-3
29.72
17.44
11.94
8.79
5.28
2.35
1.49
M-1
29.05
9.60
6.43
5.29
5.91
6.27
3.87
M-2
29.02
9.57
6.40
5.11
5.01
4.69
2.63
M-3
29.01
9.54
6.38
5.01
4.65
4.12
2.10
M-4
28.99
9.51
6.35
4.95
4.47
3.88
1.99
M-5
28.96
9.47
6.32
4.89
4.34
3.71
1.93
M-6
28.96
9.42
6.28
4.84
4.23
3.58
1.89
M-7
28.95
9.35
6.23
4.78
4.12
3.47
1.84
M-8
28.95
9.25
6.16
4.70
4.03
3.36
1.81
M-9
28.94
9.12
6.06
4.62
3.93
3.27
1.77
(1)
Determined
as described under “Yield, Prepayment and Maturity Considerations” in this
prospectus supplement.
Weighted
Average Lives to Optional Termination (in years)(1)(2)
ARM
PPC
0%
50%
75%
100%
125%
150%
200%
Class
FRM
PPC
0%
50%
75%
100%
125%
150%
200%
A-1
17.53
1.81
1.27
1.00
0.83
0.70
0.54
A-2
28.24
6.90
4.51
3.00
2.03
1.70
1.28
A-3
29.65
13.28
8.79
6.38
3.73
2.35
1.49
M-1
29.03
8.70
5.77
4.78
4.90
3.75
1.76
M-2
29.00
8.70
5.76
4.62
4.63
3.90
1.82
M-3
28.98
8.70
5.75
4.54
4.28
3.82
1.80
M-4
28.96
8.70
5.75
4.50
4.12
3.60
1.73
M-5
28.94
8.70
5.75
4.46
4.00
3.45
1.69
M-6
28.93
8.70
5.75
4.44
3.91
3.33
1.67
M-7
28.92
8.70
5.75
4.41
3.84
3.25
1.63
M-8
28.92
8.70
5.75
4.39
3.79
3.18
1.63
M-9
28.92
8.70
5.75
4.38
3.75
3.13
1.63
(1)
Determined
as described under “Yield, Prepayment and Maturity Considerations” in this
prospectus supplement.
(2)
Assumes
an optional purchase of the mortgage loans on the earliest distribution
date on which it is permitted.
Federal
Income Tax Consequences
Elections
will be made to treat the assets of the issuing entity, exclusive of the
arrangements intended to protect against basis risk for certain of the
certificates, the cap carryover reserve account, the supplemental interest
trust, the interest rate cap agreement, the interest rate swap agreement and
the
swap account and certain other assets specified in the pooling and servicing
agreement, as comprised of multiple real estate mortgage investment conduits
in
a tiered structure for federal income tax purposes.
The
offered certificates will represent (i) regular interests in a REMIC, which
will
be treated as debt instruments of a REMIC, and (ii) the right to receive
payments in respect of cap carryover amounts and the obligation to make payments
to the supplemental interest trust, which will be treated as notional principal
contracts for federal income tax purposes.
For
further information regarding the federal income tax consequences of investing
in the offered certificates, see “Federal Income Tax Consequences” in this
prospectus supplement and in the prospectus.
S-18
Legal
Investment
You
are
encouraged to consult with counsel to see if you are permitted to buy the
offered certificates, since legal investment rules will vary depending on the
type of entity purchasing the offered certificates, whether that entity is
subject to regulatory authority, and if so, by whom.
The
offered certificates will not constitute “mortgage related securities” for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended,
because the mortgage pool contains second lien mortgages. See “Legal Investment”
in this prospectus supplement and in the prospectus.
ERISA
Considerations
If
you
are a fiduciary of any employee benefit plan or other retirement arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended,
or
Section 4975 of the Internal Revenue Code of 1986 or any materially similar
provisions of applicable federal, state or local law, you are encouraged to
consult with counsel as to whether you can buy or hold an offered certificate.
Subject to the considerations and conditions described under “ERISA
Considerations” in this prospectus supplement, it is expected that the Offered
Certificates may be purchased by an employee benefit plan or other arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended,
or
Section 4975 of the Internal Revenue Code of 1986, as amended. Prior to the
termination of the supplemental interest trust, plans or persons acting on
behalf of, or using assets of, a plan may only purchase the Offered Certificates
if the purchase and holding of such certificates also meets the requirements
of
an investor-based class exemption issued by the Department of Labor or a
statutory exemption. A fiduciary of an employee benefit plan or other
arrangement must determine that the purchase of a certificate is consistent
with
its fiduciary duties under applicable law and does not result in a prohibited
transaction under applicable law. See “ERISA Considerations” in this prospectus
supplement and in the prospectus.
Affiliations
Asset
Backed Funding Corporation, the depositor, is an affiliate of Banc of America
Securities LLC, one of the underwriters. Litton Servicing LP, the servicer,
is a
wholly-owned subsidiary of Credit-Based Asset Servicing and Securitization
LLC,
the sponsor. In addition, the underwriters and JPMorgan Chase Bank, N.A. have
each provided financing to the sponsor in connection with certain of the
mortgage loans in the mortgage pool.
On
February 16, 2007, the Sponsor announced it had entered into a definitive merger
agreement with Fieldstone Investment Corporation (“Fieldstone”), the parent of
an originator of certain mortgage loans in the trust. Completion of the
transaction, which is currently expected to occur in the second quarter of
2007,
is contingent upon various closing conditions, including regulatory approvals
and certain consents of third parties. On May 22, 2007, Fieldstone announced
that the proposed merger of Fieldstone with a subsidiary of the Sponsor was
approved by a special meeting of Fieldstone stockholders.
There
are
no additional relationships, agreements or arrangements outside of this
transaction among the transaction parties that are material to an understanding
of the offered certificates.
S-19
RISK
FACTORS
The
risk factors discussed below and under the heading “Risk Factors” in the
prospectus describe the material risks of an investment in the offered
certificates and should be carefully considered by all potential
investors.
High
combined loan-to-value ratios increase risk of loss
Mortgage
loans with high combined loan-to-value ratios leave the mortgagor with little
to
no equity in the related mortgaged property. See the mortgage loan tables in
Appendix A
to this
prospectus supplement for information regarding the combined loan-to-value
ratios of the mortgage loans. An overall decline in the residential real estate
market, a rise in interest rates over a period of time and the general condition
of a mortgaged property, as well as other factors, may have the effect of
reducing the value of such mortgaged property from the appraised value at the
time the combined loan-to-value ratio was calculated. If there is a reduction
in
value of the mortgaged property, the combined loan-to-value ratio may increase
over what it was at the time of calculation. Such an increase may reduce the
likelihood that liquidation proceeds or other proceeds will be sufficient to
pay
off the mortgage loan fully. There can be no assurance that the combined
loan-to-value ratio of any mortgage loan determined at any time is less than
or
equal to its combined loan-to-value ratio as of an earlier date. Additionally,
the value of a mortgaged property used in the calculation of the combined
loan-to-value ratios of the mortgage loans may differ from the appraised value
of such mortgaged property or the actual value of such mortgaged
property.
There
are risks involving unpredictability of prepayments and the effect of
prepayments on yields
The
rate
of principal payments, the aggregate amount of distributions and the yields
to
maturity of the offered certificates will be related to the rate and timing
of
payments of principal on the applicable mortgage loans. The rate of principal
payments on the mortgage loans will in turn be affected by the amortization
schedules of the mortgage loans and by the rate of principal prepayments
(including for this purpose prepayments resulting from refinancings,
liquidations of the mortgage loans due to defaults, casualties or condemnations
and repurchases by the sponsor or the servicer). Mortgagors may prepay their
mortgage loans in whole or in part at any time. We cannot predict the rate
at
which mortgagors will repay their mortgage loans. A prepayment of a mortgage
loan generally will result in a prepayment of the certificates.
·
If
you purchase your certificates at a discount and principal is repaid
more
slowly than you anticipate, then your yield may be lower than you
anticipate.
·
If
you purchase your certificates at a premium and principal is repaid
faster
than you anticipate, then your yield may be lower than you
anticipate.
·
The
rate of prepayments on the mortgage loans will be sensitive to prevailing
interest rates. Generally, if prevailing interest rates decline
significantly below the interest rates on the fixed-rate mortgage
loans,
those mortgage loans are more likely to prepay than if prevailing
rates
remain above the interest rates on such mortgage loans. Conversely,
if
prevailing interest rates rise significantly, the prepayments on
fixed-rate mortgage loans are likely to decrease. The prepayment
behavior
of the adjustable-rate mortgage loans and of the fixed-rate mortgage
loans
may respond to different factors, or may respond differently to the
same
factors. If at the time of their first adjustment, the interest rates
on
any of the adjustable-rate mortgage loans would be subject to adjustment
to a rate higher than the then prevailing mortgage interest rates
available to the related borrowers, such borrowers may prepay their
adjustable-rate mortgage loans. Adjustable-rate mortgage loans may
also
suffer an increase in defaults and liquidations following upward
adjustments of their interest rates, especially following their initial
adjustments.
·
The
rate of prepayments on pools of mortgage loans may vary significantly
over
time and may be influenced by a variety of economic, geographic and
other
factors, including changes in mortgagors’ housing needs, job transfers,
unemployment, mortgagors’ net equity in the mortgaged properties and
servicing decisions.
S-20
·
As
of the cut-off date, certain of the mortgage loans required the mortgagor
to pay a charge if the mortgagor prepays the mortgage loan during
periods
ranging, in substantially all cases, from one year to three years
after
the mortgage loan was originated. See the mortgage loan tables under
“Summary of Prospectus Supplement” in this prospectus supplement for the
percentages of these mortgage loans in the mortgage pool. A prepayment
charge may discourage a mortgagor from prepaying the mortgage loan
during
the applicable period. Such prepayment charges will be distributed
to
holders of the Class P Certificates and not to holders of the offered
certificates. The servicer is entitled to waive prepayment charges,
subject to certain conditions specified in the prospectus under “Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements—Collection and Other Servicing
Procedures.”
·
The
sponsor may be required to purchase mortgage loans from the issuing
entity
in the event certain breaches of representations and warranties have
not
been cured. The servicer (or its affiliates) has the option to purchase
from the issuing entity mortgage loans that are at least 120 days
or more
delinquent under the circumstances described in the pooling and servicing
agreement. In addition, the Servicer, or an affiliate, has the right
to
purchase all of the mortgage loans and REO properties in the issuing
entity and thereby effect the early retirement of the certificates
under
the circumstances set forth under “The Pooling and Servicing
Agreement—Optional Termination” in this prospectus supplement. This
purchase will have the same effect on the holders of the offered
certificates as a prepayment of the mortgage loans. The removal of
any
delinquent Mortgage Loan by the Servicer pursuant to this option
may have
an effect on whether or not there exists, or continues to exist,
a loss
and delinquency trigger event, which determines the level of
overcollateralization.
·
The
servicer will generally enforce due-on-sale clauses contained in
the
mortgage notes in connection with transfers of mortgaged
properties.
·
If
the rate of default and the amount of losses on the mortgage loans
are
higher than you expect, then your yield may be lower than you
expect.
·
If
the level of overcollateralization falls below the targeted
overcollateralization amount for a distribution date, excess interest
will
be paid to the certificates as principal. This will have the effect
of
reducing the total certificate principal balance of the certificates
faster than the principal balance of the mortgage loans until the
required
level of overcollateralization is
reached.
·
The
servicer may enter into programs with third parties which may be
designed
to encourage refinancing. As a result of these programs the rate
of
principal prepayments of the mortgage loans in the mortgage pool
may be
higher than would otherwise be the
case.
Adjustable
rate mortgage loan borrowers may be more likely to prepay
Mortgage
interest rates on the adjustable-rate mortgage loans at any time may not equal
the prevailing mortgage interest rates for similar adjustable-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-rate mortgage loans may nevertheless obtain adjustable-rate
mortgage loans at a time when they regard the mortgage interest rates (and,
therefore, the payments) on fixed-rate mortgage loans as unacceptably high.
These mortgagors may be induced to refinance adjustable-rate mortgage loans
when
the mortgage interest rates and monthly payments on comparable fixed-rate
mortgage loans decline to levels which these mortgagors regard as acceptable,
even though these mortgage interest rates and monthly payments may be
significantly higher than the current mortgage interest rates and monthly
payments on the mortgagors’ adjustable-rate mortgage loans. The ability to
refinance a mortgage loan will depend on a number of factors prevailing at
the
time refinancing is desired, such as, among other things, 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.
S-21
There
is a risk that interest payments on the mortgage loans may be insufficient
to
maintain overcollateralization
Because
the weighted average of the interest rates on the mortgage loans is expected
to
be higher than the weighted average of the certificate interest rates on the
certificates, the mortgage loans are expected to generate more interest than
is
needed to pay interest owed on the certificates as well as certain fees and
expenses of the issuing entity (including any net swap payment owed to the
swap
provider and any swap termination payment, other than a defaulted swap
termination payment). After these financial obligations of the issuing entity
are covered, the available excess interest will be used to maintain
overcollateralization. Any remaining interest will then be used to compensate
for losses that occur on the mortgage loans. We cannot assure you, however,
that
enough excess interest will be generated to maintain the overcollateralization
level required by the rating agencies. The factors described below, as well
as
the factors described in the next Risk Factor, will affect the amount of excess
interest that the mortgage loans will generate:
·
When
a mortgage loan is prepaid in full or repurchased, excess interest
will
generally be reduced because the mortgage loan will no longer be
outstanding and generating interest or, in the case of a partial
prepayment, will be generating less
interest.
·
Every
time a mortgage loan is liquidated or written off, excess interest
will be
reduced because that mortgage loan will no longer be outstanding
and
generating interest.
·
If
the rates of delinquencies, defaults or losses on the mortgage loans
are
higher than expected, excess interest will be reduced by the amount
necessary to compensate for any shortfalls in cash available on a
distribution date to pay
certificateholders.
·
The
certificate interest rates of the offered certificates are based
on
one-month LIBOR while the adjustable-rate mortgage loans have rates
that
are adjustable based on six-month LIBOR and the fixed-rate mortgage
loans
have rates that do not adjust. As a result, the certificate interest
rates
on the offered certificates may increase relative to interest rates
on the
mortgage loans, thus requiring that more of the interest generated
by the
mortgage loans be applied to cover interest on the offered
certificates.
Effects
of mortgage interest rates and other factors on the certificate interest rates
of the offered certificates
The
yields to maturity on the offered certificates may be affected by the inclusion
of fixed-rate mortgage loans and the resetting of the mortgage interest rates
on
the adjustable-rate mortgage loans on their related adjustment dates due to
the
factors set forth below. The mortgage interest rates on the fixed-rate mortgage
loans are fixed and will not vary with any index and the mortgage interest
rates
on the adjustable-rate mortgage loans are based on six-month LIBOR and do not
adjust for periods ranging from six months to 5 years after the dates of their
origination, while the certificate interest rates on the offered certificates
are based on one-month LIBOR, are subject to the rate cap and are adjusted
monthly. This mismatch of indices and adjustment frequency may cause the
one-month LIBOR-based certificate interest rates on the offered certificates
to
increase relative to the mortgage interest rates on the mortgage loans, which
would require a greater portion of the interest generated by the mortgage loans
to be applied to cover interest accrued on the offered certificates, and could
result in the limitation of the certificate interest rates on some or all of
the
offered certificates by the rate cap and could therefore adversely affect the
yield to maturity on such certificates. The rate cap is equal to the weighted
average of the interest rates on the mortgage loans net of certain expenses
of
the issuing entity (including any net swap payment owed to the swap provider
and
any swap termination payment owed to the swap provider, other than a defaulted
swap termination payment). In addition, you should note that the rate cap will
decrease if the mortgage loans with relatively high mortgage interest rates
prepay at a faster rate than the other mortgage loans with relatively low
mortgage interest rates, which will increase the likelihood that the rate cap
will apply to limit the certificate interest rates on one or more classes of
the
offered certificates.
S-22
If
the
certificate interest rate on any class of the offered certificates is limited
by
a rate cap for any distribution date, the resulting cap carryover amounts may
be
recovered by the holders of such classes of certificates on that same
distribution date or on future distribution dates, to the extent that on that
distribution date or future distribution dates there are any available funds
remaining after certain other distributions on the offered certificates and
the
payment of certain fees and expenses of the issuing entity (including any net
swap payment owed to the swap provider and any swap termination payment owed
to
the swap provider, other than a defaulted swap termination payment). See
“Description of the Certificates—Application of Monthly Excess Cashflow Amounts”
in this prospectus supplement. The ratings on the offered certificates will
not
address the likelihood of any such recovery of cap carryover amounts by holders
of such certificates.
Amounts
distributed on the offered certificates in respect of shortfalls may be
supplemented by the interest rate swap agreement (to the extent that the
floating payment by the swap provider exceeds the fixed payment by the issuing
entity on any distribution date and such amount is available in the priority
described in this prospectus supplement) and the interest rate cap agreement
(to
the extent available in the priority described in this prospectus supplement).
However, the amounts received from the swap provider under the interest rate
swap agreement and the cap provider under the interest rate cap agreement may
be
insufficient to pay holders of the applicable certificates the full amount
of
interest which they would have received absent the limitations of the rate
cap.
There
are risks relating to alternatives to foreclosure
Certain
mortgage loans may become delinquent after the closing date. The servicer may
either foreclose on any such mortgage loan or work out an agreement with the
mortgagor if the delinquency is not cured, which may involve waiving or
modifying certain terms of the mortgage loan. If the servicer extends the
payment period or accepts a lesser amount than stated in the mortgage note
in
satisfaction of the mortgage note, your yield may be reduced.
Nature
of non-prime mortgage loans may increase risk of loss
All
of
the mortgage loans are of non-prime credit quality; i.e., do not meet the
underwriting requirements of Fannie Mae and Freddie Mac. The originators make
non-prime mortgage loans to borrowers that typically have limited access to
traditional mortgage financing for a variety of reasons, including impaired
or
limited past credit history, lower credit scores, high combined loan-to-value
ratios or high debt-to-income ratios. As a result of these factors,
delinquencies and liquidation proceedings are more likely with these mortgage
loans than with mortgage loans that satisfy prime mortgage loan credit
standards. In the event the mortgage loans in the mortgage pool do become
delinquent or subject to liquidation, you may face delays in receiving payment
and may suffer losses if the credit enhancements are insufficient to cover
the
delays and losses.
The
interest rate swap agreement and the swap provider
Any
amounts received by the supplemental interest trust from the swap provider
under
the interest rate swap agreement will be applied as described in this prospectus
supplement to pay interest shortfalls and basis risk shortfalls, maintain
overcollateralization and cover realized loss amortization amounts. However,
no
amounts will be payable by the swap provider unless the floating amount owed
by
the swap provider with respect to a distribution date exceeds the fixed amount
owed to the swap provider with respect to such distribution date. This will
not
occur except in periods when one-month LIBOR (as determined pursuant to the
interest rate swap agreement) generally exceeds 5.20%. No assurance can be
made
that any amounts will be received by the supplemental interest trust trustee
under the interest rate swap agreement, or that any such amounts that are
received will be sufficient to maintain required overcollateralization or to
cover interest shortfalls, basis risk shortfalls and realized loss amortization
amounts. Any net payment payable to the swap provider under the terms of the
interest rate swap agreement will reduce amounts available for distribution
to
certificateholders, and may reduce the certificate interest rates of the
certificates. If the rate of prepayments on the mortgage loans is faster than
anticipated, the schedule on which payments due under the interest rate swap
agreement are calculated may exceed the aggregate principal balance of the
mortgage loans, thereby increasing the relative proportion of interest
collections on the mortgage loans that must be applied to make net payments
to
the swap provider. The combination of a rapid rate of prepayment and low
prevailing interest rates could adversely affect the yields on the offered
certificates. In addition, any termination payment payable by the supplemental
interest trust trustee to the swap provider (other than a termination payment
resulting from a swap provider trigger event) in the event of early termination
of the interest rate swap agreement will reduce amounts available for
distribution to certificateholders.
S-23
Upon
early termination of the interest rate swap agreement, the supplemental interest
trust or the swap provider may be liable to make a swap termination payment
to
the other party (regardless of which party caused the termination). The swap
termination payment will be computed in accordance with the procedures set
forth
in the interest rate swap agreement. In the event that the supplemental interest
trust is required to make a swap termination payment, that payment will be
paid
to the supplemental interest trust and then to the swap account for payment
to
the swap provider on or prior to the related distribution date, and on any
subsequent distribution dates until paid in full, generally prior to
distributions to certificateholders. This feature may result in losses on the
certificates. Due to the priority of the applications of the available funds,
the subordinated certificates will bear the effects of any shortfalls resulting
from a net swap payment or swap termination payment by the supplemental interest
trust before such effects are borne by the Class A Certificates and one or
more
classes of the subordinated certificates may suffer a loss as a result of such
payment. Investors should note that the level of one-month LIBOR as of May29,2007 was approximately 5.32% which means the swap provider will make a net
swap
payment to the supplemental interest trust unless and until one-month LIBOR
equals approximately 5.20%.
To
the
extent that distributions on the offered certificates depend in part on payments
to be received by the supplemental interest trust under the interest rate swap
agreement, the ability of the supplemental interest trust trustee to make such
distributions on such certificates will be subject to the credit risk of the
swap provider to the interest rate swap agreement. In addition, no assurance
can
be made that in the event of an early termination of the interest rate swap
agreement, the depositor will be able to obtain a replacement interest rate
swap
agreement. See “Description of the Offered Certificates—The Swap Provider” in
this prospectus supplement.
The
interest rate cap agreement is subject to counterparty
risk
The
assets of the issuing entity include an interest rate cap agreement that will
require the cap provider to make certain payments for the benefit of the holders
of the offered certificates. To the extent that payments on the offered
certificates depend in part on payments to be received by the supplemental
interest trust under the interest rate cap agreement, the ability of the issuing
entity to make such payments on such classes of certificates will be subject
to
the credit risk of the cap provider.
Some
of the mortgage loans have an initial interest only period, which may result
in
increased delinquencies and losses or rates of prepayment
Some
of
the mortgage loans require the borrowers to make scheduled payments of interest
only for the first 24, 36, 60, 84 or 120 months following origination. See
the
mortgage loan tables under “Summary of Prospectus Supplement” in this prospectus
supplement for the percentages of these mortgage loans in the mortgage pool.
During this period, the payment due from the related mortgagor will be less
than
that of a traditional mortgage loan. In addition, the principal balance of
the
mortgage loan will not be reduced (except in the case of prepayments) because
there will be no scheduled monthly payments of principal during this period.
Accordingly, no principal payments will be distributed to the related
certificates from these mortgage loans during their interest only period except
in the case of a prepayment.
After
the
initial interest only period, payments on an interest only mortgage loan will
be
recalculated to amortize fully its unpaid principal balance over its remaining
life and the mortgagor will be required to make scheduled 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 the related
mortgage loan. In some cases, this increase in the mortgagor’s scheduled monthly
payment will occur when the mortgagor’s monthly interest payment may also be
increasing as a result of an increase in the mortgage interest rate on the
first
adjustment date. In underwriting interest only mortgage loans, the originators
generally do not consider the ability of mortgagors to make payments of
principal at the end of the interest only period. Higher scheduled monthly
payments may induce the related mortgagors to refinance their mortgage loans,
which would result in higher prepayments. In addition, in default situations
losses may be greater on these mortgage loans because they do not amortize
during the initial period. Losses, to the extent not covered by credit
enhancement, will be allocated to the related certificates.
S-24
Mortgage
loans with an initial interest only period are relatively new in the secondary
mortgage market. The performance of these mortgage loans may be significantly
different from mortgage loans that amortize from origination. In particular,
these mortgagors may be more likely to refinance their mortgage loans, which
may
result in higher prepayment speeds than would otherwise be the
case.
Balloon
mortgage loans increase the risk of loss
Balloon
mortgage loans require a mortgagor to make a large scheduled lump sum payment
of
principal at the end of the loan term. If the mortgagor is unable to pay the
lump sum or refinance such amount, you may suffer a loss. In addition, the
servicer will not advance the unpaid principal balance remaining at maturity
of
a balloon loan. See the mortgage loan tables under “Summary of Prospectus
Supplement” in this prospectus supplement for the percentages of these mortgage
loans in the mortgage pool.
There
are risks relating to subordinate loans
Certain
of the mortgage loans evidence a second lien that is subordinate to the rights
of the mortgagee under a first mortgage. The proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding principal balance of such junior mortgage loans only to the extent
that the claims of the related senior mortgage loans have been satisfied in
full, including any foreclosure costs. In circumstances where the servicer
determines that it would be uneconomical to foreclose on the related mortgaged
property, the servicer may write-off the entire outstanding principal balance
of
the related mortgage loan as bad debt. In addition, the servicer may write-off
any second lien mortgage loan that is delinquent in payment by 180 days or
more.
The foregoing considerations will be particularly applicable to junior mortgage
loans that have high combined loan-to-value ratios because the servicer is
more
likely to determine that foreclosure would be uneconomical. You should consider
the risk that to the extent losses on junior mortgage loans are not covered
by
available credit enhancement, such losses will be borne by the holders of the
certificates.
There
are risks relating to geographic concentration of the mortgage
loans
The
chart
presented under “Summary of Prospectus Supplement—The Mortgage Pool” lists the
states with the highest concentrations of mortgage loans in the mortgage pool,
based on the aggregate principal balance of the mortgage loans in the mortgage
pool as of the cut-off date.
California,
Florida and several other states have experienced natural disasters, such as
earthquakes, fires, floods and hurricanes, which may not be fully insured
against and which may result in property damage and losses on the mortgage
loans.
In
addition, the conditions below will have a disproportionate impact on the
mortgage loans in general:
·
Economic
conditions in states listed in the chart in the summary which may
or may
not affect real property values may affect the ability of mortgagors
to
repay their loans on time.
·
Declines
in the residential real estate markets in the states listed in the
chart
in the summary may reduce the values of properties located in those
states, which would result in an increase in the combined loan-to-value
ratios.
·
Any
increase in the market value of properties located in the states
listed in
the chart in the summary would reduce the combined loan-to-value
ratios
and could, therefore, make alternative sources of financing available
to
the mortgagors at lower interest rates, which could result in an
increased
rate of prepayment of the mortgage
loans.
Residential
real estate values may fluctuate and adversely affect your
investment
There
can
be no assurance that values of the mortgaged properties have remained or
will
remain at their levels on the dates of origination of the related mortgage
loans. The value of any mortgaged property generally will change over time
from
its value on the appraisal or sales date. If residential real estate values
generally or in a particular geographic area decline, the combined loan-to-value
ratios shown in the tables in Appendix
A
might
not be a reliable indicator of the rates of delinquencies, foreclosures and
losses that could occur on the mortgage loans. If the residential real estate
market should experience an overall decline in property values large enough
to
cause the outstanding balances of the mortgage loans and any secondary financing
on the related mortgaged properties to equal or exceed the value of the
mortgaged properties, delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry or
in the
sponsor’s prior securitizations involving the depositor.
S-25
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 the 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. To the extent
that credit enhancements do not cover such losses, your yield may be adversely
impacted.
Credits
scores may not accurately predict the likelihood of
default
Each
originator generally uses credit scores as part of its underwriting process.
The
tables in Appendix
A
show
credit scores for the mortgagors obtained at the time of origination of their
mortgage loans. A credit 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 credit
scores were developed to indicate a level of default probability over a two-year
period, which does not correspond to the life of most mortgage loans.
Furthermore, credit scores were not developed specifically for use in connection
with mortgage loans, but for consumer loans in general. Therefore, credit scores
do not address particular mortgage loan characteristics that influence the
probability of repayment by the borrower. None of the depositor, the sponsor
or
the originators makes any representations or warranties as to any borrower’s
current credit score or the actual performance of any mortgage loan or that
a
particular credit score should be relied upon as a basis for an expectation
that
a borrower will repay its mortgage loan according to its terms.
There
are risks in holding subordinated certificates
The
protections afforded the Class A Certificates in this transaction create risks
for the subordinated certificates. Prior to any purchase of any subordinated
certificates, consider the following factors that may adversely impact your
yield:
·
Because
the subordinated certificates receive interest and principal distributions
after the Class A Certificates receive such distributions, there
is a
greater likelihood that the subordinated certificates will not receive
the
distributions to which they are entitled on any distribution
date.
·
If
the servicer determines not to advance a delinquent payment on a
mortgage
loan because such amount is not recoverable from a mortgagor, there
may be
a shortfall in distributions on the certificates which will impact
the
subordinated certificates.
·
The
portion of the shortfalls in the amount of interest collections on
mortgage loans that are attributable to prepayments in full and are
not
covered by the servicer and shortfalls in interest collections arising
from the timing of partial principal prepayments may result in a
shortfall
in distributions on the certificates, which will disproportionately
impact
the subordinated certificates.
·
The
subordinated certificates are not expected to receive principal
distributions until, at the earliest, June 2010 (unless the Class
A
Certificates are reduced to zero prior to such
date).
·
Losses
resulting from the liquidation of defaulted mortgage loans will
first
reduce monthly excess cashflow and then reduce the level of
overcollateralization, if any, for the certificates. Realized losses
on
the mortgage loans, to the extent they exceed the amount of excess
interest and overcollateralization following distributions of principal
on
the related distribution date and any net swap payments received
under the
interest rate swap agreement or payments received under the interest
rate
cap agreement, will be allocated to the subordinated certificates
in
reverse order of payment priority. No principal or interest will
be
distributable on the amount by which the certificate principal
balance of
a class has been reduced by a realized loss allocated to a subordinated
certificate (except where a certificate principal balance has been
increased by a subsequent recovery). A loss allocation results
in a
reduction in a certificate balance without a corresponding distribution
of
cash to the holder. A lower certificate balance will result in
less
interest accruing on the
certificate.
S-26
·
The
earlier in the transaction that a loss on a mortgage loan occurs,
the
greater the impact on yield.
See
“Description of the Certificates” and “Yield, Prepayment and Maturity
Considerations” in this prospectus supplement for more detail.
Decrement
tables are based upon assumptions and models
The
decrement tables set forth in Appendix
B
have
been prepared on the basis of the modeling assumptions described under “Yield,
Prepayment and Maturity Considerations—Weighted Average Lives.” There will
likely be discrepancies between the characteristics of the actual mortgage
loans
included in the mortgage pool and the characteristics of the assumed mortgage
loans used in preparing the decrement tables. Any such discrepancy may have
an
effect upon the percentages of original certificate principal balances
outstanding set forth in the decrement tables (and the weighted average lives
of
the offered certificates). In addition, to the extent that the mortgage loans
that actually are included in the mortgage pool have characteristics that differ
from those assumed in preparing the decrement tables, the certificate principal
balance of a class of offered certificates could be reduced to zero earlier
or
later than indicated by the decrement tables.
In
the event the sponsor is not able to repurchase or replace defective mortgage
loans, you may suffer losses on your certificates
The
sponsor will make various representations and warranties related to the mortgage
loans. If the sponsor fails to cure a material breach of its representations
and
warranties with respect to any mortgage loan in a timely manner, the sponsor
will be required to repurchase, or in certain circumstances, substitute for,
the
defective mortgage loan. In the event that the sponsor is not able to repurchase
or substitute for any defective mortgage loans, for financial or other reasons,
you may suffer losses on your certificates. The inability of the sponsor to
repurchase or replace defective mortgage loans would likely cause the mortgage
loans to experience higher rates of delinquencies, defaults and losses. As
a
result, shortfalls in the distributions due on your certificates could
occur.
Recent
developments in the residential mortgage market may adversely affect the market
value of your certificates
Investors
should note that the residential mortgage market in the United States has
recently encountered a variety of difficulties and changed economic conditions
that may adversely affect the performance or market value of your
certificates.
In
recent
months, delinquencies and losses with respect to residential mortgage loans
generally have increased and may continue to increase, particularly in the
subprime sector. In addition, in recent months residential property values
in
many states have declined or remained stable, after extended periods during
which those values appreciated. A continued decline or an extended flattening
in
those values may result in additional increases in delinquencies and losses
on
residential mortgage loans generally, especially with respect to second homes
and investor properties, and with respect to any residential mortgage loans
where the aggregate loan amounts (including any subordinate loans) are close
to
or greater than the related property values.
S-27
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. Any increase in prevailing market interest rates may result
in
increased payments for borrowers who have adjustable rate mortgage loans.
Moreover, with respect to hybrid mortgage loans after their initial fixed rate
period, and with respect to mortgage loans with a negative amortization feature
which reach their negative amortization cap, borrowers may experience a
substantial increase in their monthly payment even without an increase in
prevailing market interest rates. Borrowers seeking to avoid these increased
monthly payments by refinancing their mortgage loans may no longer be able
to
find available replacement loans at comparably low interest rates. A decline
in
housing prices may also leave borrowers with insufficient equity in their homes
to permit them to refinance, and in addition many mortgage loans have prepayment
charges that inhibit refinancing. Furthermore, borrowers who intend to sell
their homes on or before the expiration of the fixed rate periods on their
mortgage loans may find that they cannot sell their properties for an amount
equal to or greater than the unpaid principal balance of their mortgage loans.
These events, alone or in combination, may contribute to higher delinquency
rates.
In
addition, several residential mortgage loan originators who originate subprime
mortgage loans have recently experienced serious financial difficulties and,
in
some cases, bankruptcy, including People’s Choice Home Loan, Inc. and New
Century Mortgage Corporation, two of the originators of the Mortgage Loans,
which filed for bankruptcy protection under Chapter 11 of the U.S. bankruptcy
code on March 30, 2007 and April 1, 2007, respectively. Those difficulties
have
resulted in part from declining markets for their mortgage loans as well as
from
claims for repurchases of mortgage loans previously sold under provisions that
require repurchase in the event of early payment defaults or for material
breaches of representations and warranties made on the mortgage loans, such
as
fraud claims. These general market conditions may affect the performance of
the
mortgage loans backing your certificates and, even if they do not affect
performance, may adversely affect the market value of your
certificates.
Various
federal, state and local regulatory authorities have taken or proposed actions
that could hinder the ability of the servicer to foreclose promptly on defaulted
mortgage loans. Any such actions may adversely affect the performance of the
mortgage loans and the value of the certificates.
United
States military operations may increase risk of shortfalls in
interest
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 issuing entity,
the interest rate limitation of the Servicemembers Civil Relief Act and any
comparable state law, will apply. Substantially all of the mortgage loans have
mortgage interest rates which exceed such limitation, if applicable. This may
result in interest shortfalls on the mortgage loans, which, in turn, will be
allocated ratably in reduction of accrued interest on all classes of
interest-bearing certificates, irrespective of the availability of excess cash
flow or other credit enhancement. None of the originators, the depositor, the
underwriters, the sponsor, the servicer or any other party has 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
Distributions” in this prospectus supplement and “Certain Legal Aspects of the
Mortgage Loans—Servicemembers Civil Relief Act” in the prospectus.
Conflicts
of interest between the servicer and the issuing entity
The
servicer or an affiliate of the servicer will initially, directly or indirectly,
own all or a portion of the Class B-1, Class CE-1, Class CE-2, Class P and
the
Residual Certificates. The timing of mortgage loan foreclosures and sales of
the
related mortgaged properties, which will be under the control of the servicer,
may affect the weighted average lives and yields of the offered certificates.
You should consider that the timing of such foreclosures or sales may not be
in
the best interests of all certificateholders and that no formal policies or
guidelines have been established to resolve or minimize such a conflict of
interest.
S-28
THE
MORTGAGE POOL
The
statistical information presented in this prospectus supplement relates to
the
Mortgage Loans and related mortgaged properties as of the Cut-off Date, as
adjusted for scheduled principal payments due on or before the Cut-off Date
whether or not received (each, a “Cut-off
Date Principal Balance”).
Prior
to the Closing Date, mortgage loans may be removed and other mortgage loans
may
be substituted for them. The Depositor believes that the information set forth
in this prospectus supplement with respect to the Mortgage Loans will be
representative of the characteristics of the mortgage pool as it will be
constituted on the Closing Date. Unless otherwise noted, all statistical
percentages or weighted averages set forth in this prospectus supplement are
measured as a percentage of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date.
General
The
assets included in the Issuing Entity will consist primarily of a pool (the
“Mortgage
Pool”)
of
closed-end, fixed-rate and adjustable-rate non-prime mortgage loans (the
“Mortgage
Loans”).
The
tables in “Summary of Prospectus Supplement—The Mortgage Pool” and in
Appendix
A
to this
prospectus supplement set forth certain statistical information with respect
to
all of the Mortgage Loans in the Mortgage Pool. Due to rounding, the percentages
shown may not total 100.00%.
The
“Principal
Balance”
of
a
Mortgage Loan, as of any date, is equal to the principal balance of such
Mortgage Loan at its origination, less the sum of (i) all collections and other
amounts credited against the principal balance of any such Mortgage Loan, (ii)
the principal portion of Advances, (iii) any Deficient Valuation and (iv) any
principal reduction resulting from a Servicer Modification. The “Pool
Balance”
is
equal to the aggregate of the Principal Balances of the Mortgage
Loans.
The
Depositor will purchase the Mortgage Loans from the Sponsor pursuant to the
Mortgage Loan Purchase Agreement (the “Mortgage
Loan Purchase Agreement”),
dated
as of the Cut-off Date, between the Sponsor and the Depositor. Pursuant to
the
Pooling and Servicing Agreement, the Depositor will cause the Mortgage Loans
to
be assigned to the Trustee for the benefit of the certificateholders. See “The
Pooling and Servicing Agreement” in this prospectus supplement.
The
Mortgage Loans were selected from the Sponsor’s portfolio of mortgage loans. The
Mortgage Loans were acquired by the Sponsor in the secondary market in the
ordinary course of its business. The Sponsor acquired approximately 22.50%,
19.99%, 19.93% and 19.70% of the Mortgage Loans from Fieldstone Mortgage
Company, Wilmington Finance Inc., New Century Mortgage Corporation and People’s
Choice Home Loan, Inc., respectively. The remainder of the Mortgage Loans were
originated by originators that each originated less than 10% of the Mortgage
Loans.
Based
on
the representations made by the Sponsor, the Depositor believes that each of
the
Mortgage Loans in the Mortgage Pool was originated or acquired generally in
accordance with the underwriting standards described under “Underwriting
Standards” in this prospectus supplement.
Under
the
Pooling and Servicing Agreement, the Sponsor will make certain representations
and warranties to the Trustee relating to, among other things, the due execution
and enforceability of the Pooling and Servicing Agreement, its title to the
Mortgage Loans and certain characteristics of the Mortgage Loans and, subject
to
certain limitations, will be obligated to repurchase or substitute a similar
mortgage loan for any Mortgage Loan as to which there exists deficient
documentation or an uncured breach of any such representation or warranty,
if
such breach of any such representation or warranty materially and adversely
affects the certificateholders’ interests in such Mortgage Loan. The Depositor
will make no representations or warranties with respect to the Mortgage Loans
and will have no obligation to repurchase or substitute for Mortgage Loans
with
deficient documentation or that are otherwise defective. The Sponsor is selling
the Mortgage Loans without recourse and will have no obligation with respect
to
the Certificates in its capacity as seller other than the repurchase or
substitution obligations described above and its reimbursement obligation
described under “The
Pooling and Servicing Agreement—Repurchase or Substitution of Mortgage Loans”
in
this
prospectus supplement and “Description of the Agreements—Material Terms of the
Pooling and Servicing Agreements and Underlying Servicing
Agreements—Representations and Warranties; Repurchases” in the
prospectus.
S-29
The
Mortgage Pool will consist of fixed-rate Mortgage Loans (the “Fixed-Rate
Mortgage Loans”)
and
adjustable-rate Mortgage Loans (the “Adjustable-Rate
Mortgage Loans”).
All
of the Adjustable-Rate Mortgage Loans have an initial fixed mortgage interest
rate for 6 months, two years, three years or five years.
The
Mortgage Loans are secured by mortgages, deeds of trust or other similar
security instruments (each, a “Mortgage”)
which
create first liens (each, a “First
Lien”)
or
second liens (each, a “Second
Lien”)
on
residential properties consisting primarily of one- to four-family dwelling
units (each, a “Mortgaged
Property”).
See
“Summary of Prospectus Supplement—The Mortgage Pool” for the percentage of
Mortgage Loans secured by a First Lien (each, a “First
Lien Mortgage Loan”)
in the
Mortgage Pool and the percentage of Mortgage Loans secured by a Second Lien
on
the related Mortgaged Property (each, a “Second
Lien Mortgage Loan”)
in the
Mortgage Pool.
Substantially
all of the Mortgage Loans have scheduled Monthly Payments due on the first
day
of the month (the day such Monthly Payments are due with respect to each
Mortgage Loan, a “Due
Date”).
Each
Mortgage Loan accrues interest at a per annum rate (the “Mortgage
Interest Rate”)
specified in the related Mortgage Note.
Certain
of the Mortgage Loans will provide for interest only Monthly Payments for the
first 24, 36, 60, 84 or 120 months of the term of such Mortgage Loans (each,
an
“Interest
Only Mortgage Loan”).
See
“Summary of Prospectus Supplement—The Mortgage Pool” for the percentages of
Interest Only Mortgage Loans in the Mortgage Pool. The Monthly Payments for
the
Interest Only Mortgage Loans will include both accrued interest and principal
on
these Mortgage Loans beginning in the 25th, 37th, 61st, 85th or 121st
month of
the term of these Mortgage Loans. As a result of this payment structure, Monthly
Payments beginning in the 25th, 37th, 61st, 85th or 121st month of the term
of
such Mortgage Loans may be significantly larger than the first 24, 36, 60,
84 or
120 Monthly Payments required under the related Mortgage Notes.
Certain
of the Mortgage Loans will not fully amortize by their respective maturity
dates
(each, a “Balloon
Loan”).
See
“Summary of Prospectus Supplement—The Mortgage Pool” for the percentages of
Balloon Loans in the Mortgage Pool. The Monthly Payment for each Balloon Loan
is
based on an amortization schedule ranging from 360 months to 600 months, except
for the final payment (the “Balloon
Payment”)
which
is due and payable on either the 180th month or the 360th month following
origination of such Mortgage Loan, depending on the terms of the related
Mortgage Note. The amount of the Balloon Payment on each Balloon Mortgage Loan
is substantially in excess of the amount of the scheduled Monthly Payment for
such Balloon Loan.
Certain
of the Mortgage Loans will amortize over 480 months for the first 120 months,
and over 240 months between the 120th month and the 360th month (each, a
“Dual
Amortization Loan”).
The
monthly payment beginning on the 121st month of such Dual Amortization Loan
may
be significantly larger than the first 120 monthly payments required under
the
Mortgage Note.
Certain
of the Mortgage Loans provide for payment by the mortgagor of a prepayment
charge in limited circumstances on certain prepayments. See “Summary of
Prospectus Supplement—The Mortgage Pool” for the percentages of these Mortgage
Loans in the Mortgage Pool. No such prepayment charge will be distributed to
the
holders of the Offered Certificates.
Approximately
46.01% of the Mortgage Loans have Combined Loan-to-Value Ratios in excess of
80%
and do not have primary mortgage insurance. There can be no assurance that
the
Combined Loan-to-Value Ratio of any Mortgage Loan determined at any time after
the Cut-off Date will be less than or equal to its Combined Loan-to-Value Ratio
at the Cut-off Date. Additionally, an Originator’s determination of the value of
a Mortgaged Property used in the calculation of the Combined Loan-to-Value
Ratios of the Mortgage Loans at the Cut-off Date may differ from the appraised
value of such Mortgaged Property or the actual value of such Mortgaged Property
at the Cut-off Date. See “Risk Factors—High combined loan-to-value ratios
increase risk of loss.” The “Combined
Loan-to-Value Ratio”
of
a
Mortgage Loan as of any date of determination generally means the ratio,
expressed as a percentage of (i) the sum of (a) the principal amount of the
Mortgage Loan as of such date of determination plus (b) the outstanding balances
of the First Lien and Second Lien, if any, at origination of the Mortgage Loan
over (ii) the lower of the appraised value of the related Mortgaged Property
at
origination or the sale price.
S-30
The
Adjustable-Rate Mortgage Loans provide for semi-annual adjustment to the
Mortgage Interest Rate thereon and for corresponding adjustments to the Monthly
Payment amount due thereon, in each case on each adjustment date applicable
thereto (each such date, an “Adjustment
Date”).
On
each Adjustment Date for each Adjustable-Rate Mortgage Loan, the Mortgage
Interest Rate thereon will be adjusted to equal the sum of the index applicable
to determining the Mortgage Interest Rate on each Adjustable-Rate Mortgage
Loan
(the “Index”)
and a
fixed percentage amount (the “Gross
Margin”).
The
Mortgage Interest Rate on each such Adjustable-Rate Mortgage Loan will not
increase or decrease by more than a percentage specified in the related Mortgage
Note on the first related Adjustment Date (the “Initial
Periodic Rate Cap”)
and a
percentage (which may be the same as the Initial Periodic Rate Cap) on any
Adjustment Date thereafter (the “Periodic
Rate Cap”).
Each
Mortgage Interest Rate on each Adjustable-Rate Mortgage Loan will not exceed
a
specified maximum Mortgage Interest Rate over the life of such Mortgage Loan
(the “Maximum
Mortgage Interest Rate”)
or be
less than a specified minimum Mortgage Interest Rate over the life of such
Mortgage Loan (the “Minimum
Mortgage Interest Rate”)
or, in
the case of any Adjustable-Rate Mortgage Loan that does not have a specified
Minimum Mortgage Interest Rate, the applicable Gross Margin.
Effective
with the first Monthly Payment due on each Adjustable-Rate Mortgage Loan after
each related Adjustment Date, the Monthly Payment amount will be adjusted to
an
amount that will amortize fully the outstanding Principal Balance of the related
Mortgage Loan over its remaining term, and pay interest at the Mortgage Interest
Rate as so adjusted. Due to the application of the Periodic Rate Caps and the
Maximum Mortgage Interest Rates, the Mortgage Interest Rate on each such
Mortgage Loan, as adjusted on any related Adjustment Date, may be less than
the
sum of the Index and the related Gross Margin. See “—The Index” in this
prospectus supplement.
None
of
the Adjustable-Rate Mortgage Loans have Mortgage Interest Rates that may be
converted to fixed Mortgage Interest Rates at the option of the related
mortgagor. None of the Mortgage Loans provide for negative
amortization.
None
of
the Mortgage Loans were Delinquent as of the Cut-off Date. Under the OTS Method,
a mortgage loan is considered “Delinquent”
if
the
borrower fails to make a scheduled monthly payment of principal and interest
on
such Mortgage Loan which is payable by the related mortgagor under the related
Mortgage Note (the “Monthly
Payment”)
prior
to the close of business on the mortgage loan’s first succeeding due date. For
example, if a securitization had a closing date occurring in August and a
cut-off date of August 1, a mortgage loan with a payment due on July 1 that
remained unpaid as of the close of business on July 31 would be described as
current as of the cut-off date herein. If the July 1 payment remains unpaid
as
of the close of business on August 1, it would be “30 days delinquent” but would
not be reported as such unless such payment was not made by the close of
business on August 31.
The
Servicer will be required to make servicing advances on Delinquent Mortgage
Loans and make advances of delinquent payments of principal and interest on
Delinquent Mortgage Loans as specified under “The Pooling and Servicing
Agreement—Advances.”
“Credit
Scores”
are
statistical credit scores obtained by many mortgage lenders in connection with
the loan application to help assess a borrower’s credit-worthiness. Credit
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 Credit 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. Credit
Scores generally 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. The Credit Scores set forth in the table
in
Appendix
A
were
obtained at either the time of origination of the Mortgage Loan or more
recently. The Depositor makes no representations or warranties as to the actual
performance of any Mortgage Loan or that a particular Credit Score should be
relied upon as a basis for an expectation that the borrower will repay the
Mortgage Loan according to its terms.
The
“Debt-to-Income
Ratio”
of
a
Mortgage Loan generally means the ratio, expressed as a percentage, of a
Mortgagor’s monthly debt obligations (including the monthly payment on the
Mortgage Loan and related expenses such as property taxes and hazard insurance)
to his or her gross monthly income. See “Summary of Prospectus Supplement—The
Mortgage Pool” and Appendix
A
to this
prospectus supplement for information regarding the Debt-to-Income Ratios of
the
Mortgage Loans.
S-31
The
Index
The
Index
for all of the Adjustable-Rate Mortgage Loans is the average of interbank
offered rates for six-month U.S. dollar deposits in the London market calculated
as provided in the related note (“Six-Month
LIBOR”).
If
Six-Month LIBOR becomes unpublished or is otherwise unavailable, the Servicer
will select an alternative index which is based upon comparable
information.
Terms
of the Mortgage Loans
The
Mortgage Loans accrue interest on an actuarial basis over the original terms
thereof, calculated based on a 360-day year of twelve 30-day months. When a
full
prepayment of principal is made on a Mortgage Loan during a month, the mortgagor
is charged interest only on the days of the month actually elapsed up to the
date of such prepayment, at a daily interest rate that is applied to the
principal amount of the loan so prepaid. When a partial prepayment of principal
is made on a Mortgage Loan during a month, the mortgagor generally is not
charged interest on the amount of the partial prepayment during the month in
which such prepayment is made.
THE
ORIGINATORS
Approximately
22.50%, 19.99%, 19.93% and 19.70% of the Mortgage Loans were originated or
acquired by Fieldstone Mortgage Company (“FMC”),
Wilmington Finance Inc., New Century Mortgage Corporation and People’s Choice
Home Loan, Inc., respectively. The information contained below with regard
to
FMC and its affiliates has been provided by FMC.
Fieldstone
Mortgage Company
Approximately
22.50% of the Mortgage Loans (the “Fieldstone
Mortgage Loans”)
were
originated by FMC, a nationwide mortgage banking company and wholly-owned
subsidiary of Fieldstone Investment Corporation in accordance with underwriting
guidelines established and maintained by FMC (the “Fieldstone
Underwriting Guidelines”).
The
principal executive offices of FMC are located at 11000 Broken Land Parkway,
Suite 600, Columbia, Maryland21044 and can be reached by telephone at (410)
772-7200.
General
FMC
originates, finances, sells, securitizes and services both “conforming” loans
(i.e.,
loans
that are insured by the FHA or partially guaranteed by VA, or which qualify
for
sale to Fannie Mae or Freddie Mac) and “non-conforming” loans (i.e.,
loans
that are not insured or guaranteed by FHA or VA and do not qualify for sale
to
Fannie Mae or Freddie Mac) secured by single-family, two- to four-family,
condominium units, units of planned unit developments, townhomes and modular
homes. FMC originates mortgage loans directly and acquires loans from mortgage
lenders and brokers. FMC originates loans primarily in the wholesale market,
through mortgage brokers, but also originates loans directly with customers
through its retail branch network. In addition, FMC acquires mortgage loans
from
correspondent lenders. The Fieldstone Mortgage Loans have been underwritten
and
originated using procedures intended to comply with all applicable federal
and
state laws and regulations. FMC focuses on providing the best loan available
for
a given borrower’s needs and credit history. FMC’s non-conforming borrowers
generally have good credit backgrounds, but tend to have higher loan-to-value
ratios, or “LTVs,”
less
income documentation, and/or higher debt-to-income ratios than conforming
borrowers. The following table summarizes certain information regarding FMC’s
total loan originations, as of the dates set forth below:
S-32
($
in 000s)
3/31/2007
12/31/2006
12/31/2005
12/312004
Non-Conforming
Loans
$
797,064
$
5,223,655
$
5,941,404
$
6,185,045
As
a percentage of total originations
100
%
95
%
80
%
83
%
Conforming
Loans
0
258,585
1,487,328
1,290,202
As
a percentage of total originations
0
%
5
%
20
%
17
%
Total
Originations
$
797,064
$
5,482,240
$
7,428,732
$
7,475,247
The
Fieldstone Mortgage Loans included in the Issuing Entity are non-conforming
loans. A non-conforming loan generally does not meet the eligibility
requirements of Fannie Mae or Freddie Mac because the borrower’s cash flow,
credit history and/or collateral value do not meet the specific standards of
the
conforming loan market.
UNDERWRITING
STANDARDS
All
of
the Mortgage Loans acquired by the Sponsor from FMC were underwritten generally
in accordance with FMC’s underwriting standards as described under
“—Fieldstone’s Underwriting Standards” below. The Sponsor re-underwrote a
substantial majority of the Mortgage Loans it acquired from the Originators
generally in accordance with its underwriting standards as described under
“—The
Sponsor’s Underwriting Standards” below.
The
Sponsor’s Underwriting Standards
The
Sponsor or a loan reviewer has reviewed a substantial majority of the files
related to the Mortgage Loans in connection with the acquisition of the Mortgage
Loans by the Sponsor for credit and compliance considerations. These files
may
include the documentation pursuant to which the Mortgage Loan was originally
underwritten, as well as the mortgagor’s payment history on the Mortgage Loan.
In its review, the Sponsor evaluates the mortgagor’s credit standing, repayment
ability and willingness to repay debt. A mortgagor’s ability and willingness to
repay debts (including the Mortgage Loans) in a timely fashion is determined
by
the Sponsor by reviewing the quality, quantity and durability of income history,
history of debt management, history of debt repayment and net worth accumulation
of the mortgagor to the extent such information is available. In addition,
the
Sponsor may also obtain and review a current credit report for the mortgagor.
During its mortgage file review, the Sponsor also confirms that the Mortgage
Loan was originated in material compliance with applicable federal, state and
local laws and regulations. In connection with its review for property value
considerations the Sponsor may obtain, for a portion of the Mortgage Loans,
a
current appraisal, broker’s price opinion, automated valuation methodology price
(“AVM”)
and/or
drive-by or desk review of such property or any combination thereof, prepared
within six months of the Sponsor’s purchase.
The
Sponsor purchases mortgage loans that were originated pursuant to one of the
following documentation programs.
Full
Documentation
Mortgage
loans originally underwritten with “Full Documentation” include a detailed
application designed to provide pertinent credit information. As part of the
description of the mortgagor’s financial condition, the mortgagor was required
to fill out a detailed application designed to provide pertinent credit
information. As part of the description of the mortgagor’s financial condition,
the mortgagor provided a balance sheet, current as of the origination of the
mortgage loan, describing assets and liabilities and a statement of income
and
expenses, as well as authorizing the originator to obtain a credit report which
summarizes the mortgagor’s credit history with local merchants and lenders and
any record of bankruptcy. In addition, an employment verification was obtained
wherein the employer reported the length of employment with that organization,
the mortgagor's salary as of the mortgage loan’s origination, and an indication
as to whether it is expected that the mortgagor will continue such employment
after the mortgage loan’s origination. If a mortgagor was self-employed when
such mortgagor’s loan was originated, the mortgagor submitted copies of signed
tax returns. The originator was also provided with deposit verification at
all
financial institutions where the mortgagor had demand or savings
accounts.
S-33
In
determining the adequacy of the property as collateral at origination, an
independent appraisal was made of each property considered for financing. The
appraiser inspected the property and verified that it was in good condition
and
that construction, if new, had been completed at the time of the loan’s
origination. Such appraisal was based on the appraiser's judgment of values,
giving appropriate weight to both the then market value of comparable homes
and
the cost of replacing the property.
Other
Levels of Documentation
Other
mortgage loans purchased by the Sponsor were originally underwritten pursuant
to
alternative documentation programs that require less documentation and
verification than do traditional “Full Documentation” programs, including “No
Documentation,”“Limited Documentation,”“Alternative Documentation,”“Stated
Documentation” and “Streamlined Documentation” programs for certain qualifying
mortgage loans. Under a “No Documentation” program, the originator does not
undertake verification of a mortgagor’s income or assets. Under a “Limited
Documentation” program, certain underwriting documentation concerning income and
employment verification is waived. “Alternative Documentation” programs allow a
mortgagor to provide W-2 forms instead of tax returns, permit bank statements
in
lieu of verification of deposits and permit alternative methods of employment
verification. Under “Stated Documentation” programs, a mortgagor’s income is
deemed to be that stated on the mortgage application and is not independently
verified by the originator. These are underwriting programs designed to
streamline the underwriting process by eliminating the requirement for income
verification. Depending on the facts and circumstances of a particular case,
the
originator of the mortgage loan may have accepted other information based on
limited documentation that eliminated the need for either income verification
and/or asset verification. The objective use of limited documentation is to
shift the emphasis of the underwriting process from the credit standing of
the
mortgagor to the value and adequacy of the mortgaged property as collateral.
“Streamlined Documentation” programs are used for mortgage loans issued to
government entities which are being refinanced by the same originator. The
originator verifies current mortgage information, but does not undertake
verification of the mortgagor's employment or assets and does not conduct a
new
appraisal of the property considered for refinancing. The objective of
Streamlined Documentation programs is to streamline the underwriting process
in
cases where the originator has the mortgagor's complete credit file from the
original loan transaction.
Fieldstone’s
Underwriting Standards
FMC
generally underwrites its non-conforming loans to meet the specific guidelines
of one of FMC’s loan programs. The Fieldstone Underwriting Guidelines generally
are designed to evaluate a prospective borrower’s credit history and ability to
repay the loan, as well as the value and adequacy of the related mortgaged
property as collateral. The Fieldstone Underwriting Guidelines are established
and maintained by FMC’s credit committee. The Fieldstone Underwriting Guidelines
are modified and revised periodically based on changes in residential mortgage
underwriting and lending practices and requirements of secondary mortgage
markets. In addition, the Fieldstone Underwriting Guidelines allow for certain
flexibility, and exceptions to the underwriting guidelines are permitted in
certain circumstances. Exceptions to the underwriting guidelines must be
approved in writing by an authorized FMC employee.
FMC
generally underwrites its non-conforming loans to meet the specific guidelines
of one of a variety of loan programs. The Fieldstone Underwriting Guidelines
are
modified and revised continually based on changes in residential mortgage
underwriting and lending practices and requirements of secondary mortgage
markets. FMC generally originates its second-lien loans in conjunction with
a
first-lien loan secured by the same mortgaged property. Although FMC’s
first-lien and second-lien programs offer unique features, FMC’s underwriting
and compliance guidelines are generally consistent across all
programs.
All
of
FMC’s non-conforming loans are underwritten by FMC’s on-staff underwriting
personnel, and FMC does not delegate underwriting authority to any broker or
third party. FMC’s underwriting procedures include consideration of a
combination of factors in deciding whether to approve a loan, including
evaluation of the borrower’s income, mortgage and consumer credit payment
history, credit score, property type and LTV. The mortgage loan underwriting
process relies upon an underwriter’s analysis of the prospective borrower’s
ability to repay the loan according to its terms, the risk that the prospective
borrower will not repay, the fees and rates charged, the value of the related
mortgaged property as collateral, the benefit the loan is providing to the
prospective borrower and the loan amount relative to its risk. FMC’s policy is
to analyze the overall situation of the prospective borrower and to take into
account compensating factors that may be used to offset certain areas of
weakness. These compensating factors include credit scores, proposed reductions
in the borrower’s debt service expense, borrower assets, employment stability,
number of years in residence and net disposable income. FMC’s underwriting
process and the Fieldstone Underwriting Guidelines require a thorough
application review and documentation designed to maximize the value of the
mortgage loans.
S-34
The
Fieldstone Underwriting Guidelines include a review of the income of each
applicant. FMC personnel review the loan applicant’s source of income, calculate
the amount of income from sources indicated on the loan application or similar
documentation and calculate debt-to-income ratios to determine the applicant’s
ability to repay the loan. Also, FMC has products that classify non-conforming
loans into credit grade categories, based on an assessment of borrower repayment
credit risk. FMC’s credit grade classification considers several factors,
including the applicant’s mortgage payment history, consumer credit history,
credit score, bankruptcy history and debt-to-income ratio. Certain loan
characteristics, including LTV and documentation type, also factor into FMC’s
credit grading.
FMC
requires a full appraisal of each property to be pledged as collateral in
connection with the origination of each loan. Appraisals generally conform
to
the Uniform Standards of Professional Appraisal Practice and must be on forms
acceptable to Freddie Mac and Fannie Mae. Appraisals are performed by licensed,
third-party, fee-based appraisers and include inspection of the exterior and
interior of the subject property and review and evaluation of neighborhood
conditions, site and zoning status and the condition and value of improvements.
FMC’s appraisal review process requires that each appraisal be validated (except
in limited circumstances) by either a non-affiliated appraisal review firm
or by
one of FMC’s qualified underwriters using additional data to evaluate the
appraisal. In most cases, FMC utilizes automated value measures to validate
appraisals. FMC generally requires that an appraisal be no more than 180 days
old on the day the loan is funded.
The
Fieldstone Mortgage Loans generally have been underwritten under one of the
following documentation programs:
·
Full
Documentation
-
income verification based on current pay stubs and W-2s for wage
earners
or two years’ tax returns for self-employed
borrowers
·
24
Months of Bank Statements
-
allowed for all types of employment, this program uses an average
of
deposits for the most recent 24
months
·
12
Months of Bank Statements
-
allowed for self-employed borrowers only, this program requires 12
months
of bank statements to verify income
·
Limited
Documentation
-
generally available for borrowers with higher credit scores, this
program
requires a year-to-date pay stub, most recent 1099 or six months
of bank
statements depending on whether the borrower is a wage earner, a
contractor or self-employed,
respectively
·
Stated
Documentation
-
this program requires wage earners to verify two years’ employment in the
same profession and self-employed borrowers to provide evidence that
the
business has been owned and operated for at least two years.
Each
of
these documentation programs includes a thorough credit underwriting. Exceptions
to documentation requirements and other modifications may be granted on a
case-by-case basis for certain prospective borrowers and for certain loan
programs.
FMC
emphasizes quality control prior to origination. FMC’s Quality Control/Risk
Assessment Department also reviews and re-underwrites, approximately 10% of
post-funded mortgage loans that FMC originates. FMC selects loans monthly for
post-funding reviews on a random basis. FMC’s Quality Control/Risk Assessment
Department also selects an additional 5% targeted sample of loans monthly to
be
reviewed and re-underwritten. FMC’s Quality Control/Risk Assessment Department
reports its findings to FMC’s senior management and senior operational
department managers on a monthly basis. Underwriting changes and corrective
actions may be implemented from time to time as a result of analysis of the
quality control data, performance trends and servicing issues.
S-35
THE
SERVICER
General
The
Servicer, Litton Loan Servicing LP provided the information set forth in the
following paragraphs
The
Servicer, a Delaware limited partnership and a subsidiary of the Sponsor, will
act as the servicer of the Mortgage Loans pursuant to the Pooling and Servicing
Agreement. The Servicer was formed in December 1996 and has been servicing
mortgage loans since such time. As of March 31, 2007, the Servicer employed
approximately 1,342 individuals. The main office of the Servicer is located
at
4828 Loop Central Drive, Houston, Texas77081. The Servicer is currently a
Fannie Mae and Freddie Mac approved seller/servicer and a HUD/FHA approved
mortgagee and VA lender with a servicing portfolio of approximately $55.44
billion as of March 31, 2007. Most of the mortgage loans in the Servicer’s
portfolio are either subprime mortgage loans or subperforming mortgage loans.
The Servicer is servicing in excess of 200 securitizations for the Sponsor
and
various third parties.
Fitch
assigned the Servicer its RSS1 residential special servicer rating on November16, 1999 and reaffirmed that rating in December 2006. The rating is based on
the
Servicer’s ability to manage and liquidate nonperforming residential mortgage
loans and real estate owned assets. This RSS1 rating is the highest special
servicer rating attainable from Fitch which reflects the Servicer’s proprietary
default management technology, the financial strength of its parent and the
experience of its management and staff.
In
January 2001, Fitch assigned the Servicer its RPS1 primary servicer rating
for
subprime and high loan to value ratio product and reaffirmed that rating in
December 2006. The RPS1 rating is currently the highest subprime primary
servicer rating attainable from Fitch for any subprime servicer, which is based
on the Servicer’s loan administration processes including its loan set up
procedures and related technology, loan accounting/cash management and loan
reporting. The RPS1 rating for high loan to value ratio product is based, in
part, on the Servicer’s focus on early collection and loss
mitigation.
In
March
2001, Moody’s assigned the Servicer its top servicer quality rating (SQ1) as a
primary servicer of prime and subprime mortgage loans, second liens and as
a
special servicer and reaffirmed that rating in November 2006. The rating is
based on the Servicer’s ability as a servicer and the stability of its servicing
operations.
In
April
2001, S&P raised the Servicer’s ranking from “Above Average” to “Strong” for
both its residential special and subprime servicing categories and reaffirmed
that rating in March 2006. The “Strong” rating is S&P’s highest possible
rating for these categories. The rankings are based on the Servicer’s
established history of servicing distressed assets for a diverse investor base,
technological improvements that have increased operational efficiencies,
management depth, and internal controls.
As
of the
date of this prospectus supplement, each of the ratings described above remains
in effect with respect to the Servicer.
From
time
to time the Servicer may acquire servicing portfolios from third parties which
acquisitions may be significant in relation to the Servicer’s current portfolio.
The Servicer does not believe that any such acquisition, if effected, would
have
an adverse effect on its ability to service the Mortgage Loans in accordance
with the Pooling and Servicing Agreement.
Once
the
Servicer starts servicing a mortgage loan it begins to collect mortgage payments
in adherence to the applicable servicing agreement and customary industry
standards. The Servicer’s collections strategy enables collection efforts to be
focused on mortgage loans that represent the greatest risks within the servicing
portfolio and is intended to address potential collection problems as soon
as
possible before they migrate into more costly delinquency, foreclosure and
REO
status. The Servicer’s servicing system is integrated with a predictive dialer
and phone switch to facilitate incoming and outgoing calls with mortgagors.
Outgoing calls range from an introduction of the Servicer as servicer to
advanced collection activities. Incoming calls are directed by the phone switch
based upon the status of the loan to the appropriate service
representative.
S-36
The
Servicer utilizes its proprietary technology to identify high severity assets
and develops specific loss mitigation strategies to apply to those assets.
As
mortgage loans become delinquent, the Servicer first tries to determine whether
the mortgagor is facing a short term or long term series of issues that created
the default. If the default is created by a short term issue, repayment plans
or
forbearance agreements may be negotiated so that the default can be cured over
the plan’s specified period. However, if a long-term issue exists, the mortgage
loan is referred to the Servicer’s loss mitigation department. If the mortgagor
has experienced a long-term event but wishes to continue to reside in the home,
a modification of the mortgage loan may be pursued. The modification may include
some or all of the following: a decrease in the mortgage interest rate, an
extension of the term of the mortgage, a reduction in certain amounts owed
(including unpaid principal or advances) and/or the capitalization of any past
due amounts. Consistent with the terms of the Pooling and Servicing Agreement,
the Servicer may waive, modify or vary any term of any Mortgage Loan or consent
to the postponement of strict compliance with any such term or in any manner
grant indulgence to any mortgagor if in the Servicer’s reasonable and prudent
determination such waiver, modification, postponement or indulgence is not
materially adverse to the certificateholders. If the mortgagor either does
not
want to make or does not have the ability to make monthly payments on the
mortgage loan, the Servicer will attempt to pursue programs such as short sales
or a deed in lieu of foreclosure. These programs are designed to assist the
mortgagor in liquidating the mortgaged property while decreasing the Servicer’s
liquidation timeframe and the associated liquidation expenses with the goal
of
ultimately reducing cumulative losses. The Servicer has a default processing
in-source agreement for contract employees to perform certain routine
foreclosure, bankruptcy, and other default related functions under the
supervision of the Servicer’s management personnel.
For
its
mortgage loans with escrows, the Servicer provides full escrow services,
including property tax, hazard insurance, flood insurance and lender-placed
insurance services. Most of these services are provided through third-party
vendors that specialize in these service areas. The Servicer conducts the
initial and annual escrow analysis functions internally; the Servicer monitors
escrow activities on an ongoing basis.
The
Servicer does not, in general, have custodial responsibility with respect to
the
Mortgage Loans.
There
have been no material changes to the Servicer’s servicing policies and
procedures during the past three years. During such time, the Servicer also
has
not been terminated as a servicer in a residential mortgage loan securitization
due to a servicing default or application of a servicing performance test or
trigger and has not failed to make any required advance with respect to any
issuance of residential mortgage backed securities. In the Servicer’s 2006
servicing compliance assertion, the Servicer identified two areas of
non-compliance relating to 90 day items outstanding on bank account
reconciliations and adjustment of payments in connection with adjustable rate
mortgage loans. In addition, in the Servicer’s review of compliance with each
servicing agreement, the Servicer noted non-compliance with certain provisions
relating to loan modifications on two servicing agreements. The Servicer
believes that the reported instances of non-compliance did not materially
adversely affect any certificateholders.
The
Servicer will be responsible for making reasonable efforts to collect all
payments called for under the Mortgage Loans consistent with the Pooling and
Servicing Agreement and current market standards. Upon receipt of collections
on
the Mortgage Loans and prior to the deposit of such collections into the
segregated collections account established for the related transaction, the
Servicer deposits such amounts into a joint collection account that includes
collections on its entire mortgage loan portfolio. The Servicer transfers
collections to the appropriate segregated collection account within two business
days of determining the proper cash application after receipt of such
funds.
The
size
and changes in the Servicer’s portfolio of assets for the periods indicated
below are as follows:
In
addition to the reports that will be provided to the certificateholders by
the
Trustee as provided in the Pooling and Servicing Agreement, the Servicer may
make available certain loan level and certificate level information, such as
delinquency and credit support data, projected and actual loss data, roll rates,
and trend analyses, through its proprietary investor interface and asset
analysis tool, RADARViewerSM.
The
RADARViewerSM
internet
website is currently located at www.radarviewer.com. The Servicer has no
obligation to continue to provide any type of information available on
RADARViewerSM
as of
the date hereof or to maintain its RADARViewerSM
website
in the entirety, and may, in its sole discretion, discontinue such service
at
any time.
THE
SPONSOR
The
Sponsor, Credit-Based Asset Servicing and Securitization LLC, is a Delaware
limited liability company with its principal place of business in New York,
New
York.
The
Sponsor was established in July 1996 as a venture of Mortgage Guaranty Insurance
Corporation (“MGIC”),
Enhance Financial Services Group, Inc. (“EFSG”)
and
certain members of management of the Sponsor. Each of MGIC and EFSG has
approximately a 46% interest in the Sponsor with the remainder owned by
management of the Sponsor. On February 28, 2001, Radian Group Inc.
(“Radian”)
acquired EFSG, including EFSG’s 46% interest in the Sponsor. Radian and MGIC are
publicly traded companies which file such periodic reports with the Securities
and Exchange Commission (the “Commission”)
as are
required by the Securities Exchange Act of 1934, as amended, and its rules
and
regulations, as interpreted by the staff of the Commission.
On
February 6, 2007 MGIC Investment Corporation (the parent of MGIC) and Radian
announced that they had agreed to merge. The companies have stated that they
expect the merger to be completed in the fourth quarter of 2007. The pro forma
financial statements presented in the press release issued in connection with
the merger announcement reflected a combined ownership interest in the Sponsor
of approximately 49.9% as opposed to the companies’ current aggregate ownership
interest of approximately 92%. There can be no assurance what ownership interest
the companies may ultimately retain in the Sponsor.
On
March31, 2007, the Sponsor had approximately $6.87 billion in assets, approximately
$5.96 billion in liabilities and approximately $912.3 million in
equity.
The
Sponsor’s principal business is the purchasing of residential mortgage loans,
primarily sub-prime in nature, from multiple parties including banks and other
financial institutions and mortgage-related securities, including non-investment
grade subordinated securities, for investment and securitization. Substantially
all of the mortgage loans the Sponsor owns are serviced by its wholly-owned
subsidiary, Litton Loan Servicing LP. The Sponsor does not originate mortgages.
The Sponsor is a HUD-approved investing mortgagee.
In
connection with its purchases of mortgage loans, the Sponsor uses its
proprietary models to formulate loan-level default and loss severities and
prepayment probability curves. The Sponsor has been acquiring mortgage loans
since 1996. Until June 2002, the Sponsor included sub-performing or
re-performing mortgage loans in its publicly offered securitization
transactions. Since June 2002, the Sponsor has generally not included
sub-performing or re-performing mortgage loans in its publicly offered
securitization transactions.
S-38
The
Sponsor has been securitizing residential mortgage loans since 1997. The
following table describes the amount of mortgage loans on a yearly or quarterly
basis, as the case may be, the Sponsor has securitized under its name or an
affiliate’s name as of the dates indicated.
Total
Number of Mortgage Loans Sold into Securitization Transactions
Total
Principal Balance of Mortgage Loans Sold into
Securitization
Transactions
Total
Number of Mortgage Loans Sold into Securitization
Transactions
Total
Principal Balance of Mortgage Loans Sold into
Securitization
Transactions
Total
Number of Mortgage Loans Sold into Securitization
Transactions
Total
Principal Balance of Mortgage Loans Sold into
Securitization
Transactions
22,879
$
2,610,784,228
67,262
$
10,768,178,262
27,362
4,245,296,699
STATIC
POOL INFORMATION
Information
concerning fixed- and adjustable-rate subprime mortgage loans purchased by
the
Sponsor and securitized in public securitizations by the Sponsor and that are
secured by first- or second-lien mortgages or deeds of trust in residential
real
properties is available on the internet at http://corp.bankofamerica.com/public/regulationab/abfc/index.jsp.
On this
website, you can view information regarding prior public securitizations of
the
Sponsor for the past 5 years and delinquency, cumulative loss, and prepayment
information with respect to these mortgage loans on a monthly basis. Delinquency
with respect to such information is measured according to the OTS Method as
described in “The Mortgage Pool—General” in this prospectus supplement. In
connection with such securitizations by the Sponsor, the Servicer acts as
servicer, and it or an affiliate generally has the right to purchase certain
delinquent or defaulted mortgage loans from the related mortgage pool. In the
past the Servicer or an affiliate has, on occasion, exercised this option.
Any
such purchases would have an effect on the delinquency and loss numbers for
the
respective securitizations. There can be no assurance that the Servicer or
any
of its affiliates will continue to make such purchases in the future. These
mortgage loans were acquired by the Sponsor from different mortgage loans
sellers under various underwriting guidelines and subjected to due diligence
review standards and tolerances which may have changed over time. The
characteristics of such mortgage loans acquired by the Sponsor in a given period
varies from each other as well as from the mortgage loans to be included in
the
Issuing Entity that will issue the certificates offered by this prospectus
supplement. In addition, the performance information relating to the mortgage
loans previously purchased by the Sponsor described above may have been
influenced by factors beyond the Sponsor’s control, such as housing prices and
market interest rates. Therefore, the performance of the mortgage loans
previously purchased by the Sponsor may not be indicative of the future
performance of the mortgage loans to be included in the Issuing Entity related
to this offering.
In
the
event any changes or updates are made to the information regarding these
securitizations available on the website, the Depositor will provide a copy
of
the original information upon request to any person who writes or calls the
Depositor at 214 North Tryon Street, Charlotte, North Carolina28255, (704)
683-4190, Attention: Luna Nguyen.
The
information available on the website relating to any mortgage loan purchased
by
the Sponsor and securitized in public securitizations by the Sponsor prior
to
January 1, 2006 is not deemed to be part of this prospectus supplement, the
accompanying prospectus or the Depositor’s registration statement.
THE
DEPOSITOR
Asset
Backed Funding Corporation is a direct wholly-owned subsidiary of Banc of
America Mortgage Capital Corporation and was incorporated in the State of
Delaware on July 23, 1997. It is not expected that the Depositor will have
any
business operations other than offering mortgage pass-through certificates
and
related activities. The Depositor will have limited obligations and rights
under
the Pooling and Servicing Agreement after the Closing Date.
S-39
The
Depositor maintains its principal executive office at 214 North Tryon Street,
Charlotte, North Carolina28255. Its telephone number is (704)
386-2400.
THE
ISSUING ENTITY
The
Issuing Entity will be a New York common law trust formed on the Closing Date
pursuant to the Pooling and Servicing Agreement. The Mortgage Loans will be
deposited by the Depositor into the Issuing Entity under the Pooling and
Servicing Agreement as described under “The Pooling and Servicing
Agreement—Assignment of the Mortgage Loans” in this prospectus supplement. The
Issuing Entity will have no officers or directors and no activities or
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 of each year.
The
Issuing Entity will be administered by the Trustee pursuant to the terms of
the
Pooling and Servicing Agreement as described under “—The Trustee” in this
prospectus supplement and under “Description of the Agreements—Material Terms of
the Pooling and Servicing Agreements and Underlying Servicing Agreements” in the
prospectus. The Trustee, on behalf of the Issuing Entity, is only permitted
to
take the actions specifically provided in the Pooling and Servicing Agreement
prior to an Event of Default. After an Event of Default, the Trustee will take
such actions as a prudent person would be required to take under the same
circumstances. Under the Pooling and Servicing Agreement, the Trustee on behalf
of the Issuing Entity will not have the power to issue additional certificates
representing interests in the Issuing Entity, borrow money on behalf of the
Issuing Entity or make loans from the assets of the Issuing Entity to any person
or entity.
The
Issuing Entity, as a common law trust, may not be eligible to be a debtor in
a
bankruptcy proceeding, unless it can be characterized as a “business trust” for
purposes of the federal bankruptcy laws. Bankruptcy courts consider various
factors in making a determination as to whether an entity is a business trust,
therefore it is not possible to predict with any certainty whether or not the
issuing entity would be considered a “business trust.” In the event of the
insolvency or bankruptcy of the Sponsor, the Depositor or any other party to
the
transaction, it is not anticipated that the trust fund would become a part
of
the bankruptcy estate or subject to the bankruptcy control of a third party.
See
“Risk Factors—Insolvency of the Depositor May Delay or Reduce Collections on
Mortgage Loans” in the prospectus.
THE
TRUSTEE
General
LaSalle
Bank National Association (“LaSalle
Bank”)
will
act as Trustee under the Pooling and Servicing Agreement. LaSalle Bank National
Association is a national banking association formed under the federal laws
of
the United States of America. Its parent company, LaSalle Bank Corporation,
is
an indirect subsidiary of ABN AMRO Bank N.V., a Netherlands banking corporation.
LaSalle Bank has extensive experience serving as trustee on securitizations
of
residential mortgage loans. Since January 1994, LaSalle has served as trustee,
securities administrator or paying agent on over 550 residential mortgage-backed
security transactions involving assets similar to the Mortgage Loans. As of
March 31, 2007 LaSalle serves as trustee, securities administrator or paying
agent on over 500 residential mortgage-backed security
transactions.
The
Depositor and Servicer may maintain other banking relationships in the ordinary
course of business with the Trustee. The Trustee’s corporate trust office is
located at 135 South LaSalle Street, Suite 1511, Chicago, Illinois, 60603.
Attention: Global Securities and Trust Services — C-BASS 2007-CB5 or at such
other address as the Trustee may designate from time to time.
On
April22, 2007, ABN AMRO Holding N.V. agreed to sell ABN AMRO North America Holding
Company, the indirect parent of LaSalle Bank National Association, to Bank
of
America Corporation. The proposed sale currently includes all parts of the
Global Securities and Trust Services Group within the LaSalle Bank organization
engaged in the business of acting as trustee, securities administrator, master
servicer, custodian, collateral administrator, securities intermediary, fiscal
agent and issuing and paying agent in connection with securitization
transactions.
S-40
The
contract between ABN AMRO Bank N.V. and Bank of America Corporation contains
a
14 calendar day “go shop” clause which continued until 11:59 PM New York time on
May 6, 2007. ABN AMRO Bank N.V. filed a copy of this contract on Form 6-K with
the Securities and Exchange Commission on April 25, 2007. The contract provides
that the sale of LaSalle Bank National Association is subject to regulatory
approvals and other customary closing conditions.
The
contract referenced above was entered into by ABN AMRO Bank N.V. without
shareholder approval. In response to a challenge of the sale by a shareholders
group, a judge in the Enterprise Chamber of the Amsterdam Superior Court in
the
Netherlands ruled on May 3, 2007 that ABN AMRO Holding N.V. was not permitted
to
proceed with the sale of LaSalle Bank without shareholder approval. As of the
date hereof, a shareholders’ meeting to vote on the proposed sale of LaSalle
Bank National Association has not occurred. Various interested parties have
filed or have indicated that they will file an appeal of the
ruling.
On
May 4,2007, Bank of America Corporation filed a lawsuit against ABN AMRO Bank N.V.
and
ABN AMRO Holding N.V. in the U.S. District Court for the Southern District
of
New York (Manhattan) seeking, among other things, an injunction prohibiting
ABN
AMRO Bank N.V. and ABN AMRO Holding N.V. from negotiating a sale of LaSalle
Bank
National Association or selling LaSalle Bank National Association to any third
party other than as provided for in the contract referenced above, monetary
damages and specific performance.
Using
information set forth in this prospectus supplement, the Trustee will develop
the cashflow model for the Trust. Based on the monthly loan information provided
by the Servicer, the Trustee will calculate the amount of principal and interest
to be paid to each class of Certificates on each Distribution Date. In
accordance with the cashflow model and based on the monthly loan information
provided by the Servicer, the Trustee will perform distribution calculations,
remit distributions on the Distribution Date to certificateholders and prepare
a
monthly statement to certificateholders detailing the payments received and
the
activity on the Mortgage Loans during the related Collection Period and
Prepayment Period. In performing these obligations, the Trustee will be able
to
conclusively rely on the information provided to it by the Servicer, and the
Trustee will not be required to recompute, recalculate or verify the information
provided to it by the Servicer.
THE
CUSTODIAN
The
Bank
of New York, a New York banking organization, will act as Custodian for the
certificates pursuant to a custodial agreement. The Custodian will perform
certain administrative functions. The principal executive office of The Bank
of
New York is located at 1 Wall Street, New York, New York10286.
The
Bank
of New York will be responsible to hold and safeguard the mortgage notes and
other contents of the mortgage files on behalf of the certificateholders. The
Bank of New York segregates files for which it acts as custodian by boarding
each file in an electronic tracking system, which identifies the owner of the
file and the file’s specific location in the Custodian’s vault.
The
mortgage files are held with an affiliate of The Bank of New York in Cypress,
California.
THE
SWAP PROVIDER AND CAP PROVIDER
JPMorgan
Chase Bank, N.A., a national banking association, is a wholly-owned bank
subsidiary of JPMorgan Chase & Co., a Delaware corporation whose principal
office is located in New York, New York. JPMorgan Chase Bank, N.A. has long
term, unsecured ratings, as of the date of this prospectus supplement, of
“AA-” from S&P, “A+” from Fitch Ratings and “Aa2” from Moody’s.
THE
POOLING AND SERVICING AGREEMENT
General
The
Certificates will be issued pursuant to the Pooling and Servicing Agreement,
dated as of May 1, 2007 (the “Pooling
and Servicing Agreement”),
among
the Depositor, the Sponsor, the Servicer and the Trustee. The “Trust
Fund”
created
under the Pooling and Servicing Agreement will consist of (i) all of the
Depositor’s right, title and interest in the Mortgage Loans, the related
mortgage notes, mortgages and other related documents, (ii) all payments on
or
collections in respect of the Mortgage Loans due after the Cut-off Date,
together with any proceeds thereof, (iii) any Mortgaged Properties acquired
on
behalf of certificateholders by foreclosure or by deed in lieu of foreclosure,
and any revenues received thereon, (iv) the Cap Carryover Reserve Account,
(v)
the right to any Net Swap Payment and any Swap Termination Payment made by
the
Swap Provider and deposited into the Swap Account, (vi) the rights of the
Trustee under all insurance policies required to be maintained pursuant to
the
Pooling and Servicing Agreement and (vii) the rights of the Depositor under
the
Mortgage Loan Purchase Agreement. The Offered Certificates will be transferable
and exchangeable at the corporate trust office of the Trustee. The prospectus
contains important additional information regarding the terms and conditions
of
the Pooling and Servicing Agreement.
S-41
Assignment
of the Mortgage Loans
On
the
Closing Date, the Depositor will transfer to the Trust Fund all of its right,
title and interest in and to each Mortgage Loan, the related mortgage notes,
mortgages and other related documents (collectively, the “Related
Documents”),
including all scheduled payments with respect to each such Mortgage Loan due
after the Cut-off Date. The Trustee, concurrently with such transfer, will
deliver the Certificates to the Depositor. Each Mortgage Loan transferred to
the
Trust Fund will be identified on a schedule (the “Mortgage
Loan Schedule”)
delivered to the Trustee pursuant to the Pooling and Servicing Agreement. The
Mortgage Loan Schedule will include information such as the Principal Balance
of
each Mortgage Loan as of the Cut-off Date, its Mortgage Interest Rate as well
as
other information.
The
Pooling and Servicing Agreement will require that, within the time period
specified therein, the Sponsor will deliver or cause to be delivered to the
Custodian the mortgage notes endorsed to the Trustee on behalf of the
certificateholders and the Related Documents. In lieu of delivery of original
mortgages or mortgage notes, if such original is not available or is lost,
the
Sponsor may deliver or cause to be delivered true and correct copies thereof,
or, with respect to a lost mortgage note, a lost note affidavit executed by
the
Sponsor or the originator of such Mortgage Loan. The Servicer is required to
cause the assignments of mortgage to be delivered in blank to be completed
and
to cause all assignments of mortgage to be recorded. The Servicer is required
to
deliver such assignments for recording within 30 days of the Closing
Date.
Repurchase
or Substitution of Mortgage Loans
Within
60
days following the Closing Date, the Custodian will review the Mortgage Loans
and the Related Documents pursuant to the Pooling and Servicing Agreement and
if
any Mortgage Loan or Related Document is found to be defective in any material
respect and such defect has a material and adverse effect on the
certificateholders and is not cured within 120 days following notification
thereof to the Sponsor (or within 90 days of the earlier of the Sponsor’s
discovery or receipt of notification if such defect would cause the Mortgage
Loan not to be a “qualified mortgage” for REMIC purposes) and the Trustee by the
Custodian (or 150 days following the Closing Date, in the case of missing
mortgages or assignments), the Sponsor will be obligated to either (i)
substitute for such Mortgage Loan an Eligible Substitute Mortgage Loan; however,
such substitution is permitted only within two years of the Closing Date and
may
not be made unless an opinion of counsel is provided to the effect that such
substitution will not disqualify any of the REMICs comprising the Issuing Entity
as a REMIC or result in a prohibited transaction tax under the Code or (ii)
purchase such Mortgage Loan at a price (the “Purchase
Price”)
equal
to the outstanding Principal Balance of such Mortgage Loan as of the date of
purchase, plus all accrued and unpaid interest thereon, computed at the Mortgage
Interest Rate through the end of the calendar month in which the purchase is
effected, plus the amount of any unreimbursed Advances and Servicing Advances
made by the Servicer plus any costs or damages incurred by the Issuing Entity
in
connection with any violation by such Mortgage Loan of any predatory or abusive
lending laws. If, however, a Mortgage Loan is discovered to be defective in
a
manner that would cause it to be a “defective obligation” within the meaning of
Treasury regulations relating to REMICs, the Sponsor will be obligated to cure
the defect or make the required purchase or substitution no later than 90 days
after the earlier of its discovery or receipt of notification of the defect.
The
Purchase Price will be deposited in the Collection Account on or prior to the
next succeeding Determination Date after such obligation arises. The obligation
of the Sponsor to cure, repurchase or substitute for a Defective Mortgage Loan
is the sole remedy regarding any defects in the Mortgage Loans and Related
Documents available to the Trustee or the certificateholders.
S-42
In
connection with the substitution of an Eligible Substitute Mortgage Loan, the
Sponsor will be required to deposit in the Collection Account on or prior to
the
next succeeding Determination Date after such obligation arises an amount (the
“Substitution
Adjustment”)
equal
to the excess of the Purchase Price of the related Defective Mortgage Loan
over
the Principal Balance (plus one month’s interest on such balance) of such
Eligible Substitute Mortgage Loan.
An
“Eligible
Substitute Mortgage Loan”
is
a
mortgage loan substituted by the Sponsor for a Defective Mortgage Loan which
must, on the date of such substitution, (i) have an outstanding Principal
Balance (or in the case of a substitution of more than one Mortgage Loan for
a
Defective Mortgage Loan, an aggregate Principal Balance), not in excess of,
and
not more than 5% less than, the Principal Balance of the Defective Mortgage
Loan; (ii) with respect to an Adjustable Rate Mortgage Loan, have a Maximum
Mortgage Interest Rate and Minimum Mortgage Interest Rate not less than the
respective rate for the Defective Mortgage Loan and have a Gross Margin equal
to
or greater than the Defective Mortgage Loan or, with respect to a Fixed Rate
Mortgage Loan, have a Mortgage Interest Rate not less than the Mortgage Interest
Rate of the Defective Mortgage Loan and not more than 1% in excess of the
Mortgage Interest Rate of such Defective Mortgage Loan; (iii) have the same
Due
Date as the Defective Mortgage Loan; (iv) have a remaining term to maturity
not
more than one year earlier and not later than the remaining term to maturity
of
the Defective Mortgage Loan; (v) comply with each representation and warranty
as
to the Mortgage Loans set forth in the Mortgage Loan Purchase Agreement (deemed
to be made as of the date of substitution); (vi) have been underwritten or
re-underwritten by the Sponsor in accordance with the same underwriting criteria
and guidelines as the Mortgage Loans being replaced; (vii) must be of the same
or better credit quality as the Mortgage Loan being replaced; and (viii) satisfy
certain other conditions specified in the Pooling and Servicing
Agreement.
The
Sponsor will make certain representations and warranties as to the accuracy
in
all material respects of certain information furnished to the Trustee with
respect to each Mortgage Loan (e.g., Principal Balance as of the Cut-off Date
and the Mortgage Interest Rate). In addition, the Sponsor will make certain
representations and warranties with respect to the Mortgage Loans to the
Depositor (which representations and warranties will be assigned to the Issuing
Entity), including, among other things, that: (i) at the time of transfer to
the
Depositor, the Sponsor has transferred or assigned all of its right, title
and
interest in each Mortgage Loan and the Related Documents, free of any lien;
and
(ii) each Mortgage Loan complies with any and all requirements of any federal,
state or local law with respect to the origination and servicing of such
Mortgage Loan including, without limitation, usury, truth in lending, real
estate settlement procedures, consumer credit protection, equal credit
opportunity, predatory and abusive lending laws or disclosure laws applicable
to
the Mortgage Loans.
Upon
discovery of a breach of any such representation and warranty which materially
and adversely affects the interests of the certificateholders in the related
Mortgage Loan and Related Documents, the Sponsor will have a period of 90 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 90-day period, the Sponsor will be obligated to (a)
substitute for such Defective Mortgage Loan an Eligible Substitute Mortgage
Loan
or (b) purchase such Defective Mortgage Loan from the Trust Fund. The same
procedure and limitations that are set forth above for the substitution or
purchase of Defective Mortgage Loans as a result of deficient documentation
relating thereto will apply to the substitution or purchase of a Defective
Mortgage Loan as a result of a breach of a representation or warranty in the
Mortgage Loan Purchase Agreement that materially and adversely affects the
interests of the certificateholders. In addition to the foregoing, if the breach
involves the Sponsor’s representation that the Mortgage Loan complies with any
and all requirements of federal, state or local law with respect to the
origination of such Mortgage Loan, including, without limitation, usury, truth
in lending, real estate settlement procedures, consumer credit protection,
equal
credit opportunity, predatory and abusive lending laws or disclosure laws
applicable to the Mortgage Loans, the Sponsor will be obligated to reimburse
the
Issuing Entity for all costs or damages incurred by the Issuing Entity as a
result of the violation of such representation (such amount, the “Reimbursement
Amount”).
Mortgage
Loans required to be transferred to an Originator or the Sponsor as described
in
the preceding paragraphs are referred to as “Defective
Mortgage Loans.”
S-43
Pursuant
to the Pooling and Servicing Agreement, the Servicer will service and administer
the Mortgage Loans as more fully set forth therein.
Payments
on Mortgage Loans; Deposits to Collection Account and Distribution
Account
The
Servicer will establish and maintain or cause to be maintained a separate trust
account (the “Collection
Account”)
for
the benefit of the certificateholders. The Collection Account will be an
Eligible Account (as defined below). Upon receipt by the Servicer of amounts
in
respect of the Mortgage Loans (excluding amounts representing the Servicing
Fee
or other servicing compensation, reimbursement for Advances and Servicing
Advances, insurance proceeds to be applied to the restoration or repair of
a
Mortgaged Property or similar items), the Servicer will be required to deposit
such amounts in the Collection Account within two business days after
determining the proper cash application after receipt of such funds. Amounts
so
deposited may be invested in eligible investments (as described in the Pooling
and Servicing Agreement) maturing no later than one Business Day prior to the
date on which the amount on deposit therein is required to be deposited in
the
Distribution Account. A “Business
Day”
is
any
day other than a Saturday, a Sunday or a day on which banking institutions
in
the State of Delaware, the State of New York, the State of Texas or in the
city
in which the corporate trust office of the Trustee is located are authorized
or
obligated by law or executive order to be closed. The Trustee will establish
an
account (the “Distribution
Account”)
into
which the Trustee will deposit, upon receipt on the Business Day preceding
each
Distribution Date, amounts withdrawn from the Collection Account and remitted
to
it by the Servicer for distribution to certificateholders on such Distribution
Date. The Distribution Account will be an Eligible Account. Amounts on deposit
in the Distribution Account may be invested in eligible investments maturing
on
or before the Business Day prior to the related Distribution Date unless
invested in investments managed or advised by the Trustee or an affiliate,
in
which case the eligible investments may mature on the related Distribution
Date.
An
“Eligible
Account”
is
a
segregated account that is (i) an account or accounts maintained with a federal
or state chartered depository institution or trust company the short-term
unsecured debt obligations of which (or, in the case of a depository institution
or trust company that is the principal subsidiary of a holding company, the
short-term unsecured debt obligations of such holding company) are rated at
least “A-2” (or the equivalent) by each of Moody’s, S&P and DBRS
(collectively, the “Rating
Agencies”)
at the
time any amounts are held on deposit therein, (ii) an account or accounts the
deposits in which are fully insured by the Federal Deposit Insurance Corporation
(to the limits established by such corporation), the uninsured deposits in
which
account are otherwise secured such that, as evidenced by an opinion of counsel
delivered to the Trustee and to each Rating Agency, the certificateholders
will
have a claim with respect to the funds in such account or a perfected first
priority security interest against such collateral (which shall be limited
to
eligible investments) securing such funds that is superior to claims of any
other depositors or creditors of the depository institution with which such
account is maintained, (iii) a trust account or accounts maintained with the
trust department of a federal or state chartered depository institution,
national banking association or trust company acting in its fiduciary capacity
or (iv) otherwise acceptable to each Rating Agency without reduction or
withdrawal of their then current ratings of the Certificates as evidenced by
a
letter from each Rating Agency to the Trustee. Eligible investments are
specified in the Pooling and Servicing Agreement and are limited to investments
which meet the criteria of the Rating Agencies from time to time as being
consistent with their then current ratings of the Certificates.
Advances
Subject
to the following limitations, the Servicer will be obligated to advance or
cause
to be advanced on each servicer remittance date from its own funds, or funds
in
the Collection Account that are not included as part of the Interest Remittance
Amount or Principal Remittance Amount for such Distribution Date, or a
combination of both, an amount equal to the aggregate of all payments of
principal and interest, net of the Servicing Fee, that were due during the
related Collection Period on the Mortgage Loans, other than Balloon Payments,
and that were not received by the related Determination Date and, with respect
to Balloon Loans as to which the Balloon Payment is not made when due, an
assumed monthly payment that would have been due on the related Due Date based
on the original principal amortization schedule for such Balloon Loan (any
such
advance, an “Advance”).
The
Servicer is not required to make any Advances of principal on Second Lien
Mortgage Loans or REO Properties.
S-44
Advances
with respect to Mortgage Loans are required to be made only to the extent the
Servicer deems them to be recoverable from related late collections, insurance
proceeds, condemnation proceeds or liquidation proceeds. The purpose of making
such Advances is to maintain a regular cash flow to the certificateholders,
rather than to guarantee or insure against losses. The Servicer will not be
required, however, to make any Advances with respect to reductions in the amount
of the Monthly Payments on the Mortgage Loans due to bankruptcy proceedings
or
the application of the Servicemembers Civil Relief Act (the “Relief
Act”)
or
similar state or local laws. Subject to the recoverability standard above,
the
Servicer’s obligation to make Advances as to any Mortgage Loan will continue
until such Mortgage Loan is paid in full by the mortgagor or disposed of by
the
Issuing Entity.
All
Advances will be reimbursable to the Servicer from late collections, insurance
proceeds, condemnation proceeds and liquidation proceeds from the Mortgage
Loan
as to which such unreimbursed Advance was made. In addition, any Advances
previously made in respect of any Mortgage Loan that the Servicer deems to
be
nonrecoverable from related late collections, insurance proceeds, condemnation
proceeds or liquidation proceeds may be reimbursed to the Servicer out of
general funds in the Collection Account prior to the distributions on the
Certificates. In addition, the Servicer may withdraw from the Collection Account
funds that were not included in the Interest Remittance Amount or Principal
Remittance Amount for the preceding Distribution Date to reimburse itself for
Advances or Servicing Advances previously made; provided, however, any funds
so
applied will be replaced by the Servicer by deposit in the Collection Account
no
later than one Business Day prior to the Distribution Date on which such funds
are required to be distributed. The Servicer may reimburse itself from amounts
in the Collection Account for any prior Advances or Servicing Advances not
reimbursed to the Servicer at the time a Mortgage Loan is modified. In the
event
the Servicer fails in its obligation to make any such Advance, the Trustee,
in
its capacity as successor servicer, or a successor servicer appointed by the
Trustee, will be obligated to make any such Advance, to the extent required
in
the Pooling and Servicing Agreement.
In
the
course of performing its servicing obligations, the Servicer will pay all
reasonable and customary “out-of-pocket” costs and expenses (including legal
fees) incurred in the performance of its servicing obligations, including,
but
not limited to, the cost of (i) the preservation, restoration, inspection and
protection of the Mortgaged Properties, (ii) any enforcement or judicial
proceedings, including foreclosures, and (iii) the management and liquidation
of
Mortgaged Properties acquired in satisfaction of the related mortgage. Each
such
expenditure will constitute a “Servicing
Advance.”
The
Servicer will only make Servicing Advances with respect to delinquent property
taxes to the extent necessary to avoid the loss of the related Mortgaged
Property
The
Servicer’s right to reimbursement for Servicing Advances is limited to late
collections on the related Mortgage Loan, including liquidation proceeds,
released mortgaged property proceeds, insurance proceeds, condemnation proceeds
and such other amounts the Servicer may collect from the related mortgagor
or
otherwise relating to the Mortgage Loan in respect of which such unreimbursed
amounts are owed, unless such amounts are deemed to be nonrecoverable by the
Servicer, in which event reimbursement will be made to the Servicer from general
funds in the Collection Account.
The
Pooling and Servicing Agreement will provide that the Servicer may enter into
a
facility with any person which provides that such person (an “Advancing
Person”)
may
fund Advances and/or Servicing Advances, although no facility will reduce or
otherwise affect the Servicer’s obligation to fund such Advances and/or
Servicing Advances. Any Advances and/or Servicing Advances made by an Advancing
Person will be reimbursed to the Advancing Person in the same manner as
reimbursements would be made to the Servicer.
Subservicers
The
Servicer may enter into subservicing agreements with subservicers for the
servicing and administration of the Mortgage Loans. However, as set forth in
the
Pooling and Servicing Agreement, no subservicing agreement will generally take
effect until 30 days after written notice is received by both the Trustee and
the Depositor. The terms of any subservicing agreement may not be inconsistent
with any of the provisions of the Pooling and Servicing Agreement. Any
subservicing agreement will include the provision that such agreement may be
immediately terminated by the Depositor or the Trustee without fee, in
accordance with the terms of the Pooling and Servicing Agreement, in the event
that the Servicer, for any reason, is no longer the Servicer (including
termination due to an Event of Servicing Termination).
S-45
The
Servicer will remain obligated and primarily liable to the Trustee for the
servicing and administering of the Mortgage Loans in accordance with the
provisions of the Pooling and Servicing Agreement without diminution of such
obligation or liability by virtue of the subservicing agreements or arrangements
or by virtue of indemnification from the subservicer and to the same extent
and
under the same terms and conditions as if the servicer alone were servicing
and
administering the Mortgage Loans. The Servicer will be solely liable for all
fees owed by it to any subservicer, regardless of whether the Servicer’s
compensation is sufficient to pay the subservicer fees.
Compensation
and Payment of Expenses of the Servicer and the Trustee
The
fees
payable each month from interest payments received on each Mortgage Loan are
called the “Administrative
Fees”
and
consist of (a) a servicing fee payable to the Servicer in respect of its
servicing activities (the “Servicing
Fee”)
and
(b) a trustee fee payable to the Trustee in respect of its obligations under
the
Pooling and Servicing Agreement (the “Trustee
Fee”),
each
payable out of the interest payments received on each Mortgage Loan in the
Mortgage Pool. The Administrative Fees will accrue on the aggregate Principal
Balance of the Mortgage Loans as of the first day of each month at a rate (the
“Administrative
Fee Rate”)
equal
to the sum of the Servicing Fee Rate and the Trustee Fee Rate. The “Servicing
Fee Rate”
will
be
0.50% per annum and the “Trustee
Fee Rate”
will
be
0.01% per annum; provided, however, for so long as Litton Loan Servicing LP
is
the servicer of the Mortgage Loans, a servicing fee (the “Litton
Servicing Fee”)
will
be paid to Litton Loan Servicing LP at a rate of 0.15% per annum on the
Principal Balance of each Mortgage Loan (the “Litton
Servicing Fee Rate)
and a
fee (the “Excess
Servicing Fee”)
will
be paid to the holder of the Class CE-2 Certificate at a rate of 0.35% per
annum
on the Principal Balance of each Mortgage Loan (the “Excess
Servicing Fee Rate).
As
additional servicing compensation, the Servicer is entitled to retain all
service-related fees, including assumption fees, modification fees, extension
fees, bad check fees, late payment charges and Prepayment Interest Excess,
to
the extent collected from mortgagors, together with any interest or other income
earned on funds held in the Collection Account and any escrow
accounts.
The
Servicer is obligated to offset any Prepayment Interest Shortfall resulting
from
a voluntary principal prepayment in full on the Mortgage Loans on any
Distribution Date (payments made by the Servicer in satisfaction of such
obligation, “Compensating
Interest”)
by an
amount not in excess of one-half of its Servicing Fee for such Distribution
Date. The Servicer is generally obligated to pay expenses incurred by it in
connection with its responsibilities under the Pooling and Servicing Agreement,
unless these expenses constitute Servicing Advances as described above under
“—Advances.” These expenses, including the fees of any subservicer hired by the
Servicer, will be paid by the Servicer out of its own funds, without
reimbursement.
“Prepayment
Interest Excess”
with
respect to any Distribution Date will be for each Mortgage Loan that was the
subject of a principal prepayment in full during the portion of the related
Prepayment Period beginning on the first day of the calendar month in which
such
Distribution Date occurs through the Determination Date of the calendar month
in
which such Distribution Date occurs, an amount equal to interest (to the extent
received) at the applicable Mortgage Interest Rate (net of the Servicing Fee
Rate) on the amount of such principal prepayment for the number of days
commencing on the first day of the calendar month in which such Distribution
Date occurs and ending on the date on which such prepayment is so
applied.
With
respect to any Determination Date and each Mortgage Loan as to which a principal
prepayment in full was applied during the portion of the related Prepayment
Period occurring in the prior calendar month or as to which a partial prepayment
received during the portion of the related Prepayment Period occurring in the
prior calendar month is applied during such prior calendar month, the
“Prepayment
Interest Shortfall”
is
an
amount equal to the interest at the Mortgage Interest Rate for such Mortgage
Loan (net of the Administrative Fee Rate) on the amount of such principal
prepayment for the number of days commencing on the date on which the principal
prepayment is applied and ending on the last day of the calendar month in which
applied.
As
additional compensation, the Trustee is entitled to retain all investment
earnings on funds on deposit in the Distribution Account. The Trustee is
obligated to pay routine ongoing expenses incurred by it in connection with
its
responsibilities under the Pooling and Servicing Agreement. Those amounts will
be paid by the Trustee out of its own funds, without reimbursement.
S-46
In
the
event the Trustee succeeds to the role of Servicer, it will be entitled to
the
same Servicing Fee as the predecessor servicer and if the Trustee appoints
a
successor servicer under the Pooling and Servicing Agreement, the Trustee may
make such arrangements for the compensation of such successor out of the
payments on the Mortgage Loans serviced by the predecessor Servicer as it and
such successor shall agree, not to exceed the Servicing Fee Rate.
The
Depositor, the Servicer and the Trustee are entitled to indemnification and
reimbursement of certain expenses from the Issuing Entity under the Pooling
and
Servicing Agreement as discussed in the prospectus under the headings “The
Depositor,”“Description of the Agreements—Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements—Certain Matters
Regarding Servicers and the Master Servicer” and “—Certain Matters Regarding the
Trustee.”
Pledge
and Assignment of Servicer’s Rights
On
the
Closing Date, the Servicer may pledge and assign all of its right, title and
interest in, to and under the Pooling and Servicing Agreement to one or more
lenders (each, a “Servicing
Rights Pledgee”)
selected by the Servicer, including JPMorgan Chase Bank, N.A., as the
representative of certain lenders. In the event that a Event of Servicing
Termination occurs, the Trustee and the Depositor have agreed to the appointment
of a Servicing Rights Pledgee or its designee as the successor servicer,
provided that at the time of such appointment the Servicing Rights Pledgee
or
such designee meets the requirements of a successor servicer described in the
Pooling and Servicing Agreement (including being acceptable to the Rating
Agencies) and that the Servicing Rights Pledgee or such designee agrees to
be
subject to the terms of the Pooling and Servicing Agreement. Under no
circumstances will JPMorgan Chase Bank, N.A be required to act as a backup
servicer.
Optional
Termination
The
Servicer, or an affiliate, will have the right to purchase all of the Mortgage
Loans and REO Properties in the Trust Fund and thereby effect the early
retirement of the Certificates, on any Distribution Date on which the aggregate
Principal Balance of such Mortgage Loans and REO Properties is 10% or less
of
the aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date.
The first Distribution Date on which such option could be exercised is referred
to herein as the “Optional
Termination Date.”
In
the
event that the option is exercised, the purchase will be made at a price (the
“Termination
Price”)
generally equal to the sum of (x) par plus accrued interest for each Mortgage
Loan at the related Mortgage Interest Rate to but not including the first day
of
the month in which such purchase price is distributed plus the amount of any
unpaid Servicing Fees, any unreimbursed Advances and Servicing Advances made
by
the Servicer and any amounts due to the Trustee and (y) any Swap Termination
Payment owed to the Swap Provider pursuant to the Interest Rate Swap Agreement.
If the Servicer is subject to regulation by the OCC, the FDIC, the Federal
Reserve or the Office of Thrift Supervision, however, the Servicer may not
exercise this option unless the aggregate fair market value of the Mortgage
Loans and REO Properties is greater than or equal to the Termination Price.
In
addition, no option may be exercised until any due and unpaid Reimbursement
Amounts have been paid to the Issuing Entity. Proceeds from such purchase will
be included in the Interest Remittance Amount and Principal Remittance Amount
and will be distributed to the holders of the Certificates in accordance with
the Pooling and Servicing Agreement. Any such purchase of Mortgage Loans and
REO
Properties will result in the early retirement of the Certificates. Any such
optional termination will be permitted only pursuant to a “qualified
liquidation” as defined in Section 860F of the Code.
In
connection with the issuance of any net interest margin securities secured
by
all or a portion of the Class CE-1 and Class P Certificates, the Servicer may
agree to refrain from exercising this option while those securities are
outstanding.
Optional
Purchase of Defaulted Loans
As
to any
Mortgage Loan which is delinquent in payment by 120 days or more or for which
the Servicer has accepted a deed in lieu of foreclosure, the Servicer or an
affiliate of the Servicer may, at its option and in accordance with the terms
of
the Pooling and Servicing Agreement, purchase such Mortgage Loan from the
Issuing Entity at the Purchase Price for such Mortgage Loan. These purchases
will have the same effect on the holders of the Offered Certificates as a
prepayment of those Mortgage Loans. In addition, the Servicer may write-off
any
Second Lien Mortgage Loan delinquent in payment by 180 days or
more.
S-47
Events
of Servicing Termination
“Events
of Servicing Termination”
will
consist, among other things, of: (i) any failure by the Servicer to deposit
in
the Collection Account the required amounts or remit to the Trustee for deposit
in the Distribution Account any payment which continues unremedied by a
specified time one Business Day after the first date on which (x) the Servicer
has knowledge of such failure or (y) written notice of such failure is given
to
the Servicer; (ii) any failure of the Servicer to make any Advance with respect
to a Mortgage Loan or to cover any Prepayment Interest Shortfalls on Mortgage
Loans, as described herein, which failure continues unremedied for one Business
Day after the first date on which (x) the Servicer has knowledge of such failure
or (y) written notice of such failure is given to the Servicer; (iii) any
failure by the Servicer to observe or perform in any material respect any other
of its covenants or agreements in the Pooling and Servicing Agreement, which
continues unremedied for 30 days after the first date on which (x) the Servicer
has knowledge of such failure or (y) written notice of such failure is given
to
the Servicer; (iv) insolvency, readjustment of debt, marshalling of assets
and
liabilities or similar proceedings, and certain actions by or on behalf of
the
Servicer indicating its insolvency or inability to pay its obligations; and
(v)
cumulative Realized Losses as of any Distribution Date exceed the amount
specified in the Pooling and Servicing Agreement.
Rights
upon Event of Servicing Termination
So
long
as an Event of Servicing Termination remains unremedied, the Trustee may, and
at
the direction of the holders of the Certificates evidencing not less than 51%
of
the Voting Rights is required to, terminate all of the rights and obligations
of
the Servicer in its capacity as servicer with respect to the Mortgage Loans,
as
provided in the Pooling and Servicing Agreement, whereupon the Trustee will
succeed to (or appoint a successor servicer to assume) all of the
responsibilities and duties of the Servicer pursuant to the Pooling and
Servicing Agreement, including the obligation to make any required Advances
and
Servicing Advances. No assurance can be given that termination of the rights
and
obligations of the Servicer under the Pooling and Servicing Agreement would
not
adversely affect the servicing of the related Mortgage Loans, including the
delinquency experience of such Mortgage Loans.
Voting
Rights
With
respect to any date of determination, the percentage of all the Voting Rights
allocated among holders of the Certificates (other than the Class CE-1, Class
CE-2, Class P, Class R and Class R-X Certificates) will be 98% and will be
allocated among the classes of such Certificates in the proportion that the
aggregate Certificate Principal Balance of all the Certificates of such class
then outstanding bear to the aggregate Certificate Principal Balance of all
Certificates then outstanding. With respect to any date of determination, 1%
of
all the Voting Rights will be allocated to the holders of each of the Class
CE-1
and Class P Certificates. The Voting Rights allocated to a class of Certificates
will be allocated among all holders of each such class in proportion to the
outstanding certificate balances (or percentage interest) of such Certificates.
The Class CE-2, Class R and Class R-X Certificates will not have any Voting
Rights.
No
holder
of an Offered Certificate, solely by virtue of such holder’s status as a holder
of an Offered Certificate, will have any right under the Pooling and Servicing
Agreement to institute any proceeding with respect thereto, unless such holder
previously has given to the Trustee written notice of default and unless the
holders of Certificates having not less than 51% of the Voting Rights evidenced
by the Certificates so agree and have offered indemnity satisfactory to the
Trustee.
Amendment
The
Pooling and Servicing Agreement may be amended by the Depositor, the Servicer
and the Trustee, without the consent of the holders of the Certificates, for
any
of the purposes set forth under “Description of the Agreements—Material Terms of
the Pooling and Servicing Agreements and Underlying Servicing
Agreements—Amendment” in the prospectus. In addition, the Pooling and Servicing
Agreement may be amended by the Depositor, the Servicer and the Trustee and
the
holders of a majority in interest of any class of Certificates affected thereby
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Pooling and Servicing Agreement or
of
modifying in any manner the rights of the holders of any class of Certificates;
provided, however, that no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, distributions required to be made on any
class of Certificates without the consent of the holders of such Certificates;
(ii) adversely affect in any material respect the interests of the holders
of
any class of Certificates in a manner other than as described in clause (i)
above, without the consent of the holders of such class evidencing percentage
interests aggregating not less than 51% of the Voting Rights represented by
such
class; (iii) reduce the aforesaid percentage of aggregate outstanding principal
amounts of Certificates, the holders of which are required to consent to any
such amendment, without the consent of the holders of all such Certificates;
or
(iv) cause any of the REMICs created thereunder to be disqualified as a REMIC
or
result in a prohibited transaction or contribution tax under the Code on any
REMIC created thereunder unless an indemnification is provided for such
tax.
S-48
DESCRIPTION
OF THE CERTIFICATES
General
The
Certificates will consist of (i) the twelve classes of Offered Certificates
listed in the table beginning on page S-6 of this prospectus supplement and
(ii)
the Class B-1, Class CE-1, Class CE-2, Class P, Class R and Class R-X
Certificates.
The
Offered Certificates will be issuable in the forms and denominations set forth
in the table beginning on page S-6. The Offered Certificates are not intended
to
be and should not be directly or indirectly held or beneficially owned in
amounts lower than the minimum denominations in the table.
Interest
Distributions
On
each
Distribution Date, based upon the information provided to it in a remittance
report prepared by the Servicer, the Trustee will distribute the Interest
Remittance Amount in the following order of priority to the extent
available:
(i) concurrently,
to the Class A-1, Class A-2 and Class A-3 Certificates, pro
rata,
the
applicable Accrued Certificate Interest thereon for such Distribution
Date;
(ii) concurrently,
to the Class A-1, Class A-2 and Class A-3 Certificates, pro
rata,
the
applicable Interest Carry Forward Amount thereon for such Distribution Date;
(iii) to
the
Class M-1 Certificates, the Accrued Certificate Interest thereon for such
Distribution Date;
(iv) to
the
Class M-2 Certificates, the Accrued Certificate Interest thereon for such
Distribution Date;
(v) to
the
Class M-3 Certificates, the Accrued Certificate Interest thereon for such
Distribution Date;
(vi) to
the
Class M-4 Certificates, the Accrued Certificate Interest thereon for such
Distribution Date;
(vii) to
the
Class M-5 Certificates, the Accrued Certificate Interest thereon for such
Distribution Date;
(viii) to
the
Class M-6 Certificates, the Accrued Certificate Interest thereon for such
Distribution Date;
S-49
(ix) to
the
Class M-7 Certificates, the Accrued Certificate Interest thereon for such
Distribution Date;
(x) to
the
Class M-8 Certificates, the Accrued Certificate Interest thereon for such
Distribution Date;
(xi) to
the
Class M-9 Certificates, the Accrued Certificate Interest thereon for such
Distribution Date;
(xii) to
the
Class B-1 Certificates, the Accrued Certificate Interest thereon for such
Distribution Date; and
(xiii) the
amount, if any, of the Interest Remittance Amount remaining after application
with respect to the priorities set forth above which is defined below as the
“Monthly Excess Interest Amount” for such Distribution Date, will be applied as
described below under “—Application of Monthly Excess Cashflow
Amounts.”
On
any
Distribution Date, any shortfalls resulting from the application of the Relief
Act or similar state laws will be allocated as a reduction to the Accrued
Certificate Interest for the Offered Certificates on a pro
rata
basis
based on the respective amounts of interest accrued on those Certificates for
that Distribution Date. The holders of the Offered Certificates will not be
entitled to reimbursement on future Distribution Dates of any such Relief Act
shortfalls following their allocation to such Certificates.
“Accrued
Certificate Interest”
for
each Class of Certificates and each Distribution Date means an amount equal
to
the interest accrued during the related Interest Accrual Period on the
Certificate Principal Balance of such class of Certificates, minus each class’s
Interest Percentage of shortfalls caused by the Relief Act or similar state
or
local laws for such Distribution Date.
The
“Interest
Accrual Period”
(a)
for
any Distribution Date and each class of Floating Rate Certificates will be
the
period from and including the preceding Distribution Date, or in the case of
the
first Distribution Date, from the Closing Date, through and including the day
prior to the current Distribution Date, and calculations of interest will be
made on the basis of the actual number of days in the Interest Accrual Period
and on a 360-day year and (b) for any Distribution Date and the Class B-1
Certificates will be the period from the first day of the calendar month
preceding such Distribution Date up to and including the last day of such
calendar month, on a 30/360 basis.
The
“Interest
Carry Forward Amount”
means
for any class of Certificates and any Distribution Date, the excess of (a)
the
sum of (x) any Interest Carry Forward Amount for the prior Distribution Date
(along with interest on such amount at the applicable Certificate Interest
Rate
on the basis of the related accrual method) and (y) the Accrued Certificate
Interest for such Distribution Date over (b) the amount of interest actually
distributed on such class on such Distribution Date.
The
“Interest
Percentage”
is,
with respect to any class of Certificates and any Distribution Date, the ratio
(expressed as a decimal carried to six places) of the Accrued Certificate
Interest for such class to the Accrued Certificate Interest for all classes
of
Certificates, in each case for that Distribution Date and without regard to
shortfalls caused by the Relief Act or similar state or local laws.
The
“Interest
Remittance Amount”
means
as of any Distribution Date, (A) the sum, without duplication, of (i) all
interest collected or advanced with respect to the related Collection Period
on
the Mortgage Loans received by the Servicer on or prior to the Determination
Date for such Distribution Date (less the Administrative Fees for the Mortgage
Loans, certain amounts available for reimbursement of Advances and Servicing
Advances with respect to the Mortgage Loans as described above under “The
Pooling and Servicing Agreement—Advances” and certain other reimbursable
expenses or indemnification payments pursuant to the Pooling and Servicing
Agreement), (ii) all Compensating Interest paid by the Servicer on such
Distribution Date with respect to the Mortgage Loans, (iii) the portion of
any
payment in connection with any principal prepayment (other than any Prepayment
Interest Excess), substitution, Purchase Price, Termination Price, liquidation
proceeds (net of certain expenses) or insurance proceeds relating to interest
with respect to the Mortgage Loans received during the related Prepayment Period
and (iv) any Reimbursement Amount relating to the Mortgage Loans received during
the related Prepayment Period less (B) any amounts payable to the Swap Provider
(including any Net Swap Payment and any Swap Termination Payment owed to the
Swap Provider but excluding any Defaulted Swap Termination
Payment).
S-50
Principal
Distributions
For
any
Distribution Date (a) before the Stepdown Date or (b) on which a Trigger Event
is in effect, the Principal Distribution Amount will be allocated among and
distributed in reduction of the Certificate Principal Balances of the
Certificates in the following order of priority:
(i) sequentially,
to the Class A-1, Class A-2 and Class A-3 Certificates, in that order, the
Senior Principal Distribution Amount until the Certificate Principal Balances
thereof have been reduced to zero;
(ii) to
the
Class M-1 Certificates, until the Certificate Principal Balance thereof has
been
reduced to zero;
(iii) to
the
Class M-2 Certificates, until the Certificate Principal Balance thereof has
been
reduced to zero;
(iv) to
the
Class M-3 Certificates, until the Certificate Principal Balance thereof has
been
reduced to zero;
(v) to
the
Class M-4 Certificates, until the Certificate Principal Balance thereof has
been
reduced to zero;
(vi) to
the
Class M-5 Certificates, until the Certificate Principal Balance thereof has
been
reduced to zero;
(vii) to
the
Class M-6 Certificates, until the Certificate Principal Balance thereof has
been
reduced to zero;
(viii) to
the
Class M-7 Certificates, until the Certificate Principal Balance thereof has
been
reduced to zero;
(ix) to
the
Class M-8 Certificates, until the Certificate Principal Balance thereof has
been
reduced to zero;
(x) to
the
Class M-9 Certificates, until the Certificate Principal Balance thereof has
been
reduced to zero;
(xi) to
the
Class B-1 Certificates, until the Certificate Principal Balance thereof has
been
reduced to zero; and
(xii) any
remaining Principal Distribution Amount will be distributed as part of the
Monthly Excess Cashflow Amount as described below under “—Application of Monthly
Excess Cashflow Amounts.”
For
any
Distribution Date (a) on or after the Stepdown Date and (b) as long as a
Trigger
Event is not in effect, the Principal Distribution Amount will be allocated
among and distributed in reduction of the Certificate Principal Balances
of the
Certificates in the following order of priority:
S-51
(i) sequentially,
to the Class A-1, Class A-2 and Class A-3 Certificates, in that order, the
Senior Principal Distribution Amount until the Certificate Principal Balances
thereof have been reduced to zero;
(ii) to
the
Class M-1 Certificates, up to the Class M-1 Principal Distribution Amount,
until
the Certificate Principal Balance thereof has been reduced to zero;
(iii) to
the
Class M-2 Certificates, up to the Class M-2 Principal Distribution Amount,
until
the Certificate Principal Balance thereof has been reduced to zero;
(iv) to
the
Class M-3 Certificates, up to the Class M-3 Principal Distribution Amount,
until
the Certificate Principal Balance thereof has been reduced to zero;
(v) to
the
Class M-4 Certificates, up to the Class M-4 Principal Distribution Amount,
until
the Certificate Principal Balance thereof has been reduced to zero;
(vi) to
the
Class M-5 Certificates, up to the Class M-5 Principal Distribution Amount,
until
the Certificate Principal Balance thereof has been reduced to zero;
(vii) to
the
Class M-6 Certificates, up to the Class M-6 Principal Distribution Amount,
until
the Certificate Principal Balance thereof has been reduced to zero;
(viii) to
the
Class M-7 Certificates, up to the Class M-7 Principal Distribution Amount,
until
the Certificate Principal Balance thereof has been reduced to zero;
(ix) to
the
Class M-8 Certificates, up to the Class M-8 Principal Distribution Amount,
until
the Certificate Principal Balance thereof has been reduced to zero;
(x) to
the
Class M-9 Certificates, up to the Class M-9 Principal Distribution Amount,
until
the Certificate Principal Balance thereof has been reduced to zero;
(xi) to
the
Class B-1 Certificates, up to the Class B-1 Principal Distribution Amount,
until
the Certificate Principal Balance thereof has been reduced to zero; and
(xii) any
remaining Principal Distribution Amount will be distributed as part of the
Monthly Excess Cashflow Amount as described below under “—Application of Monthly
Excess Cashflow Amounts.”
Notwithstanding
the foregoing, on or after the Distribution Date on which the aggregate
Certificate Principal Balance of the Class M and Class B Certificates has been
reduced to zero and there is no overcollateralization, all principal
distributions to the Class A Certificates will be distributed concurrently
on a
pro
rata
basis,
based on the Certificate Principal Balance of each such Class of Certificates,
until the Certificate Principal Balance of each such Class has been reduced
to
zero.
For
purposes of the foregoing, the following terms will have the respective meanings
set forth below.
“60+
Day Delinquent Loan”
means
each Mortgage Loan (including each Mortgage Loan in foreclosure and each
Mortgage Loan for which the mortgagor has filed for bankruptcy after the Closing
Date) with respect to which any portion of a Monthly Payment is, as of the
last
day of the prior Collection Period, two months or more past due and each
Mortgage Loan relating to an REO Property.
The
“Certificate
Principal Balance”
with
respect to any class of Class A, Class M and Class B Certificates and the Class
P Certificates and any Distribution Date, will equal the principal balance
of
that class on the date of the initial issuance of the Certificates as reduced,
but not below zero, by:
S-52
·
all
amounts distributed on previous Distribution Dates on that class
on
account of principal; and
·
any
Applied Realized Loss Amounts allocated to that class for previous
Distribution Dates;
and
increased by:
·
any
Subsequent Recoveries allocated to that class for previous Distribution
Dates.
“Class
M-1 Principal Distribution Amount”
means
as of any Distribution Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of (i) the sum of
the
Certificate Principal Balances of the Class A Certificates (after taking into
account the payment of the Senior Principal Distribution Amount on such
Distribution Date) and (ii) the Certificate Principal Balance of the Class
M-1
Certificates immediately prior to such Distribution Date over (y) the lesser
of
(a) the product of (i) approximately 64.50% and (ii) the Pool Balance as of
the
last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period and (b) the amount by which the
Pool Balance as of the last day of the related Collection Period after giving
effect to principal prepayments in the related Prepayment Period exceeds the
Overcollateralization Floor.
“Class
M-2 Principal Distribution Amount”
means
as of any Distribution Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of (i) the sum of
the
Certificate Principal Balances of the Class A Certificates and the Class M-1
Certificates (after taking into account the payment of the Senior Principal
Distribution Amount and the Class M-1 Principal Distribution Amount on such
Distribution Date) and (ii) the Certificate Principal Balance of the Class
M-2
Certificates immediately prior to such Distribution Date over (y) the lesser
of
(a) the product of (i) approximately 71.40% and (ii) the Pool Balance as of
the
last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period and (b) the amount by which the
Pool Balance as of the last day of the related Collection Period after giving
effect to principal prepayments in the related Prepayment Period exceeds the
Overcollateralization Floor.
“Class
M-3 Principal Distribution Amount”
means
as of any Distribution Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of (i) the sum of
the
Certificate Principal Balances of the Class A Certificates and Class M-1 and
Class M-2 Certificates (after taking into account the payment of the Senior
Principal Distribution Amount and the Class M-1 and Class M-2 Principal
Distribution Amounts on such Distribution Date) and (ii) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date over (y) the lesser of (a) the product of (i) approximately
75.30% and (ii) the Pool Balance as of the last day of the related Collection
Period after giving effect to principal prepayments in the related Prepayment
Period and (b) the amount by which the Pool Balance as of the last day of the
related Collection Period after giving effect to principal prepayments in the
related Prepayment Period exceeds the Overcollateralization Floor.
“Class
M-4 Principal Distribution Amount”
means
as of any Distribution Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of (i) the sum of
the
Certificate Principal Balances of the Class A Certificates and the Class M-1,
Class M-2 and Class M-3 Certificates (after taking into account the payment
of
the Senior Principal Distribution Amount and the Class M-1, Class M-2 and Class
M-3 Principal Distribution Amounts on such Distribution Date) and (ii) the
Certificate Principal Balance of the Class M-4 Certificates immediately prior
to
such Distribution Date over (y) the lesser of (a) the product of (i)
approximately 78.80% and (ii) the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period and (b) the amount by which the Pool Balance as of the last
day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the Overcollateralization
Floor.
“Class
M-5 Principal Distribution Amount”
means
as of any Distribution Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of (i) the sum of
the
Certificate Principal Balances of the Class A Certificates and the Class M-1,
Class M-2, Class M-3 and Class M-4 Certificates (after taking into account
the
payment of the Senior Principal Distribution Amount and the Class M-1, Class
M-2, Class M-3 and Class M-4 Principal Distribution Amounts on such Distribution
Date) and (ii) the Certificate Principal Balance of the Class M-5 Certificates
immediately prior to such Distribution Date over (y) the lesser of (a) the
product of (i) approximately 82.10% and (ii) the Pool Balance as of the last
day
of the related Collection Period after giving effect to principal prepayments
in
the related Prepayment Period and (b) the amount by which the Pool Balance
as of
the last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the Overcollateralization
Floor.
S-53
“Class
M-6 Principal Distribution Amount”
means
as of any Distribution Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of (i) the sum of
the
Certificate Principal Balances of the Class A Certificates and the Class M-1,
Class M-2, Class M-3, Class M-4 and Class M-5 Certificates (after taking into
account the payment of the Senior Principal Distribution Amount and the Class
M-1, Class M-2, Class M-3, Class M-4 and Class M-5 Principal Distribution
Amounts on such Distribution Date) and (ii) the Certificate Principal Balance
of
the Class M-6 Certificates immediately prior to such Distribution Date over
(y)
the lesser of (a) the product of (i) approximately 85.20% and (ii) the Pool
Balance as of the last day of the related Collection Period after giving effect
to principal prepayments in the related Prepayment Period and (b) the amount
by
which the Pool Balance as of the last day of the related Collection Period
after
giving effect to principal prepayments in the related Prepayment Period exceeds
the Overcollateralization Floor.
“Class
M-7 Principal Distribution Amount”
means
as of any Distribution Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of (i) the sum of
the
Certificate Principal Balances of the Class A Certificates and the Class M-1,
Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates (after
taking into account the payment of the Senior Principal Distribution Amount
and
the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6
Principal Distribution Amounts on such Distribution Date) and (ii) the
Certificate Principal Balance of the Class M-7 Certificates immediately prior
to
such Distribution Date over (y) the lesser of (a) the product of (i)
approximately 88.20% and (ii) the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period and (b) the amount by which the Pool Balance as of the last
day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the Overcollateralization
Floor.
“Class
M-8 Principal Distribution Amount”
means
as of any Distribution Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of (i) the sum of
the
Certificate Principal Balances of the Class A Certificates and the Class M-1,
Class M-2, Class M-3, Class M-4, Class M-5, Class M-6 and Class M-7 Certificates
(after taking into account the payment of the Senior Principal Distribution
Amount and the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class
M-6
and Class M-7 Principal Distribution Amounts on such Distribution Date) and
(ii)
the Certificate Principal Balance of the Class M-8 Certificates immediately
prior to such Distribution Date over (y) the lesser of (a) the product of (i)
approximately 90.30% and (ii) the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period and (b) the amount by which the Pool Balance as of the last
day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the Overcollateralization
Floor.
“Class
M-9 Principal Distribution Amount”
means
as of any Distribution Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of (i) the sum of
the
Certificate Principal Balances of the Class A Certificates and the Class M-1,
Class M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class M-7 and Class
M-8
Certificates (after taking into account the payment of the Senior Principal
Distribution Amount and the Class M-1, Class M-2, Class M-3, Class M-4, Class
M-5, Class M-6, Class M-7 and Class M-8 Principal Distribution Amounts on such
Distribution Date) and (ii) the Certificate Principal Balance of the Class
M-9
Certificates immediately prior to such Distribution Date over (y) the lesser
of
(a) the product of (i) approximately 92.60% and (ii) the Pool Balance as of
the
last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period and (b) the amount by which the
Pool Balance as of the last day of the related Collection Period after giving
effect to principal prepayments in the related Prepayment Period exceeds the
Overcollateralization Floor.
“Class
B-1 Principal Distribution Amount”
means
as of any Distribution Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of (i) the sum of
the
Certificate Principal Balances of the Class A Certificates and the Class M
Certificates (after taking into account the payment of the Senior Principal
Distribution Amount and the Class M-1, Class M-2, Class M-3, Class M-4, Class
M-5, Class M-6, Class M-7, Class M-8 and Class M-9 Principal Distribution
Amounts on such Distribution Date) and (ii) the Certificate Principal Balance
of
the Class B-1 Certificates immediately prior to such Distribution Date over
(y)
the lesser of (a) the product of (i) approximately 94.60% and (ii) the Pool
Balance as of the last day of the related Collection Period after giving effect
to principal prepayments in the related Prepayment Period and (b) the amount
by
which the Pool Balance as of the last day of the related Collection Period
after
giving effect to principal prepayments in the related Prepayment Period exceeds
the Overcollateralization Floor.
S-54
“Extra
Principal Distribution Amount”
means
as of any Distribution Date, the lesser of (x) the Monthly Excess Interest
Amount for that Distribution Date and (y) the Overcollateralization Deficiency
for that Distribution Date.
“Overcollateralization
Amount”
means
as of any Distribution Date the excess, if any, of (x) the Pool Balance as
of
the last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period over (y) the aggregate Certificate
Principal Balance of all classes of Certificates (after taking into account
all
distributions of principal on that Distribution Date and the increase of any
Certificate Principal Balance as a result of Subsequent
Recoveries).
“Overcollateralization
Deficiency”
means
as of any Distribution Date, the excess, if any, of (x) the Targeted
Overcollateralization Amount over (y) the Overcollateralization Amount for
that
Distribution Date, calculated for this purpose after taking into account the
reduction on that Distribution Date of the Certificate Principal Balances of
all
classes of Certificates resulting from the distribution of the Principal
Distribution Amount (but not the Extra Principal Distribution Amount) on that
Distribution Date, but prior to taking into account any Applied Realized Loss
Amounts on that Distribution Date.
“Overcollateralization
Floor”
means
the product of (i) 0.50% and (ii) the Pool Balance on the Cut-off
Date.
“Overcollateralization
Release Amount”
means
with respect to any Distribution Date on or after the Stepdown Date on which
a
Trigger Event is not in effect, the lesser of (x) the Principal Remittance
Amount for that Distribution Date and (y) the excess, if any, of (i) the
Overcollateralization Amount for that Distribution Date, assuming that 100%
of
the Principal Remittance Amount is applied as a principal payment on the
Certificates on that Distribution Date over (ii) the Targeted
Overcollateralization Amount. With respect to any Distribution Date on which
a
Trigger Event is in effect, the Overcollateralization Release Amount will be
zero.
“Principal
Distribution Amount”
means
as of any Distribution Date, the sum of (i) the Principal Remittance Amount
(minus the Overcollateralization Release Amount, if any) and (ii) the Extra
Principal Distribution Amount, if any.
“Principal
Remittance Amount”
means
with respect to any Distribution Date, the amount equal to (A) the sum (less
certain amounts available for reimbursement of Advances and Servicing Advances
as described above under “The Pooling and Servicing Agreement—Advances” and
certain other reimbursable expenses or indemnification payments pursuant to
the
Pooling and Servicing Agreement) of the following amounts (without duplication)
with respect to the Mortgage Loans: (i) each payment of principal on a Mortgage
Loan due during the immediately preceding Collection Period and received by
the
Servicer on or prior to the Determination Date for that Distribution Date,
including any Advances with respect thereto, (ii) all full and partial principal
prepayments received by the Servicer during the related Prepayment Period,
(iii)
the insurance proceeds, Subsequent Recoveries and liquidation proceeds (net
of
certain expenses) allocable to principal actually collected by the Servicer
during the related Prepayment Period, (iv) the portion of the Purchase Price
allocable to principal of all repurchased Defective Mortgage Loans with respect
to that Prepayment Period, (v) any Substitution Adjustments received during
the
related Prepayment Period and (vi) on the Distribution Date on which the Issuing
Entity is to be terminated in accordance with the Pooling and Servicing
Agreement, that portion of the Termination Price in respect of principal less
(B) any amounts payable to the Swap Provider (including any Net Swap Payment
and
any Swap Termination Payment owed to the Swap Provider, other than a Defaulted
Swap Termination Payment) not covered by the Interest Remittance
Amount.
S-55
“Senior
Enhancement Percentage”
for
any
Distribution Date is the percentage obtained by dividing (x) the sum of (i)
the aggregate Certificate Principal Balance of the Class M and Class B
Certificates, before taking into account the distribution of the Principal
Distribution Amount on such Distribution Date and (ii) the Overcollateralization
Amount, calculated for this purpose only after taking into account the reduction
of the Certificate Principal Balances of all Classes of Certificates resulting
from the distribution of the Principal Distribution Amount (but not the Extra
Principal Distribution Amount), by (y) the Pool Balance as of the last day
of
the related Collection Period after giving effect to principal prepayments
in
the related Prepayment Period.
“Senior
Principal Distribution Amount”
means
as of any Distribution Date (i) before the Stepdown Date or on which a Trigger
Event is in effect, the Principal Distribution Amount and (ii) on or after
the
Stepdown Date and as long as a Trigger Event is not in effect, the excess of
(a)
the Certificate Principal Balance of the Class A Certificates immediately prior
to that Distribution Date over (b) the lesser of (x) the product of (1)
approximately 57.20% and (2) the aggregate Principal Balance of the Mortgage
Loans as of the last day of the related Collection Period after giving effect
to
principal prepayments in the related Prepayment Period and (y) the amount by
which the aggregate Principal Balance of the Mortgage Loans as of the last
day
of the related Collection Period after giving effect to principal prepayments
in
the related Prepayment Period exceeds the Overcollateralization
Floor.
“Stepdown
Date”
means
the earlier to occur of (i) the Distribution Date on which the aggregate
Certificate Principal Balance of the Class A Certificates is reduced to zero
and
(ii) the later to occur of (x) Distribution Date in June 2010, and (y) the
first
Distribution Date on which the Senior Enhancement Percentage is greater than
or
equal to 42.80%.
“Subsequent
Recovery”
means
any amount (net of reimbursable expenses) received on a Mortgage Loan subsequent
to such Mortgage Loan being determined to be a Liquidated Mortgage Loan that
resulted in a Realized Loss in a prior month. If Subsequent Recoveries are
received, they will be included as part of the Principal Remittance Amount
for
the following Distribution Date relating to the Prepayment Period in which
received and distributed in accordance with the priorities described above.
In
addition, after giving effect to all distributions on a Distribution Date,
the
Unpaid Realized Loss Amount for the class of Subordinated Certificates then
outstanding with the highest distribution priority will be decreased by the
amount of Subsequent Recoveries until reduced to zero (with any remaining
Subsequent Recoveries applied to reduce the Unpaid Realized Loss Amount of
the
class with the next highest distribution priority), and the Certificate
Principal Balance of such class or classes of Subordinated Certificates will
be
increased by the same amount.
“Targeted
Overcollateralization Amount”
means
as of any Distribution Date, (x) prior to the Stepdown Date, approximately
2.70%
of the Pool Balance of the Mortgage Loans on the Cut-off Date and (y) on and
after the Stepdown Date, (i) if a Trigger Event has not occurred, the greater
of
(x) the lesser of (i) approximately 2.70% of the Pool Balance of the Mortgage
Loans on the Cut-off Date and (ii) approximately 5.40% of the Pool Balance
as of
the last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period and (y) 0.50% of the Pool Balance
of the Mortgage Loans on the Cut-off Date and (ii) if a Trigger Event has
occurred, the Targeted Overcollateralization Amount for the immediately
preceding Distribution Date. On any Distribution Date following the reduction
of
the aggregate Certificate Principal Balance of the Offered Certificates and
the
Class B-1 Certificates to zero, the Targeted Overcollateralization Amount will
be zero.
A
“Trigger
Event”
has
occurred on a Distribution Date if (i) the six-month rolling average of 60+
Day
Delinquent Loans equals or exceeds 37.38% of the Senior Enhancement Percentage
or (ii) the aggregate amount of Realized Losses incurred since the Cut-off
Date
through the last day of the related Collection Period (reduced by the aggregate
amount of Subsequent Recoveries received since the Cut-off Date through the
last
day of the related Collection Period) divided by the Pool Balance of the
Mortgage Loans on the Cut-off Date exceeds the applicable percentages set forth
below with respect to that Distribution Date:
S-56
Distribution
Date Occurring In
Percentage
June
2009 through May 2010
1.50%
for the first month, plus an additional 1/12th of 2.00% for each
month
thereafter,
June
2010 through May 2011
3.50%
for the first month, plus an additional 1/12th of 1.95% for each
month
thereafter,
June
2011 through May 2012
5.45%
for the first month, plus an additional 1/12th of 1.60% for each
month
thereafter,
June
2012 through May 2013
7.05%
for the first month, plus an additional 1/12th of 0.90% for each
month
thereafter,
June
2013 through May 2014
7.95%
for the first month, plus an additional 1/12th of 0.15% for each
month
thereafter,
June
2014 through May 2015
8.10%
for the first month, plus an additional 1/12th of 0.05% for each
month
thereafter, and
June
2015 and thereafter
8.15%
Allocation
of Losses
A
“Realized
Loss”
is:
·
as
to any Liquidated Mortgage Loan, its unpaid Principal Balance less
the net
proceeds from the liquidation of, and any insurance proceeds from,
that
Mortgage Loan and the related Mortgaged Property which are applied
to the
Principal Balance of that Mortgage
Loan.
·
as
to any Mortgage Loan, a Deficient
Valuation.
·
as
to any Mortgage Loan, a reduction in its Principal Balance resulting
from
a Servicer Modification.
A
“Liquidated
Mortgage Loan”
is
any
defaulted Mortgage Loan as to which the Servicer has determined that all amounts
which it expects to recover from or on account of the Mortgage Loan have been
recovered.
A
Realized Loss may result from the personal bankruptcy of a mortgagor if the
bankruptcy court establishes the value of the Mortgaged Property at an amount
less than the then outstanding Principal Balance of the Mortgage Loan secured
by
that Mortgaged Property and reduces the secured debt to such value. In such
case, the Issuing Entity, as the holder of the Mortgage Loan, would become
an
unsecured creditor to the extent of the difference between the outstanding
Principal Balance of the Mortgage Loan and the reduced secured debt (the
difference, a “Deficient
Valuation”).
If
a
Mortgage Loan is in default, or if default is reasonably foreseeable, the
Servicer may permit a modification of the Mortgage Loan to reduce its Principal
Balance and/or extend its term to a term not longer than the latest maturity
date of any other Mortgage Loan (any such modification, a “Servicer
Modification”).
Any
such principal reduction will constitute a Realized Loss at the time of the
reduction. An extension of the term will not result in a Realized Loss unless
coupled with a principal reduction.
Realized
Losses will, in effect, be absorbed first by the Class CE-1 Certificates,
through the application of the Monthly Excess Interest Amount to fund the
deficiency, as well as through a reduction in the Overcollateralization
Amount.
If,
after
giving effect to the distribution of the Principal Distribution Amount on any
Distribution Date and the increase of any Certificate Principal Balances as
a
result of Subsequent Recoveries, the aggregate Certificate Principal Balance
of
the Certificates exceeds the Pool Balance as of the end of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period, the resulting excess (the “Applied
Realized Loss Amount”)
will
be allocated sequentially to the Class B-1, Class M-9, Class M-8, Class M-7,
Class M-6, Class M-5, Class M-4, Class M-3, Class M-2 and Class M-1
Certificates, in that order, until their respective Certificate Principal
Balances are reduced to zero. The Certificate Principal Balances of the Class
A
Certificates will not be reduced by any Applied Realized Loss Amounts; however,
under certain loss scenarios, there will not be enough interest and principal
on
the Mortgage Loans to pay the Class A Certificates all interest and principal
amounts to which they are entitled. Any reduction of a Certificate Principal
Balance will not be reversed or reinstated (except in the case of Subsequent
Recoveries). However, on future Distribution Dates, certificateholders of the
related class may receive amounts reimbursing them for prior reductions in
the
related Certificate Principal Balances as described below or, with respect
to
the Class M Certificates only, from the Supplemental Interest Trust, according
to the priorities set forth under “—Distributions from the Supplemental
Interest” below. These subsequent payments will be applied sequentially to the
Class M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class M-7,
Class M-8, Class M-9 and Class B-1 Certificates, in that order.
S-57
Special
Hazard Losses initially will be allocated as described above. However, if the
cumulative amount of such losses, as of any date of determination, exceeds
the
greatest of (i) 1.00% of the Pool Balance as of the Cut-off Date, (ii) two
times
the amount of the Principal Balance of the largest Mortgage Loan as of the
date
of determination and (iii) an amount equal to the aggregate Principal Balance
of
the Mortgage Loans in the largest zip-code concentration in the State of
California as of the date of determination, such excess instead will be
allocated among the Class M and Class B-1 Certificates, pro
rata,
based
on their respective Certificate Principal Balances and such excess will not
be
reimbursed from the Monthly Excess Cashflow Allocation or from the Supplemental
Interest Trust.
“Special
Hazard Losses”
are
generally Realized Losses that result from direct physical damage to mortgaged
properties caused by natural disasters and other hazards (i) which are not
covered by hazard insurance policies (such as earthquakes) and (ii) for which
claims have been submitted and rejected by the related hazard insurer and any
shortfall in insurance proceeds for partial damage due to the application of
the
co-insurance clauses contained in hazard insurance policies.
Application
of Monthly Excess Cashflow Amounts
The
weighted average Net Mortgage Interest Rate for the Mortgage Loans is generally
expected to be higher than the weighted average of the Certificate Interest
Rates on the Certificates, thus generating certain excess interest collections
which, in the absence of losses, will not be necessary to fund interest
distributions on the Certificates. This excess interest for a Collection Period
(reduced by amounts paid as part of the Principal Distribution Amount), together
with interest on the Overcollateralization Amount itself, is the “Monthly
Excess Interest Amount.”
The
“Net
Mortgage Interest Rate”
for
each Mortgage Loan is the applicable Mortgage Interest Rate less the
Administrative Fee Rate.
If
Realized Losses occur that are not covered by the Monthly Excess Cashflow
Amount, these Realized Losses will result in an Overcollateralization Deficiency
(since they will reduce the Pool Balance without giving rise to a corresponding
reduction of the aggregate Certificate Principal Balance of the Certificates).
The cashflow priorities in this situation increase the Extra Principal
Distribution Amount (subject to the availability of any Monthly Excess Cashflow
Amount in subsequent months) for the purpose of re-establishing the
Overcollateralization Amount at the then-required Targeted Overcollateralization
Amount.
On
and
after the Stepdown Date and assuming that a Trigger Event is not in effect,
the
Targeted Overcollateralization Amount may be permitted to decrease or
“stepdown.” If the Targeted Overcollateralization Amount is permitted to
stepdown on a Distribution Date, the cashflow priorities of this transaction
permit a portion of the Principal Remittance Amount for that Distribution Date
not to be passed through as a distribution of principal on the Certificates
on
that Distribution Date. This has the effect of decelerating the amortization
of
the Certificates relative to the Pool Balance, thereby reducing the actual
level
of the Overcollateralization Amount to the new, lower Targeted
Overcollateralization Amount. This portion of the Principal Remittance Amount
not distributed as principal on the Certificates therefore releases a limited
portion of the overcollateralization from the Trust Fund.
On
any
Distribution Date, the sum of the Monthly Excess Interest Amount, the
Overcollateralization Release Amount and any portion of the Principal
Distribution Amount (without duplication) remaining after principal
distributions on the Certificates is the “Monthly
Excess Cashflow Amount,”
which
is required to be applied in the following order of priority (the “Monthly
Excess Cashflow Allocation”)
on
that Distribution Date:
S-58
(i) to
the
Class A Certificates, pro
rata,
any
remaining Accrued Certificate Interest for such classes for that Distribution
Date;
(ii) to
the
Class A Certificates, pro
rata,
any
Interest Carry Forward Amounts for such classes for that Distribution
Date;
(iii) to
the
Class M-1 Certificates, any remaining Accrued Certificate Interest for such
class for that Distribution Date;
(iv) to
the
Class M-1 Certificates, any Interest Carry Forward Amount for such class for
that Distribution Date;
(v) to
the
Class M-1 Certificates, any Class M-1 Realized Loss Amortization Amount for
that
Distribution Date;
(vi) to
the
Class M-2 Certificates, any remaining Accrued Certificate Interest for such
class for that Distribution Date;
(vii) to
the
Class M-2 Certificates, any Interest Carry Forward Amount for such class for
that Distribution Date;
(viii) to
the
Class M-2 Certificates, any Class M-2 Realized Loss Amortization Amount for
that
Distribution Date;
(ix) to
the
Class M-3 Certificates, any remaining Accrued Certificate Interest for such
class for that Distribution Date;
(x) to
the
Class M-3 Certificates, any Interest Carry Forward Amount for such class for
that Distribution Date;
(xi) to
the
Class M-3 Certificates, any Class M-3 Realized Loss Amortization Amount for
that
Distribution Date;
(xii) to
the
Class M-4 Certificates, any remaining Accrued Certificate Interest for such
class for that Distribution Date;
(xiii) to
the
Class M-4 Certificates, any Interest Carry Forward Amount for such class for
that Distribution Date;
(xiv) to
the
Class M-4 Certificates, any Class M-4 Realized Loss Amortization Amount for
that
Distribution Date;
(xv) to
the
Class M-5 Certificates, any remaining Accrued Certificate Interest for such
class for that Distribution Date;
(xvi) to
the
Class M-5 Certificates, any Interest Carry Forward Amount for such class for
that Distribution Date;
(xvii) to
the
Class M-5 Certificates, any Class M-5 Realized Loss Amortization Amount for
that
Distribution Date;
S-59
(xviii) to
the
Class M-6 Certificates, any remaining Accrued Certificate Interest for such
class for that Distribution Date;
(xix) to
the
Class M-6 Certificates, any Interest Carry Forward Amount for such class for
that Distribution Date;
(xx) to
the
Class M-6 Certificates, any Class M-6 Realized Loss Amortization Amount for
that
Distribution Date;
(xxi) to
the
Class M-7 Certificates, any remaining Accrued Certificate Interest for such
class for that Distribution Date;
(xxii) to
the
Class M-7 Certificates, any Interest Carry Forward Amount for such class for
that Distribution Date;
(xxiii) to
the
Class M-7 Certificates, any Class M-7 Realized Loss Amortization Amount for
that
Distribution Date;
(xxiv) to
the
Class M-8 Certificates, any remaining Accrued Certificate Interest for such
class for that Distribution Date;
(xxv) to
the
Class M-8 Certificates, any Interest Carry Forward Amount for such class for
that Distribution Date;
(xxvi) to
the
Class M-8 Certificates, any Class M-8 Realized Loss Amortization Amount for
that
Distribution Date;
(xxvii) to
the
Class M-9 Certificates, any remaining Accrued Certificate Interest for such
class for that Distribution Date;
(xxviii) to
the
Class M-9 Certificates, any Interest Carry Forward Amount for such class for
that Distribution Date;
(xxix) to
the
Class M-9 Certificates, any Class M-9 Realized Loss Amortization Amount for
that
Distribution Date;
(xxx) to
the
Class B-1 Certificates, any remaining Accrued Certificate Interest for such
class for that Distribution Date;
(xxxi) to
the
Class B-1 Certificates, any Interest Carry Forward Amount for such class for
that Distribution Date;
(xxxii) to
the
Class B-1 Certificates, any Class B-1 Realized Loss Amortization Amount for
that
Distribution Date;
(xxxiii) from
amounts otherwise distributable to the Class CE-1 Certificates, to the Cap
Carryover Reserve Account, first, to the Class A Certificates, pro
rata,
based
on Cap Carryover Amount, and then sequentially, to the Class M-1, Class M-2,
Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9
and
Class B-1 Certificates, any Cap Carryover Amount for such class;
(xxxiv) from
amounts otherwise distributable to the Class CE-1 Certificates, to the
Supplemental Interest Trust, to fund any Defaulted Swap Termination
Payment;
(xxxv) from
amounts otherwise distributable to the Class CE-1 Certificates, if a 40-Year
Trigger Event is in effect, then the amount necessary to increase the
Overcollateralization Amount for such Distribution Date so that a 40-Year
Trigger Event is no longer in effect, if available, will be distributed
sequentially, to the Class A-1, Class A-2, Class A-3, Class M-1, Class M-2,
Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9
and
Class B-1 Certificates, in that order, until their respective Certificate
Principal Balances have been reduced to zero; and
S-60
(xxxvi) to
the
Class CE-1, Class P, Class R and Class R-X Certificates, as specified in the
Pooling and Servicing Agreement.
For
purposes of the foregoing, the following terms will have the respective meanings
set forth below.
A
“40-Year
Trigger Event”
is
in
effect if on the 241st
Distribution Date or any Distribution Date thereafter, (i) the aggregate
Principal Balance of the Mortgage Loans with 40-year original terms to maturity
as of the last day of the related Collection Period after giving effect to
principal prepayments in the related Prepayment Period, exceeds (ii) the
Overcollateralization Amount for such Distribution Date (after giving effect
to
all principal distributions on such Distribution Date other than principal
distributions resulting from this event).
“Class
M-1 Realized Loss Amortization Amount”
means as
to the Class M-1 Certificates and as of any Distribution Date, the lesser of
(x)
the Unpaid Realized Loss Amount for the Class M-1 Certificates as of that
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the amounts described in clauses (i) through (iv) of the
Monthly Excess Cashflow Allocation for that Distribution Date.
“Class
M-2 Realized Loss Amortization Amount”
means
as to the Class M-2 Certificates and as of any Distribution Date, the lesser
of
(x) the Unpaid Realized Loss Amount for the Class M-2 Certificates as of that
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the amounts described in clauses (i) through (vii) of
the
Monthly Excess Cashflow Allocation for that Distribution Date.
“Class
M-3 Realized Loss Amortization Amount”
means
as to the Class M-3 Certificates and as of any Distribution Date, the lesser
of
(x) the Unpaid Realized Loss Amount for the Class M-3 Certificates as of that
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the amounts described in clauses (i) through (x) of the
Monthly Excess Cashflow Allocation for that Distribution Date.
“Class
M-4 Realized Loss Amortization Amount”
means
as to the Class M-4 Certificates and as of any Distribution Date, the lesser
of
(x) the Unpaid Realized Loss Amount for the Class M-4 Certificates as of that
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the amounts described in clauses (i) through (xiii) of
the
Monthly Excess Cashflow Allocation for that Distribution Date.
“Class
M-5 Realized Loss Amortization Amount”
means
as to the Class M-5 Certificates and as of any Distribution Date, the lesser
of
(x) the Unpaid Realized Loss Amount for the Class M-5 Certificates as of that
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the amounts described in clauses (i) through (xvi) of
the
Monthly Excess Cashflow Allocation for that Distribution Date.
“Class
M-6 Realized Loss Amortization Amount”
means
as to the Class M-6 Certificates and as of any Distribution Date, the lesser
of
(x) the Unpaid Realized Loss Amount for the Class M-6 Certificates as of that
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the amounts described in clauses (i) through (xix) of
the
Monthly Excess Cashflow Allocation for that Distribution Date.
“Class
M-7 Realized Loss Amortization Amount”
means
as to the Class M-7 Certificates and as of any Distribution Date, the lesser
of
(x) the Unpaid Realized Loss Amount for the Class M-7 Certificates as of that
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the amounts described in clauses (i) through (xxii) of
the
Monthly Excess Cashflow Allocation for that Distribution Date.
“Class
M-8 Realized Loss Amortization Amount”
means
as to the Class M-8 Certificates and as of any Distribution Date, the lesser
of
(x) the Unpaid Realized Loss Amount for the Class M-8 Certificates as of that
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the amounts described in clauses (i) through (xxv) of
the
Monthly Excess Cashflow Allocation for that Distribution Date.
S-61
“Class
M-9 Realized Loss Amortization Amount”
means
as to the Class M-9 Certificates and as of any Distribution Date, the lesser
of
(x) the Unpaid Realized Loss Amount for the Class M-9 Certificates as of that
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the amounts described in clauses (i) through (xxviii)
of
the Monthly Excess Cashflow Allocation for that Distribution Date.
“Class
B-1 Realized Loss Amortization Amount”
means
as to the Class B-1 Certificates and as of any Distribution Date, the lesser
of
(x) the Unpaid Realized Loss Amount for the Class B-1 Certificates as of that
Distribution Date and (y) the excess of (i) the Monthly Excess Cashflow Amount
over (ii) the sum of the amounts described in clauses (i) through (xxxi) of
the
Monthly Excess Cashflow Allocation for that Distribution Date.
“Realized
Loss Amortization Amount”
means
each of the Class M-1 Realized Loss Amortization Amount, the Class M-2 Realized
Loss Amortization Amount, the Class M-3 Realized Loss Amortization Amount,
the
Class M-4 Realized Loss Amortization Amount, the Class M-5 Realized Loss
Amortization Amount, the Class M-6 Realized Loss Amortization Amount, the Class
M-7 Realized Loss Amortization Amount, the Class M-8 Realized Loss Amortization
Amount, the Class M-9 Realized Loss Amortization Amount and the Class B-1
Realized Loss Amortization Amount.
“Unpaid
Realized Loss Amount”
means
for any class of Class M and Class B Certificates and as to any Distribution
Date, the excess of (x) the cumulative amount of related Applied Realized Loss
Amounts allocated to that class for all prior Distribution Dates, as described
under “—Allocation of Losses” above, over (y) the sum of (a) the cumulative
amount of any Subsequent Recoveries allocated to that class, (b) the cumulative
amount of related Realized Loss Amortization Amounts for that class for all
prior Distribution Dates and (c) the cumulative amount of Unpaid Realized Loss
Amounts reimbursed to such class for all prior Distribution Dates from the
Supplemental Interest Trust.
Distributions
from the Supplemental Interest Trust
On
or
before any Distribution Date, funds in the Supplemental Interest Trust with
respect to the Interest Rate Swap Agreement and the Interest Rate Cap Agreement
will be distributed in the following order of priority:
(i) to
the
Swap Provider, all Net Swap Payments, if any, owed to the Swap Provider for
such
distribution date;
(ii) to
the
Swap Provider, any Swap Termination Payment, other than a Defaulted Swap
Termination Payment, if any, owed to the Swap Provider;
(iii) concurrently,
to the Class A Certificates, on a pro
rata
basis,
any remaining applicable Accrued Certificate Interest and Interest Carry Forward
Amounts for such Distribution Date to the extent unpaid from the Interest
Remittance Amount and Monthly Excess Cashflow Amounts;
(iv) sequentially,
to each class of the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5,
Class M-6, Class M-7, Class M-8, Class M-9 Certificates, in that order, any
remaining Accrued Certificate Interest and Interest Carry Forward Amounts for
such Distribution Date to the extent unpaid from Interest Remittance Amounts
and
Monthly Excess Cashflow Amounts;
(v) to
the
Offered Certificates and the Class B Certificates, to pay principal as described
and in the same manner and order of priority as set forth under “—Principal
Distributions” above in order to maintain amounts in respect of the Targeted
Overcollateralization Amount, after giving effect to distributions of the
Principal Distribution Amount for each such class;
(vi) sequentially,
to each class of the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5,
Class M-6, Class M-7, Class M-8 and Class M-9 Certificates, in that order,
any
remaining Unpaid Realized Loss Amount for such Distribution Date;
S-62
(vii) first,
to
the Class A Certificates, pro
rata,
based
on Cap Carryover Amounts, and then sequentially, to the Class M-1, Class M-2,
Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8 and Class
M-9
Certificates, any Cap Carryover Amount for such classes;
(viii) to
the
Swap Provider, to fund any Defaulted Swap Termination Payment, to the extent
not
already paid; and
(ix) to
the
Class CE-1 Certificates, any remaining amounts.
Amounts
distributed in respect of clauses (v) and (vi) above, together with amounts
distributed in respect of such clauses on prior Distribution Dates, shall not
exceed the aggregate of current or prior Realized Losses not previously
reimbursed by Subsequent Recoveries or through the Monthly Excess Cashflow
Allocation.
Interest
Rate Swap Agreement
On
the
Closing Date, the Supplemental Interest Trust Trustee on behalf of the
supplemental interest trust, a separate trust created under the Pooling and
Servicing Agreement (the “Supplemental
Interest Trust”),
will
enter into the interest rate swap agreement (the “Swap
Agreement”)
with
JPMorgan Chase Bank, N.A., as Swap Provider, for the benefit of the Offered
Certificates.
Under
the
Swap Agreement, on or before each Distribution Date during the period beginning
on the Distribution Date in June 2007 and ending on the Distribution Date in
April 2011, the Supplemental Interest Trust will owe to the Swap Provider a
fixed payment for that Distribution Date, equal to the product of (x) a fixed
rate equal to 5.20% per annum, (y) the swap notional amount (as set forth in
the
table in Appendix
D
to this
prospectus supplement) for that Distribution Date, and (z) a fraction, the
numerator of which is 30 (or, for the first Distribution Date, the number of
days elapsed from and including the effective date (as defined in the Swap
Agreement) to but excluding the first Distribution Date) and the denominator
of
which is 360, and the Swap Provider will owe to the Supplemental Interest Trust
a floating payment for that Distribution Date equal to the product of (x)
one-month LIBOR (as determined pursuant to the Swap Agreement) for the related
calculation period (as defined in the Swap Agreement), (y) the swap notional
amount for that Distribution Date, and (z) a fraction, the numerator of which
is
equal to the actual number of days in the related calculation period and the
denominator of which is 360. To the extent the fixed payment owed by the
Supplemental Interest Trust exceeds the floating payment owed by the Swap
Provider, on or before the related Distribution Date the Supplemental Interest
Trust will make a net payment to the Swap Provider out of amounts otherwise
available to certificateholders as described in “Description of the
Certificates—Interest Distributions” and “—Principal Distributions.” To the
extent that the floating payment owed by the Swap Provider exceeds the fixed
payment owed by the Supplemental Interest Trust, on or before the related
Distribution Date the Swap Provider will make a net payment to the Supplemental
Interest Trust, which will be deposited in the Supplemental Interest Trust
for
the benefit of the Offered Certificates. Each such net payment is referred
to in
this prospectus supplement as a “Net
Swap Payment.”
All
payments made to and from the Supplemental Interest Trust pursuant to the Swap
Agreement will be made through a segregated trust account established on the
Closing Date (the “Swap
Account”).
The
Swap Account will be an asset of the Supplemental Interest Trust but not of
any
REMIC.
The
scheduled notional amount for each applicable Distribution Date related to
the
Swap Agreement is set forth in Appendix
D
to this
prospectus supplement.
Upon
early termination of the Swap Agreement, the Swap Provider may owe the
Supplemental Interest Trust a Swap Termination Payment (as defined in the Swap
Agreement), or the Supplemental Interest Trust may owe the Swap Provider a
Swap
Termination Payment. Net Swap Payments and Swap Termination Payments (other
than
Defaulted Swap Termination Payments) payable to the Swap Provider shall be
paid
out of the Supplemental Interest Trust on a senior basis on each applicable
Distribution Date. Defaulted Swap Termination Payments owed to the Swap Provider
shall be paid out of the Supplemental Interest Trust on a subordinated basis.
See “Description of the Certificates—Distributions from the Supplemental
Interest Trust” in this prospectus supplement.
S-63
The
respective obligations of the Swap Provider and the Supplemental Interest Trust
to pay specified amounts due under the Swap Agreement (other than Swap
Termination Payments) generally will be subject to the following conditions
precedent: (1) no Event of Default (as defined in the Swap Agreement) or event
that with the giving of notice or lapse of time or both would become a Event
of
Default will have occurred and be continuing with respect to the other party
and
(2) no “early termination date” (as defined in the Swap Agreement) has occurred
or been effectively designated.
The
Swap
Agreement can be terminated upon an event of default under that agreement or
a
termination event under that agreement. Events of default applicable to either
party under the Swap Agreement include the following:
·
failure
to pay;
·
failure
by the Swap Provider to comply with or perform certain agreements
or
obligations as required under the terms of the Swap
Agreement,
·
failure
to comply with or perform certain agreements or obligations in connection
with any credit support document as required under the terms of the
Swap
Agreement,
·
certain
representations by the Swap Provider or its credit support provider
prove
to have been incorrect or misleading in any material
respect,
·
repudiation
or certain defaults by the Swap Provider or any credit support provider
in
respect of any derivative or similar transactions entered into between
the
Supplemental Interest Trust Trustee and the Swap Provider and specified
for this purpose in the Swap
Agreement,
·
cross-default
by the Swap Provider or any credit support provider relating generally
to
its obligations in respect of borrowed money in excess of a threshold
specified in the Swap Agreement,
·
certain
bankruptcy and insolvency events;
and
·
a
merger without an assumption of obligations under the Swap
Agreement.
Termination
events under the Swap Agreement include the following:
·
illegality
(which generally relates to changes in law causing it to become unlawful
for either party (or its guarantor, if applicable) to perform its
obligations under the Swap Agreement or guaranty, as
applicable);
·
a
tax event (which generally relates to the application of certain
withholding taxes to amounts payable under the Swap Agreement as
a result
of a change in tax law or certain similar
events);
·
a
tax event upon merger (which generally relates to the application
of
withholding taxes to amounts payable under the Swap Agreement resulting
from a merger or similar
transaction);
·
amendment
of the Pooling and Servicing Agreement in a manner contrary to the
requirements of the Swap Agreement;
·
the
occurrence of an optional termination as described under “The Pooling and
Servicing Agreement—Optional Termination” in this prospectus
supplement;
·
failure
of the Swap Provider to maintain certain credit ratings or otherwise
comply with the downgrade provisions of the Swap Agreement (including
certain collateral posting requirements), in each case in certain
circumstances as specified in the Swap Agreement;
and
S-64
·
failure
of the Swap Provider to comply with the Regulation AB provisions
of the
Swap Agreement (including, if applicable, the provisions of any additional
agreement incorporated by reference into the Swap
Agreement).
“Defaulted
Swap Termination Payment”
means,
any payment required to be made by the Supplemental Interest Trust to the Swap
Provider pursuant to the Swap Agreement as a result of an event of default
under
the Swap Agreement with respect to which the Swap Provider is the defaulting
party or a termination event under that agreement with respect to which the
Swap
Provider is the sole Affected Party (as defined in the Swap
Agreement).
If
the
Swap Provider’s credit ratings are withdrawn or reduced below certain ratings
thresholds specified in the Swap Agreement, the Swap Provider may be required,
at its own expense and in accordance with the requirements of the Swap
Agreement, to do one or more of the following: (1) obtain a substitute swap
provider, or (2) establish any other arrangement as may be specified for such
purpose in the Swap Agreement.
If
a
substitute swap agreement is not obtained in accordance with the Swap Agreement,
in the event that the Swap Agreement is terminated, interest distributable
on
the certificates will be paid from amounts received on the mortgage loans
without the benefit of a Swap Agreement or a substitute swap agreement;
provided, however, the Supplemental Interest Trust Trustee shall thereafter
administer the Swap Termination Payment received by the Supplemental Interest
Trust as described under “Description of the Certificates—Distributions from the
Supplemental Interest Trust” in this prospectus supplement.
On
or
after the Closing Date, so long as the rating agency condition has been
satisfied and subject to the requirements of the Swap Agreement, (i) the
Supplemental Interest Trust Trustee may, with the consent of the Swap Provider,
assign or transfer all or a portion of the Swap Agreement and (ii) the Swap
Provider may assign its obligations under the Swap Agreement.
The
Swap
Agreement is scheduled to terminate by its terms after the Distribution Date
in
April 2011, and upon termination of the Swap Agreement no further amounts will
be paid to the Swap Provider by the Supplemental Interest Trust Trustee and
no
further regularly scheduled amounts will be paid to the Supplemental Interest
Trust by the Swap Provider.
As
of the
date of this prospectus supplement, the Swap Agreement, together with the Cap
Agreement, has an aggregate “significance percentage,” as defined in Item 1115
of Regulation AB, of less than 10%.
Interest
Rate Cap Agreement
On
the
Closing Date, the Supplemental Interest Trust Trustee on behalf of the
Supplemental Interest Trust will enter into the interest rate cap agreement
(the
“Cap
Agreement”)
with
JPMorgan Chase Bank, N.A., as Cap Provider, for the benefit of the Offered
Certificates. All obligations of the Supplemental Interest Trust pursuant to
the
Cap Agreement will be paid on or prior to the Closing Date.
Under
the
Cap Agreement, on or before each Distribution Date commencing with the
Distribution Date in July 2007 and ending with the Distribution Date in May
2012, the Cap Provider will be obligated to make a payment for that Distribution
Date equal to the product of (a) the excess, if any, of (i) one-month LIBOR
as
determined pursuant to the Cap Agreement for the related calculation period
(as
defined in the Cap Agreement) over (ii) 5.32%, (b) an amount equal to the lower
of (x) the maximum cap notional amount shown in the table set forth on
Appendix
E
to this
prospectus supplement for that Distribution Date and (y) the excess, if any,
of
(A) the aggregate Class Certificate Balance of the Offered Certificates (prior
to taking into account any distributions on such Distribution Date) over (B)
the
then current swap notional amount shown in the table set forth on Appendix D
to this
prospectus supplement, and (c) a fraction, the numerator of which is equal
to
the actual number of days in the related calculation period and the denominator
of which is 360.
The
specified maximum cap notional amounts and cap strike rates for the Cap
Agreement are set forth on Appendix
E
to this
prospectus supplement. The Cap Agreement will be governed by and construed
in
accordance with the law of the State of New York. The obligations of the Cap
Provider are limited to those specifically set forth in the Cap
Agreement.
S-65
The
obligations of the Cap Provider to pay specified amounts due under the Cap
Agreement (other than cap termination payments) generally will be subject to
the
following conditions precedent: (1) no Event of Default (as defined in the
Cap
Agreement) or event that with the giving of notice or lapse of time or both
would become a Event of Default will have occurred and be continuing with
respect to the other party and (2) no “early termination date” (as defined in
the Cap Agreement) has occurred or been effectively designated.
Events
of
default under the Cap Agreement include the following:
·
failure
to make a payment as required under the terms of the Cap
Agreement;
·
failure
by the Cap Provider to comply with or perform certain agreements
or
obligations as required under the terms of the Cap
Agreement;
·
failure
to comply with or perform certain agreements or obligations in connection
with any credit support document as required under the terms of the
Cap
Agreement;
·
certain
representations by the Cap Provider or its credit support provider
prove
to have been incorrect or misleading in any material
respect;
·
repudiation
or certain defaults by the Cap Provider or any credit support provider
in
respect of any derivative or similar transactions entered into between
the
Supplemental Interest Trust Trustee and the Cap Provider and specified
for
this purpose in the Cap Agreement;
·
cross-default
by the Cap Provider or any credit support provider relating generally
to
its obligations in respect of borrowed money in excess of a threshold
specified in the Cap Agreement;
·
certain
insolvency or bankruptcy events;
and
·
a
merger by a party to the Cap Agreement without an assumption of such
party’s obligations under the Cap
Agreement;
each
as
further described in the Cap Agreement.
Termination
events under the Cap Agreement include the following:
·
illegality
(which generally relates to changes in law causing it to become unlawful
for either party to perform its obligations under the Cap
Agreement);
·
tax
event (which generally relates to the application of certain withholding
taxes to amounts payable under the Cap Agreement, as a result of
a change
in tax law or certain similar
events);
·
tax
event upon merger (which generally relates to the application of
certain
withholding taxes to amounts payable under the Cap Agreement as a
result
of a merger or similar
transaction);
·
failure
of the Cap Provider to maintain certain credit ratings or otherwise
comply
with the downgrade provisions of the Cap Agreement (including certain
collateral posting requirements), in each case in certain circumstances
as
specified in the Cap Agreement;
·
failure
of the Cap Provider to comply with the Regulation AB provisions of
the Cap
Agreement (including, if applicable, the provisions of any additional
agreement incorporated by reference into the Cap Agreement);
and
S-66
·
the
occurrence of an optional termination as described under “The Pooling and
Servicing Agreement—Optional Termination” in this prospectus
supplement;
each
as
further described in the Cap Agreement.
If
the
Cap Provider’s credit ratings are withdrawn or reduced below certain ratings
thresholds specified in the Cap Agreement, the Cap Provider may be required,
at
its own expense and in accordance with the requirements of the Cap Agreement,
to
do one or more of the following: (1) obtain a substitute cap provider or (2)
establish any other arrangement as may be specified for such purpose in the
Cap
Agreement.
As
of the
date of this prospectus supplement, the Cap Agreement, together with the Swap
Agreement, has an aggregate “significance percentage,” as defined in Item 1115
of Regulation AB, of less than 10%.
Certificate
Interest Rates
Interest
for each Distribution Date on or prior to the Optional Termination Date will
accrue on the Class A, Class M and Class B Certificates during the related
Interest Accrual Period at a per annum rate (the “Certificate
Interest Rate”)
equal
to the lesser of (i) (a) in the case of the Floating Rate Certificates,
One-Month LIBOR plus the applicable certificate margin set forth in the table
beginning on page S-6 or (b) in the case of the Class B-1 Certificates, the
pass-through rate set forth in the table beginning on page S-6 and (ii) the
Rate
Cap for such Distribution Date. During each Interest Accrual Period relating
to
the Distribution Dates after the Optional Termination Date, each of the
certificate margins and pass-through rates will be “stepped-up” to the
applicable margin or pass-through rate set forth in the table beginning on
page
S-6 if the optional termination right is not exercised.
The
“Maximum
Rate Cap”
for
any
Distribution Date and for the Class A and Class M Certificates will be a per
annum rate (expressed on the basis of an assumed 360-day year and the actual
number of days elapsed during the related accrual period) equal to (i) the
Net
Maximum WAC plus (ii) 12 times the quotient of (a) the Net Swap Payment and
Swap
Termination Payment (other than a Defaulted Swap Termination Payment), if any,
made to the Supplemental Interest Trust and (b) the aggregate principal balance
of the Mortgage Loans as of the first day of the related Collection Period.
Any
interest shortfall due to the Maximum Rate Cap will not be reimbursed.
The
“Net
Maximum Mortgage Interest Rate”
for
each Adjustable-Rate Mortgage Loan is the applicable Maximum Mortgage Interest
Rate and for each Fixed-Rate Mortgage Loan is the Mortgage Interest Rate for
such Mortgage Loan, in each case less the Administrative Fee Rate.
The
“Net
Maximum WAC”
for
any
Distribution Date will be the average of the Net Maximum Mortgage Interest
Rates
for the Mortgage Loans, weighted on the basis of the principal balances of
the
Mortgage Loans as of the first day of the related Collection
Period.
The
“Net
WAC”
for
any
Distribution Date will be the average of the Net Mortgage Interest Rates for
the
Mortgage Loans, weighted on the basis of the principal balances of the Mortgage
Loans as of the first day of the related Collection Period.
The
“Rate
Cap”
for
any
Distribution Date and for the Certificates will be a per annum rate (expressed,
in the case of the Floating Rate Certificates, on the basis of an assumed
360-day year and the actual number of days elapsed during the related accrual
period) equal to (i) the Net WAC less (ii) 12 times the quotient of (a) the
Net
Swap Payment and Swap Termination Payment (other than a Defaulted Swap
Termination Payment), if any, made to the Swap Provider and (b) the aggregate
principal balance of the Mortgage Loans as of the first day of the related
Collection Period.
The
Rate
Cap is sometimes referred to in this prospectus supplement as a “Cap.”
If
on any
Distribution Date the Accrued Certificate Interest for any Certificate is based
on the Rate Cap, the excess of (i) the amount of interest such Certificate
would have been entitled to receive on such Distribution Date if its Certificate
Interest Rate had not been limited by the Rate Cap, up to but not exceeding
the
related Maximum Rate Cap, over (ii) the amount of interest such Certificate
received on such Distribution Date based on the Rate Cap, together with the
unpaid portion of any such excess from prior Distribution Dates (and interest
accrued thereon at the then applicable Certificate Interest Rate on such
Certificate without regard to the Rate Cap but subject to the Maximum Rate
Cap)
will be the “Cap
Carryover Amount.”
Any
Cap Carryover Amount will be distributed on the same or future Distribution
Dates from amounts that would otherwise be distributed on the Class CE-1
Certificates. On
the Closing Date, the Trustee will establish the cap carryover reserve account
(the “Cap
Carryover Reserve Account”)
pursuant to the Pooling and Servicing Agreement from which distributions in
respect of Cap Carryover Amounts on the Offered Certificates will be made.
Distributions in respect of these Cap Carryover Amounts may also be made from
the Supplemental Interest Trust. The
Cap
Carryover Reserve Account will be an asset of the Issuing Entity but not of
any
REMIC.
S-67
Calculation
of One-Month LIBOR
One-Month
LIBOR for the first Distribution Date will be determined on the second Business
Day preceding the Closing Date and for each subsequent Distribution Date will
be
determined on the second Business Day prior to the immediately preceding
Distribution Date (each such date, a “LIBOR
Determination Date”).
With
respect to each Distribution Date, “One-Month
LIBOR”
will
equal the interbank offered rate for one-month United States dollar deposits
in
the London market as quoted on Reuters Screen LIBOR01 Page as of 11:00 A.M.,
London time, on the related LIBOR Determination Date. “Reuters
Screen LIBOR01”
means
the display currently so designated on the Reuters Monitor Money Rates Service
(or such other page as may replace that page on that service for the purpose
of
displaying comparable rates or prices). If such rate does not appear on that
page (or such other page as may replace that page on that service, or if such
service is no longer offered, another service for displaying One-Month LIBOR
or
comparable rates as may be selected by the Trustee), the rate will be the
Reference Bank Rate. The “Reference
Bank Rate”
will
be
determined on the basis of the rates at which deposits in U.S. Dollars are
offered by the reference banks (which shall be three major banks that are
engaged in transactions in the London interbank market, selected by the Trustee)
as of 11:00 A.M., London time, on the related LIBOR Determination Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the aggregate Certificate Principal Balance of the
Offered Certificates. The Trustee will request the principal London office
of
each of the reference banks to provide a quotation of its rate. If at least
two
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks
in
New York City, selected by the Trustee, as of 11:00 A.M., New York City time,
on
such date for loans in United States dollars to leading European banks for
a
period of one month in amounts approximately equal to the aggregate Certificate
Principal Balance of the Offered Certificates. If no quotations can be obtained,
the rate will be One-Month LIBOR for the prior Distribution Date.
The
establishment of One-Month LIBOR on each LIBOR Determination Date by the Trustee
and the Trustee’s calculation of the rate of interest applicable to the Offered
Certificates for the related Interest Accrual Period shall (in the absence
of
manifest error) be final and binding.
YIELD,
PREPAYMENT AND MATURITY CONSIDERATIONS
The
yields to maturity and weighted average lives of the Offered Certificates will
depend upon, among other things, the price at which such Offered Certificates
are purchased, the amount and timing of principal payments on the Mortgage
Loans, the allocation of the Interest Remittance Amount and Principal Remittance
Amount to various classes of Offered Certificates, the amount and timing of
mortgagor delinquencies and defaults on the applicable Mortgage Loans, the
rate
of liquidations and Realized Losses and the allocation of Realized Losses to
various classes of Offered Certificates, the relationship between payments
made
by the Supplemental Interest Trust (if any) and payments made by the Swap
Provider (if any) under the Interest Rate Swap Agreement and payments made
by
the Cap Provider (if any) under the Interest Rate Cap Agreement.
The
rate
of payment of principal, the aggregate amount of distributions and the yield
to
maturity of the Offered Certificates will be affected by the rate of defaults
resulting in Realized Losses and by the severity and timing of these losses.
If
a purchaser of an Offered Certificate calculates its anticipated yield based
on
an assumed rate of default and amount of Realized Losses that is lower than
the
default rate and amount of losses actually incurred, its actual yield to
maturity will be lower than the yield calculated. The timing of Realized Losses
will also affect an investor’s actual yield to maturity, even if the average
rate of defaults and severity of losses are consistent with an investor’s
expectations. In general, the earlier a loss occurs, the greater the effect
on
an investor’s yield to maturity. There can be no assurance as to the
delinquency, foreclosure or loss experience of the Mortgage Loans. The Mortgage
Loans may have a greater than normal risk of future defaults and delinquencies,
as compared to newly originated, high quality one- to four-family residential
mortgage loans of comparable size and geographic concentration because the
Mortgage Loans are of non-prime credit quality. See “Risk Factors—Non-Prime
Mortgage Loans May Experience Greater Rates of Delinquency and Foreclosure” in
this prospectus supplement.
S-68
The
rate
of principal payments, the aggregate amount of distributions and the yields
to
maturity of the Offered Certificates will be related to the rate and timing
of
payments of principal on the Mortgage Loans. The rate of principal payments
on
the Mortgage Loans will in turn be affected by the amortization schedules of
the
Mortgage Loans and by the rate of principal prepayments (including for this
purpose prepayments resulting from refinancing, liquidations of the Mortgage
Loans due to defaults, casualties or condemnations and repurchases by the
Sponsor or the Servicer). Because certain of the Mortgage Loans contain
prepayment charges, the rate of principal payments may be less than the rate
of
principal payments for mortgage loans which did not have prepayment charges.
The
Mortgage Loans are subject to the “due-on-sale” provisions in the related
Mortgage Notes and each Adjustable-Rate Mortgage Loan generally provides that
the Mortgage Loan is assumable by a creditworthy purchaser of the related
Mortgaged Property. See “Yield Considerations” in the prospectus.
Unscheduled
payments of principal (whether resulting from prepayments, liquidations,
casualties, condemnations, repurchases due to breaches of representations and
warranties, or purchase in connection with optional termination) will result
in
distributions on the related Offered Certificates of principal amounts which
would otherwise be distributed over the remaining terms of the Mortgage Loans.
Since the rate of payment of principal on the Mortgage Loans will depend on
future events and a variety of other factors, no assurance can be given as
to
such rate or the rate of principal prepayments. The extent to which the yield
to
maturity of a class of Offered Certificates may vary from the anticipated yield
will depend upon the degree to which such class of Offered Certificates is
purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of
the
applicable Mortgage Loans. Further, an investor should consider the risk that,
in the case of any Offered Certificate purchased at a discount, a slower than
anticipated rate of principal payments (including prepayments) on the applicable
Mortgage Loans could result in an actual yield to such investor that is lower
than the anticipated yield and, in the case of any Offered Certificate purchased
at a premium, a faster than anticipated rate of principal payments on the
applicable Mortgage Loans could result in an actual yield to such investor
that
is lower than the anticipated yield.
The
rate
of principal payments (including prepayments) on pools of mortgage loans may
vary significantly over time and may be influenced by a variety of economic,
geographic and other factors, including changes in mortgagors’ housing needs,
job transfers, unemployment, mortgagors’ net equity in the mortgaged properties
and servicing decisions. In general, if prevailing interest rates were to fall
significantly below the Mortgage Interest Rates on the Mortgage Loans, such
Mortgage Loans could be subject to higher prepayment rates than if prevailing
interest rates were to remain at or above the Mortgage Interest Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally
be
expected to decrease. As is the case with the Fixed-Rate Mortgage Loans, the
Adjustable-Rate Mortgage Loans may be subject to a greater rate of principal
prepayments in a low interest rate environment. For example, if prevailing
interest rates were to fall, mortgagors with adjustable-rate mortgage loans
may
be inclined to refinance their adjustable-rate mortgage loans with a fixed-rate
loan to “lock in” a lower interest rate. The existence of the applicable
Periodic Rate Cap and Maximum Mortgage Interest Rate also may affect the
likelihood of prepayments resulting from refinancings. No assurances can be
given as to the rate of prepayments on the Mortgage Loans in stable or changing
interest rate environments. In addition, the delinquency and loss experience
of
the Adjustable-Rate Mortgage Loans may differ from that on the Fixed-Rate
Mortgage Loans because the amount of the Monthly Payments on the Adjustable-Rate
Mortgage Loans are subject to adjustment on each Adjustment Date. Further,
a
majority of the Adjustable-Rate Mortgage Loans will not have their initial
Adjustment Date for two to five years after their origination. The
Adjustable-Rate Mortgage Loans may be subject to greater rates of prepayment
they approach their initial Adjustment Dates even if market interest rates
are
only slightly higher or lower than the Mortgage Interest Rates on such
Adjustable-Rate Mortgage Loans as borrowers seek to avoid changes in their
Monthly Payments.
S-69
The
interest-only feature of the Interest Only Mortgage Loans may reduce the
perceived benefits of refinancing to take advantage of lower market interest
rates or to avoid adjustments in the Mortgage Rates. However, as a Mortgage
Loan
with such a feature nears the end of its interest-only period, the borrower
may
be more likely to refinance the Mortgage Loans, even if market interest rates
are only slightly less than the Mortgage Rate in order to avoid the increase
in
the monthly payments needed to amortize the Mortgage Loan over its remaining
life.
The
weighted average life and yield to maturity of each class of Certificates will
also be influenced by the amount of Monthly Excess Cashflow Amounts generated
by
the Mortgage Loans and applied in reduction of the Certificate Principal
Balances of such Certificates. The level of Monthly Excess Cashflow Amounts
available on any Distribution Date to be applied in reduction of the Certificate
Principal Balances of the Certificates will be influenced by, among other
factors, (i) the overcollateralization level of the Mortgage Loans at such
time
(i.e., the extent to which interest on the Mortgage Loans is accruing on a
higher Principal Balance than the aggregate Certificate Principal Balance of
the
Certificates); (ii) the delinquency and default experience of the Mortgage
Loans; and (iii) the level of the Index for the Adjustable-Rate Mortgage Loans.
To the extent that greater amounts of Monthly Excess Cashflow Amounts are
distributed in reduction of the Certificate Principal Balance of a class of
Certificates, the weighted average life thereof can be expected to shorten.
No
assurance can be given as to the amount of Monthly Excess Cashflow Amounts
distributed at any time or in the aggregate.
The
Class
M Certificates are not expected to receive any principal distributions until
at
least the Distribution Date in June 2010 (unless the aggregate Certificate
Principal Balance of the Class A Certificates is reduced to zero prior thereto).
As a result, the weighted average lives of the Class M Certificates will be
longer than would have been the case if principal distributions were to be
made
on a pro
rata
basis.
The longer weighted average lives may increase the risk that an Applied Realized
Loss Amount will be allocated to one or more classes of Class M
Certificates.
Weighted
Average Lives
The
timing of changes in the rate of principal prepayments on the Mortgage Loans
may
significantly affect an investor’s actual yield to maturity, even if the average
rate of principal prepayments is consistent with such investor’s expectation. In
general, the earlier a principal prepayment on the Mortgage Loans occurs, the
greater the effect of such principal prepayment on an investor’s yield to
maturity. The effect on an investor’s yield of principal prepayments occurring
at a rate higher (or lower) than the rate anticipated by the investor during
the
period immediately following the issuance of the Offered Certificates may not
be
offset by a subsequent like decrease (or increase) in the rate of principal
prepayments.
The
projected weighted average life of any class of Offered Certificates is the
average amount of time that will elapse from the Closing Date, until each dollar
of principal is scheduled to be repaid to the investors in such class of Offered
Certificates. Because it is expected that there will be prepayments and defaults
on the Mortgage Loans, the actual weighted average lives of the classes of
Offered Certificates are expected to vary substantially from the weighted
average remaining terms to stated maturity of the Mortgage Loans as set forth
in
the tables in this prospectus supplement under “Summary of Prospectus
Supplement.”
Prepayments
on mortgage loans are commonly measured relative to a prepayment model or
standard. The prepayment models used in this prospectus supplement (the
“Prepayment
Assumptions”)
are
based on an assumed rate of prepayment each month of the then unpaid principal
balance of two hypothetical pools of mortgage loans similar to the Mortgage
Loans.
For
the
Adjustable-Rate Mortgage Loans, a 100% Prepayment Assumption is the
“Adjustable-Rate
Prepayment Curve”
or
“ARM
PPC,”
which
assumes a prepayment rate of 2.00% CPR per annum of the then-outstanding
principal balance of a hypothetical pool of adjustable-rate mortgage loans
in
the first month of the life of such mortgage loans and an additional approximate
1/11th of 28% per annum in each month thereafter until 30.00% CPR is reached
in
the twelfth month and remaining at 30.00% CPR until the twenty-second month.
From the twenty-third month until the twenty-seventh month ARM PPC assumes
a
constant prepayment rate of 50.00% CPR per annum. Beginning in the twenty-eighth
month and in each month thereafter during the life of such mortgage loans,
ARM
PPC assumes a constant prepayment rate of 35.00% CPR per annum each
month.
S-70
For
the
Fixed-Rate Mortgage Loans, a 100% Prepayment Assumption is the “Fixed-Rate
Prepayment Curve”
or
“FRM
PPC,”
which
assumes a prepayment rate of 2.30% CPR per annum of the then-outstanding
principal balance of such mortgage loans in the first month of the life of
such
mortgage loans and an additional 2.30% per annum in each month thereafter until
23.00% CPR is reached in the tenth month. Beginning in the tenth month and
in
each month thereafter during the life of such mortgage loans, FRM PPC assumes
a
constant prepayment rate of 23.00% CPR per annum each month.
“CPR”
represents a constant assumed rate of principal prepayment each month relative
to the then-outstanding principal balance of a pool of mortgage loans for the
life of such mortgage loans. No Prepayment Assumption purports 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.
The
decrement tables set forth in Appendix
B
were
prepared on the basis of the assumptions in the following paragraph and the
table set forth in Appendix
C.
There
may be certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of original Certificate
Principal Balances outstanding and weighted average lives of the Offered
Certificates set forth in the decrement tables. In addition, since the actual
Mortgage Loans in the Trust Fund will have characteristics that differ from
those assumed in preparing the table in Appendix
C,
the
distributions of principal of the Offered Certificates may be made earlier
or
later than indicated in the tables.
The
percentages and weighted average lives in the decrement tables were determined
using the following assumptions collectively (the “Structuring
Assumptions”):
(i)
the Mortgage Loans have the characteristics set forth in the table in
Appendix
C,
(ii)
the closing date for the Offered Certificates occurs on May 31, 2007 and the
Offered Certificates are sold to investors on such date, (iii) distributions
on
the Certificates are made on the 25th day of each month regardless of the day
on
which the Distribution Date actually occurs, commencing in June 2007, in
accordance with the allocation of the Interest Remittance Amount and the
Principal Remittance Amount set forth above under “Description of the
Certificates,” (iv) the Mortgage Loans prepay in accordance with the Prepayment
Assumptions indicated, (v) the Sponsor is not required to substitute or
repurchase any of the Mortgage Loans pursuant to the Pooling and Servicing
Agreement and no optional termination is exercised (except with respect to
the
entries identified by the row heading “Weighted Avg. Life to Optional
Termination Date” in the tables in Appendix
B),
(vi)
the Targeted Overcollateralization Amount is set initially as specified herein
and thereafter decreases as described in the definition thereof, (vii) scheduled
payments for all Mortgage Loans are received on the Due Date commencing in
June
2007, the principal portion of such payments is computed prior to giving effect
to prepayments received in such month and there are no losses or delinquencies
with respect to such Mortgage Loans, (viii) all Mortgage Loans prepay at the
same rate and all such payments are treated as prepayments in full of individual
Mortgage Loans, with no Prepayment Interest Shortfalls, (ix) such prepayments
are received on the last day of each month commencing in May 2007, (x) the
Servicing Fee Rate is 0.50% per annum and the Trustee Fee Rate is 0.01% per
annum, (xi) One-Month LIBOR is at all times equal to 5.32%, (xii) the
Certificate Interest Rates for the Offered Certificates are as set forth in
the
table beginning on page S-6, (xiii) the Mortgage Interest Rate for each
Adjustable-Rate Mortgage Loan adjusts on its next Adjustment Date (and on
subsequent Adjustment Dates, if necessary) to equal the sum of (a) the assumed
level of the Index and (b) the respective Gross Margin (this sum subject to
the
applicable Periodic Rate Caps, Minimum Mortgage Interest Rates and Maximum
Mortgage Interest Rates), (xiv) with respect to the Adjustable-Rate Mortgage
Loans, Six-Month LIBOR is at all times equal to 5.37%, (xv) the Class P
Certificates have a zero Certificate Principal Balance and (xvi) the Net Swap
Payment is calculated as described under “Description of the
Certificates—Interest Rate Swap Agreement” and no Swap Termination Payment is
made. Nothing contained in the foregoing assumptions should be construed as
a
representation that the Mortgage Loans will not experience delinquencies or
losses.
Based
on
the foregoing assumptions and the assumed mortgage loan characteristics set
forth in the table in Appendix
C,
the
decrement tables set forth in Appendix
B
indicate
the projected weighted average lives of each class of Offered Certificates
and
set forth the percentages of the original Certificate Principal Balance of
each
such class that would be outstanding after each of the dates shown at the
indicated percentages of the applicable Prepayment Assumption.
S-71
Final
Scheduled Distribution Dates
The
“Final
Scheduled Distribution Date”
of
each
class of Offered Certificates is the Distribution Date in April 25, 2037. The
Final Scheduled Distribution Date for the Offered Certificates is calculated
as
the month after the maturity of the latest maturing 30-year Mortgage Loan in
the
Mortgage Pool. Since the rate of distributions in reduction of the Certificate
Principal Balance of each class of Offered Certificates will depend on the
rate
of payment (including prepayments) of the Mortgage Loans, the Certificate
Principal Balance of any such class could be reduced to zero significantly
earlier or later than the Final Scheduled Distribution Date. The rate of
payments on the Mortgage Loans will depend on their particular characteristics,
as well as on prevailing interest rates from time to time and other economic
factors, and no assurance can be given as to the actual payment experience
of
the Mortgage Loans.
USE
OF PROCEEDS
The
Depositor will apply the net proceeds of the sale of the Offered Certificates
to
the purchase of the Mortgage Loans from the Sponsor.
FEDERAL
INCOME TAX CONSEQUENCES
General
The
Pooling and Servicing Agreement provides that elections will be made to treat
certain designated portions of the Issuing Entity (exclusive of arrangements
intended to protect against basis risk for certain of the certificates, the
Interest Rate Swap Agreement, the Interest Rate Cap Agreement, the Swap Account,
the Supplemental Interest Trust and the Cap Carryover Reserve Account and
certain other assets specified in the Pooling and Servicing Agreement) as
multiple separate REMICs for federal income tax purposes. Each REMIC will
designate a single class of interests as the residual interest in that REMIC.
Elections will be made to treat each REMIC as a REMIC for federal income tax
purposes. Each class of Offered Certificates (exclusive of the right to receive
payments in respect of Cap Carryover Amounts and the obligation to make payments
to the Supplemental Interest Trust) will represent beneficial ownership of
REMIC
regular interests.
Upon
the
issuance of the Offered Certificates, Hunton & Williams LLP will deliver its
opinion to the effect that, assuming compliance with the Pooling and Servicing
Agreement, for federal income tax purposes, each REMIC elected by the Issuing
Entity will qualify as a REMIC for federal income tax purposes.
Taxation
of Regular Interests
The
regular interest portion of the Offered Certificates generally will be treated
as debt instruments issued by a REMIC for federal income tax purposes. Income
on
the regular interest portion of the Offered Certificates must be reported under
an accrual method of accounting. For federal income tax reporting purposes,
the
regular interest portion of the classes of Offered Certificates may be treated
as having been issued with original issue discount (“OID”).
The
Prepayment Assumption that will be used in determining the rate of accrual
of
original issue discount, premium and market discount, if any, for federal income
tax purposes will be based on the assumption that subsequent to the date of
any
determination the Mortgage Loans will prepay at a constant rate of 100% ARM
PPC
with respect to the Adjustable-Rate Mortgage Loans and 100% FRM PPC with respect
to the Fixed-Rate Mortgage Loans. No representation is made that the Mortgage
Loans will prepay at such rate or at any other rate. See “Federal Income Tax
Consequences—REMICs—Taxation of Owners of Regular Securities—Original Issue
Discount” in the prospectus.
The
IRS
has issued regulations (the “OID
Regulations”)
under
Sections 1271 to 1275 of the Code generally addressing the treatment of debt
instruments issued with original issue discount. Purchasers of the Offered
Certificates should be aware that the OID Regulations do not adequately address
certain issues relevant to, or are not applicable to, securities such as the
Offered Certificates. Because of the uncertainty concerning the application
of
Section 1272(a)(6) of the Code to such Certificates, and because the rules
of
the OID Regulations are limited in their application in ways that could preclude
their application to such Certificates even in the absence of Section 1272(a)(6)
of the Code, the IRS could assert that the Offered Certificates should be
treated as issued with original issue discount or should be governed by the
rules applicable to debt instruments having contingent payments or by some
other
manner not yet set forth in regulations. Prospective purchasers of the Offered
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
S-72
The
Offered Certificates will represent beneficial ownership of (i) a REMIC regular
interest and (ii) the right to receive payments in respect of Cap Carryover
Amounts and the right to receive payments from the Supplemental Interest Trust
in respect of the Cap Carryover Amount and the obligation to make payments
to
the Supplemental Interest Trust (the “Notional
Principal Contract Arrangement”).
Holders of the Offered Certificates must allocate their basis between their
regular interest and their Notional Principal Contract Arrangement component
as
set forth below under “— Taxation of Notional Principal Contract Arrangement.”
The Cap Carryover Reserve Account, the Interest Rate Swap Agreement, the
Interest Rate Cap Agreement, the Swap Account and the Supplemental Interest
Trust are not assets of any REMIC created in this transaction. The REMIC regular
interest corresponding to an Offered Certificate (the “Regular
Interest”)
will
be entitled to receive interest and principal payments at the times and in
the
amounts equal to those made on the Offered Certificate to which it corresponds,
except that (i) any payments made to the corresponding Offered Certificate
in
respect of Cap Carryover Amounts will not be paid in respect of the regular
interest, (ii) the maximum interest rate of that Regular Interest for purposes
of all calculations related to that Regular Interest will equal the Rate Cap
of
the Offered Certificate computed for this purpose by limiting the Notional
Amount of the Interest Rate Swap Agreement to the aggregate Principal Balance
of
the Mortgage Loans and (ii) any Swap Termination Payment will be treated as
being first payable solely from net Monthly Excess Cashflow otherwise
distributable to the Class CE-1 Certificate and then from distributions made
to
the Regular Interests related to the Offered Certificates, which are then paid
to the Swap Provider. As a result of the foregoing, the amount of distributions
on the Regular Interest corresponding to an Offered Certificate may exceed
the
actual amount of distributions on the Offered Certificate.
The
Regular Interest component of the Offered Certificates (but not the Notional
Principal Contract Arrangement components) generally will be treated as assets
described in Section 7701(a)(19)(C) of the Code for a domestic building and
loan
association and “real estate assets” under Section 856(c)(5)(B) of the Code for
a real estate investment trust (a “REIT”),
in
the same proportion that the assets in the Issuing Entity would be so treated.
In addition, interest on the regular interest portion of the Offered
Certificates generally will be treated as “interest on obligations secured by
mortgages on real property” under Section 856(c)(3)(B) of the Code for a REIT,
to the extent that the Offered Certificates are treated as “real estate assets”
under Section 856(c)(5)(B) of the Code. See “Federal Income Tax
Consequences—REMICs—Characterization of Investments in REMIC Securities” in the
prospectus. If more than 95% of the Regular Interests and income qualify for
these treatments, the Regular Interests generally will qualify for such
treatments in their entirety (exclusive of the Notional Principal Contract
Arrangement component). However, no portion of an offered certificateholder’s
basis or income allocable to a Notional Principal Contract Arrangement will
qualify for such treatment. As a result, the Offered Certificates generally
are
not suitable investments for many REITs or for inclusion in another
REMIC.
Taxation
of the Notional Principal Contract Arrangements
General.
Each
holder of an Offered Certificate will be treated for federal income tax purposes
as having entered into a notional principal contract pursuant to its rights
to
receive payment with respect to Cap Carryover Amounts and the obligation to
make
payments to the Supplemental Interest Trust on the date it purchases its
Certificates.
In
general, the holders of the Offered Certificates must allocate the price they
pay for the Offered Certificates between the Regular Interest component and
the
Notional Principal Contract Arrangement component based on their relative fair
market values. To the extent rights to receive payments are 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 rights, and such portion will be treated as
a
cap premium (the “Cap
Premium”)
paid
or received by the holders of Offered Certificates, as applicable. A holder
of
an Offered Certificate 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 applicable Notional Principal
Contract 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 Offered Certificates are encouraged to consult their own tax
advisors regarding the appropriate method of amortizing any Cap Premium. The
Notional Principal Contract Regulations treat a nonperiodic payment made under
a
notional principal 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 regulations governing notional principal
contracts (the “Notional
Principal Contract Regulations”).
S-73
Under
the
Notional Principal Contract 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 under
the
applicable Notional Principal Contract Arrangement must be netted against
payments, if any, deemed made 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 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 deduct any such
net deduction and are encouraged to consult their tax advisors prior to
investing in the Offered Certificates.
Any
payments made to a beneficial owner of an Offered Certificate in excess of
the
amounts payable on the corresponding Regular Interest will be treated as having
been received as a payment on a notional principal contract. To the extent
the
sum of such periodic payments for any year exceeds that year's amortized cost
of
any Cap Carryover Amounts, such excess represents net income for that year.
Conversely, to the extent that the amount of that year's amortized cost exceeds
the sum of the periodic payments, such excess shall represent a net deduction
for that year. In addition, any amounts payable on such Regular Interest in
excess of the amount of payments on the Offered Certificate to which it relates
will be treated as having been received by the beneficial owners of such
Certificates and then paid by such owners to the Supplemental Interest Trust
pursuant to the Interest Rate Swap Agreement, and such excess should be treated
as a periodic payment on a notional principal contract that is made by the
beneficial owner during the applicable taxable year and that is taken into
account in determining the beneficial owner’s net income or net deduction with
respect to any Cap Carryover Amounts for such taxable year. Although not clear,
net income or a net deduction with respect to the Cap Carryover Amount should
be
treated as ordinary income or as an ordinary deduction. Holders of the Offered
Certificates are advised to consult their own tax advisors regarding the tax
characterization and timing issues relating to payments and obligations under
the Notional Principal Contract Arrangement.
An
offered certificateholder’s ability to recognize a net deduction with respect to
the Notional Principal Contract Arrangement component is limited under Sections
67 and 68 of the Code in the case of (i) estates and trusts and (ii) individuals
owning an interest in such component directly or through a “pass-through entity”
(other than in connection with such individual’s trade or business).
Pass-through entities include partnerships, S corporations, grantor trusts
and
non-publicly offered regulated investment companies, but do not include estates,
nongrantor trusts, cooperatives, real estate investment trusts and publicly
offered regulated investment companies. Further, such a holder will not be
able
to recognize a net deduction with respect the Notional Principal Contract
Arrangement component in computing the beneficial owner’s alternative minimum
tax liability.
It
is
possible that the right to receive payments in respect of the Notional Principal
Contract Arrangement could be treated as a partnership among the holders of
all
of the Certificates, in which case holders of such Certificates potentially
would be subject to different timing of income and foreign holders of such
Certificates could be subject to withholding in respect of any related Cap
Carryover Amount. Holders of the Offered Certificates are advised to consult
their own tax advisors regarding the allocation of issue price, timing,
character and source of income and deductions resulting from the ownership
of
their Certificates.
Any
amount of proceeds from the sale, redemption or retirement of an Offered
Certificate that is considered to be allocated to rights under a Notional
Principal Contract Arrangement would be considered a “termination payment” under
the Notional Principal Contract Regulations. It is anticipated that the
Supplemental Interest Trust Trustee will account for any termination payments
for reporting purposes in accordance with the Notional Principal Contract
Regulations, as described below.
Termination
Payments.
Any
amount of sales proceeds that is considered to be allocated to the selling
certificateholder’s rights under the applicable Notional Principal Contract
Arrangement in connection with the sale or exchange of an Offered Certificate
would be considered a “termination payment” under the Notional Principal
Contract Regulations allocable to that Offered Certificate. A holder of an
Offered Certificate will have gain or loss from such a termination of a Notional
Principal Contract Arrangement equal to (i) any termination payment it received
or is deemed to have received minus (ii) the unamortized portion of any Cap
Premium paid (or deemed paid) by the beneficial owner upon entering into or
acquiring its interest in a Notional Principal Contract
Arrangement.
S-74
Gain
or
loss realized upon the termination of a Notional Principal Contract 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.
REMIC
Taxes and Reporting
It
is not
anticipated that the Issuing Entity will engage in any transactions that would
subject it to the prohibited transactions tax as defined in Section 860F(a)(2)
of the Code, the contributions tax as defined in Section 860G(d) of the Code
or
the tax on net income from foreclosure property as defined in Section 860G(c)
of
the Code. However, in the event that any such tax is imposed on the Issuing
Entity, such tax will be borne (i) by the Trustee, if the Trustee has breached
its obligations with respect to REMIC compliance under the Agreement, (ii)
the
Servicer, if the Servicer has breached its obligations with respect to REMIC
compliance under the Agreement, and (iii) otherwise by the Issuing Entity,
with
a resulting reduction in amounts otherwise distributable to Holders of the
Offered Certificates. See “Description of the Securities—General” and “Federal
Income Tax Consequences—REMICs—Taxes That May Be Imposed on the REMIC
Pool—Prohibited Transactions” in the prospectus.
The
responsibility for filing annual federal information returns and other reports
will be borne by the Trustee. See “Federal Income Tax Consequences—REMICs—Taxes
That May Be Imposed on the REMIC Pool—Administrative Matters” in the
prospectus.
For
further information regarding the federal income tax consequences of investing
in the Offered Certificates, see “Federal Income Tax Consequences—REMICs” in the
prospectus.
ERISA
CONSIDERATIONS
Section
406 of the Employee Retirement Income Security Act of 1974, as amended
(“ERISA”),
prohibits “parties in interest” with respect to an employee benefit plan subject
to ERISA and/or a plan or other arrangement subject to the excise tax provisions
set forth under Section 4975 of the Code (each of the foregoing, a “Plan”)
from
engaging in certain transactions involving such ERISA Plan and its assets unless
a statutory, regulatory or administrative exemption applies to the transaction.
Section 4975 of the Code imposes certain excise taxes on prohibited transactions
involving plans described under that Section; ERISA authorizes the imposition
of
civil penalties for prohibited transactions involving plans not covered under
Section 4975 of the Code. Any Plan fiduciary which proposes to cause a Plan
to
acquire any of the Offered Certificates is encouraged to consult with its
counsel with respect to the potential consequences under ERISA and the Code
of
the Plan’s acquisition and ownership of such Certificates. See “ERISA
Considerations” in the prospectus.
Certain
employee benefit plans, including governmental plans and certain church plans,
are not subject to ERISA’s requirements. However, such plans may be subject to
the provisions of other applicable federal, state or local law (“Similar
Law”)
materially similar to the foregoing provisions of ERISA and the Code. Any such
plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code may nonetheless be subject to the prohibited transaction
rules set forth in Section 503 of the Code.
Except
as
noted above, investments by Plans are subject to ERISA’s general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan’s investments be made in
accordance with the documents governing the Plan. A fiduciary which decides
to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
S-75
The
U.S.
Department of Labor has extended to Banc of America Securities LLC an
administrative exemption (the “Exemption”)
from
certain of the prohibited transaction rules of ERISA and the related excise
tax
provisions of Section 4975 of the Code with respect to the initial purchase,
the
holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemption. The Exemption can apply
to certificates in a pass-through trust holding mortgage loans, and the
Exemption may apply to the Offered Certificates.
Among
the
conditions that must be satisfied for the Exemption to apply are the
following:
(1) the
acquisition of the certificates by a Plan is on terms (including the price
for
the certificates) that are at least as favorable to the Plan as they would
be in
an arm’s length transaction with an unrelated party;
(2) the
certificates acquired by the Plan have received a rating at the time of such
acquisition that is one of the four highest generic rating categories from
Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., Moody’s
Investors Service, Inc., DBRS or Fitch Ratings (collectively, the “Exemption
Rating Agencies”);
(3) the
trustee must not be an affiliate of any other member of the Restricted Group
(as
defined below), other than an underwriter;
(4) the
sum
of all payments made to and retained by the underwriters in connection with
the
distribution of the certificates represents not more than reasonable
compensation for underwriting the certificates; the sum of all payments made
to
and retained by the seller pursuant to the assignment of the loans to the trust
represents not more than the fair market value of such loans; the sum of all
payments made to and retained by the servicer represents not more than
reasonable compensation for such person’s services under the agreement pursuant
to which the loans are pooled and reimbursements of such person’s reasonable
expenses in connection therewith; and
(5) the
Plan
investing in the certificates is 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 “Act”).
The
trust
must also meet the following requirements:
(i) the
corpus of the trust must consist solely of assets of the type that have been
included in other investment pools;
(ii) certificates
in such other investment pools must have been rated in one of the four highest
generic rating categories by an Exemption Rating Agency for at least one year
prior to the Plan’s acquisition of certificates; and
(iii) certificates
evidencing interests in such other investment pools must have been purchased
by
investors other than Plans for at least one year prior to any Plan’s acquisition
of the certificates.
Moreover,
the Exemption provides relief from certain self-dealing/conflict of interest
prohibited transactions that may occur when the Plan fiduciary causes a Plan
to
acquire certificates in a trust holding receivables as to which the fiduciary
(or its affiliate) is an obligor provided that, among other requirements, (i)
in
the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent (50%) of each class of certificates in
which Plans have invested is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to
five
percent (5%) or less of the fair market value of the obligations contained
in
the trust; (iii) a Plan’s investment in certificates of any class does not
exceed twenty-five percent (25%) of all of the certificates of that class
outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of any Plan
with respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored
by
any Underwriter, the Trustee, the Servicer, the Swap Provider, the Cap Provider
any obligor with respect to Mortgage Loans included in the Issuing Entity
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Issuing Entity, or any affiliate of such parties
(the “Restricted
Group”).
S-76
For
a
further of description of the conditions for the Exemption, see “ERISA
Considerations” in the Prospectus.
The
Exemption may cover the acquisition and holding of the Offered Certificates
(exclusive of the right of the Offered Certificates to receive payments from
the
Supplemental Interest Trust) by Plans to which it applies provided that all
conditions of the Exemption will be met. In addition, as of the date hereof
there is no single mortgagor that is an obligor on 5% of the Pool Balance as
of
the Cut-off Date.
For
so
long as the holder of an Offered Certificate also holds an interest in the
Supplemental Interest Trust, the holder will be deemed to have acquired and
be
holding the Offered Certificate without the right to receive payments from
the
Supplemental Interest Trust and, separately, the right to receive payments
from
the Supplemental Interest Trust. The Exemption is not applicable to the
acquisition, holding and transfer of an interest in the Supplemental Interest
Trust. In addition, while the Supplemental Interest Trust is in existence,
it is
possible that not all of the requirements for the Exemption to apply to the
acquisition, holding and transfer of Offered Certificates will be satisfied.
However, if the Exemption is not available, there may be other exemptions that
apply. The acquisition or holding may be eligible for the exemptive relief
available under one or the Department of Labor Prohibited Transaction Class
Exemptions (each, a “PTCE”),
including PTCE 84-14 (for transactions by independent “qualified professional
asset managers”), PTCE 91-38 (for transactions by bank collective investment
funds), 90-1 (for transactions by insurance company pooled separate accounts),
PTCE 95-60 (for transactions by insurance company general accounts) or PTCE
96-23 (for transactions effected by “in-house asset managers”). In addition,
section 408(b)(17) of ERISA may provide a statutory exemption for prohibited
transactions between a Plan and certain service providers provided that that
there is adequate consideration. However, even if the conditions specified
in
one of these prohibited transaction class exemptions or statutory exemptions
are
met, the scope of relief provided under such an exemption may or may not cover
all acts which might be construed as prohibited transactions. Accordingly,
for
so long as the Supplemental Interest Trust is in existence, each beneficial
owner of an Offered Certificate or any interest therein, shall be deemed to
have
represented, by virtue of its acquisition or holding of the Offered Certificate,
or interest therein, that either (i) it is not a Plan or other person acting
on
behalf of, or using the assets of, a Plan or (ii) (A) it is an accredited
investor within the meaning of the Exemption and (B) the acquisition and holding
of such Certificate and the separate right to receive payments from the
Supplemental Interest Trust are eligible for the exemptive relief available
under one of the five prohibited transaction class exemptions or the statutory
exemption enumerated above.
In
addition, the rating of a Certificate may change. If a Class of Offered
Certificates is no longer rated at least BBB- (or its equivalent), the
Certificates of that class will no longer be eligible for relief under the
Exemption (although a Plan that had purchased the Certificate when it had a
investment grade rating would not be required by the Exemption to dispose of
it). Consequently, an Offered Certificate that is no longer rated at least
BBB-
(or its equivalent) may not be transferred unless the transferee delivers to
the
Trustee either (i) a representation letter, in form and substance satisfactory
to the Trustee, stating that (a) it is not, and is not acting on behalf of,
a
Plan or using the assets of any such Plan to effect such purchase or (b) if
it
is an insurance company, using funds from an “insurance company general account”
(as such term is defined in section V(e) of PTCE 95-60, (60 Fed. Reg. 35925
(July 12, 1995)), to purchase such Certificates, the purchase and holding of
such Certificates are covered under Sections I and III of PTCE 95-60, or (ii)
an
opinion of counsel, in form and substance satisfactory to the Trustee, to the
effect that the purchase or holding of this Certificate by or on behalf of
such
Plan will not constitute or result in a non-exempt prohibited transaction within
the meaning of Section 406 of ERISA or section 4975 of the Code and will not
subject the Depositor, the Servicer, the Sponsor or the Trustee to any
obligation in addition to those undertaken in the Pooling and Servicing
Agreement. Each person who acquires this certificate or any interest therein
shall be deemed to have made the representations required by the representation
letter referred to in the preceding sentence, unless such person shall have
provided such representation letter or the opinion of counsel referred to in
the
preceding sentence to the Trustee.
S-77
A
person
considering investing in the Offered Certificates on behalf of or with the
assets of a governmental plan or church plan that is subject to Similar Law
should consult with legal advisors regarding the requirements of any Similar
Law
and whether the acquisition, holding or transfer of an Offered Certificates
will
result in a violation of Similar Law.
If
any
Offered Certificate, or any interest therein, is acquired or held in violation
of the provisions discussed above, the next preceding permitted beneficial
owner
will be treated as the beneficial owner of that Certificate, retroactive to
the
date of transfer to the purported beneficial owner. Any purported beneficial
owner whose acquisition or holding of an Offered Certificate, or interest
therein, was effected in violation of the provisions of the preceding paragraph
shall indemnify to the extent permitted by law and hold harmless the Sponsor,
the Depositor, the Trustee and the Servicer from and against any and all
liabilities, claims, costs or expenses incurred by such parties as a result
of
such acquisition or holding.
Prospective
Plan investors should consult with their legal advisors concerning the impact
of
ERISA and the applicability of, and scope of relief provided by, the Exemption
or any other exemption, and the potential consequences in their specific
circumstances, prior to making an investment in the Offered Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification, an investment
in
the Offered Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan’s
investment portfolio.
For
more
information about ERISA considerations, see the information under the heading
“ERISA
Considerations”
in
the
prospectus.
LEGAL
INVESTMENT
The
Offered Certificates will not constitute “mortgage related securities” for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
(“SMMEA”),
because the Mortgage Pool contains Second Lien Mortgage Loans.
There
may
be restrictions on the ability of certain investors, including depository
institutions, either to purchase the Offered Certificates or to purchase Offered
Certificates representing more than a specified percentage of the investor’s
assets. Investors are encouraged to consult their own legal advisors in
determining whether and to what extent the Offered Certificates constitute
legal
investments for such investors. See “Legal Investment” in the
prospectus.
METHOD
OF DISTRIBUTION
Subject
to the terms and conditions set forth in the Underwriting Agreement, between
the
Depositor and Banc of America Securities LLC (“Banc
of America Securities”),
an
affiliate of the Depositor, as representative of Banc of America Securities
and
Barclays Capital Inc. (together, the “Underwriters”),
the
Underwriters have severally agreed to purchase and the Depositor has agreed
to
sell to the Underwriters the Offered Certificates as follows: Banc of America
Securities and Barclays Capital Inc. will acquire approximately 85% and 15%,
respectively, of each class of Offered Certificates. Proceeds to the Depositor
from the sale of the Offered Certificates are expected to be approximately
100.00% of the initial Certificate Principal Balance of those Certificates,
before deducting expenses estimated at $165,000 payable by the
Depositor.
Distribution
of the Offered Certificates will be made by the Underwriters from time to time
in negotiated transactions or otherwise at varying prices to be determined
at
the time of sale. The Underwriters may effect such transactions by selling
Offered Certificates to or through dealers and such dealers may receive from
the
Underwriters, for which they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The Underwriters and any
dealers that participate with the Underwriters in the distribution of such
Offered Certificates may be deemed to be underwriters, and any discounts,
commissions or concessions received by them, and any profits on resale of the
Offered Certificates purchased by them, may be deemed to be underwriting
discounts and commissions under the Act.
S-78
The
Depositor has been advised by the Underwriters that they intend to make a market
in the Offered Certificates but have no obligation to do so. There can be no
assurance that a secondary market for the Offered Certificates will develop
or,
if it does develop, that it will continue.
The
Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
Affiliates
of Banc of America Securities may purchase a portion of the Offered
Certificates.
REPORTS
TO CERTIFICATEHOLDERS
The
Trustee will prepare on a monthly basis a statement containing, among other
things, information relating to principal and interest distributions on the
Certificates, the status of the Mortgage Pool and certain other information
as
set forth in the Pooling and Servicing Agreement in accordance with Item 1121
of
Regulation AB (17 C.F.R. 229.1121), as described under “Description of the
Agreements—Material Terms of the Pooling and Servicing Agreements and Underlying
Servicing Agreements—Reports to Securityholders” in the prospectus. In addition,
the Trustee and the Servicer, and potentially certain other parties as described
in the Pooling and Servicing Agreement, will furnish to the Depositor and the
Trustee, as applicable, the compliance statements, assessments and attestation
reports in accordance with Item 1122 and Item 1123 of Regulation AB (17 CFR
229.1122 and 229.1123) detailed under “Description of the Agreements—Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements—Evidence as to Compliance” in the prospectus.
Copies
of
these statements and reports will be filed on Forms 10-D and 10-K with the
SEC
through its EDGAR system located at “http://www.sec.gov” under the name of the
Issuing Entity for so long as the Issuing Entity is subject to the reporting
requirement of the Securities Exchange Act of 1934, as amended.
The
Trustee will make the statement described in the prospectus under “Description
of the Agreements—Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements—Reports to Securityholders” available each month
to certificateholders and the other parties to the Pooling and Servicing
Agreement via the Trustee’s internet website. To the extent set forth in the
Pooling and Servicing Agreement, the Trustee will also make the Periodic Reports
described in the prospectus under “Where You Can Find More Information” relating
to the Issuing Entity available through its website. The Trustee’s internet
website will initially be located at “www.etrustee.net.” Assistance in using the
website can be obtained by calling the Trustee’s transaction manager at (312)
904-4373. Parties that are unable to use the website are entitled to have a
paper copy mailed to them at no charge via first class mail by calling the
customer service desk.
LEGAL
MATTERS
The
legality of the Offered Certificates and certain tax matters will be passed
upon
for the Depositor and the Underwriters by Hunton & Williams
LLP.
RATINGS
It
is a
condition to the issuance of the Offered Certificates that the Certificates
receive at least the rating set forth in the table beginning on page S-6 of
this
prospectus supplement from Moody’s Investors Service, Inc. (“Moody’s”),
Standard and Poor’s Rating Services, a division of The McGraw-Hill Companies,
Inc. (“S&P”)
and
DBRS.
A
securities rating addresses the likelihood of the receipt by a certificateholder
of distributions on the Mortgage Loans. The rating takes into consideration
the
characteristics of the Mortgage Loans and the structural, legal and tax aspects
associated with the certificates. The ratings on the Offered Certificates do
not, however, constitute statements regarding the likelihood of the payment
of
any Cap Carryover Amount, the frequency of prepayments on the Mortgage Loans,
or
the possibility that a holder of an Offered Certificate might realize a lower
than anticipated yield.
S-79
A
security rating is not a recommendation to buy, sell or hold securities and
may
be subject to revision or withdrawal at any time by the assigning rating
organization. In the event that the ratings initially assigned to any of the
Offered Certificates by the Rating Agencies are subsequently lowered for any
reason, no person or entity is obligated to provide any additional support
or
credit enhancement with respect to such Offered Certificates.
In
addition, the rating agencies that assign the initial ratings to the Offered
Certificates will monitor those ratings for so long as the Offered Certificates
remain outstanding.
S-80
INDEX
OF PROSPECTUS SUPPLEMENT DEFINITIONS
40-Year
Trigger Event
S-61
60+
Day Delinquent Loan
S-52
Accrued
Certificate Interest
S-50
Act
S-76
Adjustable-Rate
Mortgage Loans
S-30
Adjustable-Rate
Prepayment Curve
S-70
Adjustment
Date
S-31
Administrative
Fee Rate
S-46
Administrative
Fees
S-46
Advance
S-44
Advancing
Person
S-45
Applied
Realized Loss Amount
S-57
ARM
PPC
S-70
AVM
S-33
Balloon
Loan
S-30
Balloon
Payment
S-30
Banc
of America Securities
S-78
Business
Day
S-44
Cap
S-67
Cap
Agreement
S-65
Cap
Carryover Amount
S-68
Cap
Carryover Reserve Account
S-68
Cap
Premium
S-73
Cap
Provider
S-8
Certificate
Interest Rate
S-67
Certificate
Principal Balance
S-52
Class
A Certificates
S-10
Class
B Certificates
S-10
Class
B-1 Principal Distribution Amount
S-54
Class
B-1 Realized Loss Amortization Amount
S-62
Class
M Certificates
S-10
Class
M-1 Principal Distribution Amount
S-53
Class
M-1 Realized Loss Amortization Amount
S-61
Class
M-2 Principal Distribution Amount
S-53
Class
M-2 Realized Loss Amortization Amount
S-61
Class
M-3 Principal Distribution Amount
S-53
Class
M-3 Realized Loss Amortization Amount
S-61
Class
M-4 Principal Distribution Amount
S-53
Class
M-4 Realized Loss Amortization Amount
S-61
Class
M-5 Principal Distribution Amount
S-53
Class
M-5 Realized Loss Amortization Amount
S-61
Class
M-6 Principal Distribution Amount
S-54
Class
M-6 Realized Loss Amortization Amount
S-61
Class
M-7 Principal Distribution Amount
S-54
Class
M-7 Realized Loss Amortization Amount
S-61
Class
M-8 Realized Loss Amortization Amount
S-61
Class
M-9 Realized Loss Amortization Amount
S-62
Closing
Date
S-8
Collection
Account
S-44
Collection
Period
S-8
Combined
Loan-to-Value Ratio
S-30
Commission
S-38
Compensating
Interest
S-46
CPR
S-71
Credit
Scores
S-31
Custodian
S-8
Cut-off
Date
S-8
Cut-off
Date Principal Balance
S-29
Debt-to-Income
Ratio
S-31
Defaulted
Swap Termination Payment
S-65
Deficient
Valuation
S-57
Delinquent
S-31
Depositor
S-8
Determination
Date
S-8
Distribution
Account
S-44
Distribution
Date
S-8
Dual
Amortization Loan
S-30
Due
Date
S-30
EFSG
S-38
Eligible
Account
S-44
Eligible
Substitute Mortgage Loan
S-43
ERISA
S-75
Events
of Servicing Termination
S-48
Excess
Servicing Fee
S-46
Excess
Servicing Fee Rate
S-46
Exemption
S-76
Exemption
Rating Agencies
S-76
Extra
Principal Distribution Amount
S-55
Fieldstone
Mortgage Loans
S-32
Fieldstone
Underwriting Guidelines
S-32
Final
Scheduled Distribution Date
S-72
First
Lien
S-30
First
Lien Mortgage Loan
S-30
Fixed-Rate
Mortgage Loans
S-30
Fixed-Rate
Prepayment Curve
S-71
Floating
Rate Certificates
S-10
FMC
S-32
FRM
PPC
S-71
Gross
Margin
S-31
Index
S-31
Initial
Periodic Rate Cap
S-31
Interest
Accrual Period
S-50
Interest
Carry Forward Amount
S-50
Interest
Only Mortgage Loan
S-30
Interest
Percentage
S-50
Interest
Remittance Amount
S-50
Issuing
Entity
S-8
LaSalle
Bank
S-40
LIBOR
Determination Date
S-68
Liquidated
Mortgage Loan
S-57
Litton
Servicing Fee
S-46
LTVs
S-32
Maximum
Mortgage Interest Rate
S-31
Maximum
Rate Cap
S-67
MGIC
S-38
Minimum
Mortgage Interest Rate
S-31
Monthly
Excess Cashflow Allocation
S-59
Monthly
Excess Cashflow Amount
S-59
S-81
Monthly
Excess Interest Amount
S-58
Monthly
Payment
S-31
Moody’s
S-79
Mortgage
S-30
Mortgage
Interest Rate
S-30
Mortgage
Loan Purchase Agreement
S-29
Mortgage
Loan Schedule
S-42
Mortgage
Loans
S-29
Mortgage
Pool
S-29
Mortgaged
Property
S-30
Net
Maximum Mortgage Interest Rate
S-67
Net
Maximum WAC
S-67
Net
Mortgage Interest Rate
S-58
Net
Swap Payment
S-63
Net
WAC
S-67
Non-Offered
Certificates
S-10
Notional
Principal Contract Arrangement
S-73
Notional
Principal Contract Regulations
S-74
Offered
Certificates
S-10
OID
S-72
OID
Regulations
S-72
One-Month
LIBOR
S-68
Optional
Termination Date
S-47
Originators
S-8
Overcollateralization
Amount
S-55
Overcollateralization
Deficiency
S-55
Overcollateralization
Floor
S-55
Overcollateralization
Release Amount
S-55
Periodic
Rate Cap
S-31
Plan
S-75
Pool
Balance
S-29
Pooling
and Servicing Agreement
S-41
Prepayment
Assumptions
S-70
Prepayment
Charge Certificates
S-10
Prepayment
Interest Excess
S-46
Prepayment
Interest Shortfall
S-46
Prepayment
Period
S-8
Principal
Balance
S-29
Principal
Distribution Amount
S-55
Principal
Remittance Amount
S-55
PTCE
S-77
Purchase
Price
S-42
Radian
S-38
Rate
Cap
S-67
Rating
Agencies
S-44
Realized
Loss
S-57
Realized
Loss Amortization Amount
S-62
Record
Date
S-8
Reference
Bank Rate
S-68
Regular
Interest
S-73
Reimbursement
Amount
S-43
REIT
S-73
Related
Documents
S-42
Relevant
Implementation Date
S-5
Relevant
Member State
S-5
Relevant
Persons
S-5
Relief
Act
S-45
Residual
Certificates
S-10
Restricted
Group
S-77
Reuters
Screen LIBOR01
S-68
S&P
S-79
Second
Lien
S-30
Second
Lien Mortgage Loan
S-30
Senior
Enhancement Percentage
S-56
Senior
Principal Distribution Amount
S-56
Servicer
S-8
Servicer
Modification
S-57
Servicing
Advance
S-45
Servicing
Fee
S-46
Servicing
Fee Rate
S-46
Servicing
Rights Pledgee
S-47
Similar
Law
S-75
Six-Month
LIBOR
S-32
SMMEA
S-78
Special
Hazard Losses
S-58
Sponsor
S-8
Stepdown
Date
S-56
Structuring
Assumptions
S-71
Subordinated
Certificates
S-10
Subsequent
Recovery
S-56
Substitution
Adjustment
S-43
Supplemental
Interest Trust
S-63
Supplemental
Interest Trust Trustee
S-8
Swap
Account
S-63
Swap
Agreement
S-63
Swap
Provider
S-8
Targeted
Overcollateralization Amount
S-56
Termination
Price
S-47
Trigger
Event
S-56
Trust
Fund
S-42
Trustee
S-8
Trustee
Fee
S-46
Trustee
Fee Rate
S-46
Underwriters
S-78
Unpaid
Realized Loss Amount
S-62
S-82
APPENDIX
A - MORTGAGE LOAN DATA
The
Mortgage Loans are expected to have the following characteristics as of the
Cut-off Date (the sum in any column may not equal the total indicated due
to
rounding):
Cut-off
Date Principal Balances of the Mortgage Loans
Range
of Principal Balances
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
$1
to $50,000
93
$
3,166,459
0.89
%
11.075
%
662
87.62
%
$50,001
to $100,000
246
18,775,290
5.27
9.568
627
83.10
$100,001
to $150,000
294
36,853,205
10.35
8.824
619
78.47
$150,001
to $200,000
307
53,689,073
15.08
8.387
630
79.22
$200,001
to $250,000
217
48,589,053
13.65
8.329
627
81.33
$250,001
to $300,000
151
41,139,027
11.56
8.113
638
80.68
$300,001
to $350,000
120
38,869,832
10.92
8.181
627
82.39
$350,001
to $400,000
77
29,040,374
8.16
7.837
646
83.06
$400,001
to $450,000
48
20,388,209
5.73
7.968
643
82.01
$450,001
to $500,000
40
18,950,425
5.32
7.383
679
82.18
$500,001
to $550,000
33
17,266,638
4.85
7.734
664
82.92
$550,001
to $600,000
10
5,713,230
1.60
7.281
688
85.59
$600,001
to $650,000
6
3,741,321
1.05
7.451
632
76.12
$650,001
to $700,000
5
3,437,426
0.97
7.250
663
83.80
$700,001
to $750,000
5
3,681,301
1.03
7.773
680
82.76
$750,001
to $800,000
5
3,889,887
1.09
7.697
660
77.29
$800,001
to $850,000
6
5,012,030
1.41
7.700
676
78.82
$900,001
to $950,000
3
2,773,006
0.78
6.927
661
83.05
$950,001
to $1,000,000
1
997,646
0.28
7.990
590
80.00
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
A-1
Credit
Scores of the Mortgage Loans
Range
of Credit Scores
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
1
to
500
3
$
426,351
0.12
%
10.035
%
500
69.50
%
501
to 520
35
5,948,968
1.67
10.515
510
66.92
521
to 540
64
11,836,412
3.33
9.421
532
75.20
541
to 560
107
21,830,519
6.13
8.787
551
76.18
561
to 580
130
25,137,010
7.06
8.569
570
76.68
581
to 600
180
36,065,431
10.13
8.738
590
84.13
601
to 620
208
43,995,915
12.36
8.327
610
81.41
621
to 640
203
42,570,786
11.96
8.191
631
82.58
641
to 660
212
47,584,159
13.37
8.110
650
82.10
661
to 680
158
33,980,966
9.55
8.026
670
83.41
681
to 700
120
27,773,364
7.80
7.880
690
83.82
701
to 720
89
20,894,447
5.87
7.564
710
83.66
721
to 740
59
13,276,693
3.73
7.442
730
82.28
741
to 760
43
9,177,739
2.58
7.276
750
78.39
761
to 780
36
9,910,790
2.78
7.192
772
81.34
781
to 800
16
4,085,459
1.15
7.061
790
75.60
801
or greater
4
1,478,424
0.42
8.049
814
79.34
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
Original
Terms to Maturity of the Mortgage Loans
Original
Term (months)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
121
to 180
143
$
8,820,186
2.48
%
10.419
%
656
85.44
%
181
to 240
10
788,811
0.22
8.225
678
67.17
301
to 360
1,461
334,727,559
94.03
8.151
638
80.61
421
to 480
53
11,636,877
3.27
8.781
621
95.49
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
A-2
Remaining
Terms to Maturity of the Mortgage Loans
Remaining
Term (months)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
121
to 180
143
$
8,820,186
2.48
%
10.419
%
656
85.44
%
181
to 240
10
788,811
0.22
8.225
678
67.17
301
to 360
1,461
334,727,559
94.03
8.151
638
80.61
421
to 480
53
11,636,877
3.27
8.781
621
95.49
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
Property
Types of the Mortgage Loans
Property
Type
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
Single
Family
1,184
$
241,791,160
67.92
%
8.259
%
633
80.73
%
PUD
266
62,723,994
17.62
8.127
637
82.79
Condominium
126
25,698,703
7.22
8.280
654
81.14
2-Family
66
17,885,781
5.02
8.083
680
82.41
3-Family
16
4,841,752
1.36
8.445
680
80.84
4-Family
8
2,656,511
0.75
7.859
675
78.27
Townhouse
1
375,532
0.11
8.050
622
80.00
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
Occupancy
Status of the Mortgage Loans(1)
Occupancy
Status
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
Primary
1,498
$
322,647,571
90.64
%
8.207
%
635
81.27
%
Non-Owner
Occupied
146
29,023,728
8.15
8.376
668
80.42
Second
Home
23
4,302,135
1.21
8.780
647
80.16
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
(1)
Based
on a representation made by the borrower at the time of
origination.
A-3
Purpose
of the Mortgage Loans
Purpose
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
Equity
Refinance
960
$
216,583,677
60.84
%
8.205
%
628
78.23
%
Purchase
583
113,236,482
31.81
8.356
655
86.96
Rate/Term
Refinance
124
26,153,274
7.35
7.866
652
80.71
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
Mortgage
Interest Rates of the Mortgage Loans as of the Cut-off
Date
Range
of Mortgage Interest Rates (%)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
5.5001%
to 6.0000%
13
$
3,855,718
1.08
%
5.894
%
708
68.84
%
6.0001%
to 6.5000%
78
23,342,546
6.56
6.344
686
73.25
6.5001%
to 7.0000%
185
49,487,876
13.90
6.837
669
76.28
7.0001%
to 7.5000%
185
50,458,950
14.17
7.322
653
78.78
7.5001%
to 8.0000%
221
57,056,617
16.03
7.813
638
79.65
8.0001%
to 8.5000%
169
40,832,202
11.47
8.307
632
84.18
8.5001%
to 9.0000%
239
49,378,288
13.87
8.809
621
85.81
9.0001%
to 9.5000%
127
22,917,436
6.44
9.288
623
89.74
9.5001%
to 10.0000%
166
26,199,254
7.36
9.802
609
88.15
10.0001%
to 10.5000%
64
9,031,416
2.54
10.315
604
85.27
10.5001%
to 11.0000%
65
7,997,968
2.25
10.788
601
80.45
11.0001%
to 11.5000%
50
6,584,756
1.85
11.347
567
71.92
11.5001%
to 12.0000%
57
6,025,883
1.69
11.799
597
76.46
12.0001%
to 12.5000%
30
1,714,622
0.48
12.278
632
89.64
12.5001%
to 13.0000%
11
777,666
0.22
12.875
595
78.70
13.5001%
to 14.0000%
6
271,457
0.08
13.689
674
89.30
14.0001%
to 14.5000%
1
40,778
0.01
14.500
754
99.79
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
A-4
Combined
Loan-to-Value Ratios of the Mortgage Loans
Range
of Combined Loan-to-Value Ratios (%)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
0.01%
to 50.00%
80
$
10,846,262
3.05
%
8.148
%
615
38.49
%
50.01%
to 55.00%
40
8,008,378
2.25
7.806
629
53.37
55.01%
to 60.00%
55
11,981,851
3.37
7.873
619
58.30
60.01%
to 65.00%
66
13,071,871
3.67
8.497
605
63.25
65.01%
to 70.00%
103
22,444,163
6.31
8.301
614
68.65
70.01%
to 75.00%
90
19,306,471
5.42
7.935
630
73.58
75.01%
to 80.00%
405
106,533,578
29.93
7.670
658
79.63
80.01%
to 85.00%
140
31,475,813
8.84
8.200
621
84.26
85.01%
to 90.00%
269
60,550,233
17.01
8.444
634
89.52
90.01%
to 95.00%
125
29,889,196
8.40
8.568
641
94.73
95.01%
to 100.00%
294
41,865,615
11.76
9.329
648
99.89
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
A-5
Geographic
Distribution of the Mortgage Loans
Location
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
CA
291
$
93,749,078
26.34
%
7.933
%
651
79.24
%
FL
270
58,784,713
16.51
8.187
631
79.30
WA
88
20,386,340
5.73
8.013
628
82.61
TX
140
18,797,476
5.28
8.744
624
87.12
MD
59
14,930,412
4.19
7.895
626
80.80
AZ
70
14,675,177
4.12
8.238
632
80.45
NY
42
12,114,354
3.40
8.172
649
73.64
IL
50
9,696,037
2.72
8.726
639
88.04
NJ
50
9,436,645
2.65
8.948
658
82.96
HI
19
7,319,052
2.06
7.230
667
75.67
PA
47
7,290,585
2.05
8.495
638
81.29
NV
39
7,096,184
1.99
8.252
634
76.86
OR
33
7,037,625
1.98
8.147
626
81.66
VA
29
6,941,981
1.95
7.873
645
81.56
CT
34
6,475,279
1.82
7.925
648
78.76
GA
35
5,338,920
1.50
8.728
618
83.81
TN
44
5,260,970
1.48
9.150
629
86.49
UT
23
4,523,070
1.27
8.235
640
80.37
MO
34
4,385,312
1.23
9.058
618
87.71
MA
26
4,018,346
1.13
8.630
655
83.44
CO
25
3,467,975
0.97
8.940
635
86.99
MI
19
2,760,203
0.78
9.072
613
91.83
ID
17
2,577,483
0.72
8.303
637
80.65
KS
16
2,394,212
0.67
8.877
631
89.23
MS
11
1,902,169
0.53
8.696
617
78.04
MN
10
1,892,281
0.53
8.478
620
82.19
LA
11
1,864,260
0.52
8.601
640
81.13
AL
13
1,644,246
0.46
8.876
607
89.77
DE
6
1,434,854
0.40
8.024
641
81.56
MT
4
1,422,945
0.40
8.971
642
85.57
IA
10
1,400,921
0.39
9.711
620
89.56
NM
10
1,327,505
0.37
8.337
615
84.67
ME
6
1,270,408
0.36
6.909
632
79.19
RI
5
1,269,533
0.36
7.253
649
81.03
NH
7
1,266,750
0.36
8.207
613
81.65
OK
10
1,188,342
0.33
8.692
635
89.29
AR
11
1,171,023
0.33
9.375
622
90.78
IN
9
1,151,195
0.32
9.499
623
88.42
NC
8
1,146,024
0.32
9.132
627
91.51
OH
9
1,069,160
0.30
7.947
667
88.49
NE
8
956,039
0.27
8.833
611
90.32
WY
3
871,944
0.24
8.101
650
88.76
DC
2
591,322
0.17
8.695
702
91.10
SC
3
463,370
0.13
8.392
606
88.12
WI
4
416,290
0.12
9.498
628
94.11
ND
1
277,455
0.08
8.990
620
90.00
WV
2
261,292
0.07
9.188
572
93.90
KY
1
132,762
0.04
9.050
551
90.00
AK
2
98,993
0.03
9.495
654
70.62
VT
1
24,923
0.01
10.125
680
90.00
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
A-6
Documentation
Levels of the Mortgage Loans(1)
Documentation
Level
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
Full
Doc
782
$
151,681,496
42.61
%
8.038
%
627
83.09
%
Stated/Stated
432
103,879,432
29.18
8.390
642
78.32
Stated
Income
250
52,022,297
14.61
8.785
655
83.18
Limited
Doc
125
33,614,369
9.44
7.811
634
80.95
NINA
64
11,578,477
3.25
8.018
701
72.78
Alternate
Doc
14
3,197,361
0.90
8.038
617
84.74
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
(1)
For
a description of each documentation level, see “Underwriting Standards” in
this free writing prospectus.
Original
Prepayment Charge Term(1)
Original
Prepayment Charge Term (months)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
0
331
$
55,855,829
15.69
%
8.961
%
636
83.48
%
6
11
1,562,665
0.44
8.550
629
92.39
12
69
18,873,540
5.30
8.318
651
75.12
24
684
156,633,917
44.00
8.320
634
82.75
36
566
122,800,090
34.50
7.753
643
78.93
60
6
247,392
0.07
11.127
670
85.15
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
(1)
As
of the Cut-off Date, the weighted average original prepayment charge
term
of the Mortgage Loans with prepayment charges is expected to be
approximately 28 months. The majority of the Mortgage Loans with
prepayment charges charge a charge of 6 months interest on 80%
of the
prepaid balance.
A-7
Original
Interest Only Term(1)
Original
Interest Only Term (months)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
0
1,446
$
295,404,052
82.98
%
8.281
%
634
81.81
%
24
15
3,317,977
0.93
10.695
581
65.87
36
3
777,000
0.22
10.914
556
63.95
60
154
42,980,804
12.07
7.889
662
79.92
84
35
10,055,725
2.82
7.451
670
77.07
120
14
3,437,875
0.97
7.201
699
74.84
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
(1)
As
of the Cut-off Date, the weighted average original interest only
term of
the Mortgage Loans is expected to be approximately 60 months.
Debt-to-Income
Ratios of the Mortgage Loans(1)
Range
of Debt-to-Income Ratios (%)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
Not
Calculated
64
$
11,578,477
3.25
%
8.018
%
701
72.78
%
0.01%
to 20.00%
62
13,628,970
3.83
8.146
627
82.47
20.01%
to 25.00%
67
12,426,435
3.49
8.209
640
81.93
25.01%
to 30.00%
102
18,435,196
5.18
8.154
632
78.20
30.01%
to 35.00%
160
31,553,377
8.86
8.091
636
79.73
35.01%
to 40.00%
219
40,811,009
11.46
8.226
632
79.14
40.01%
to 45.00%
299
64,881,141
18.23
8.293
635
81.62
45.01%
to 50.00%
418
92,908,807
26.10
8.229
638
82.52
50.01%
to 55.00%
176
41,699,222
11.71
8.277
631
82.05
55.01%
to 60.00%
100
28,050,798
7.88
8.341
651
83.63
Total:
1,667
$
355,973,433
100.00
%
8.228
%
638
81.19
%
(1)
As
of the Cut-off Date, the weighted average Debt-to-Income Ratio
is expected
to be approximately 42.29%.
A-8
The
following tables present certain statistical information relevant only to
the
Adjustable-Rate Mortgage Loans:
Gross
Margins of the Adjustable-Rate Mortgage Loans(1)
Range
of Gross Margins (%)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
1.5001%
to 2.0000%
1
$
123,413
0.05
%
6.350
%
726
65.00
%
2.5001%
to 3.0000%
8
2,131,774
0.83
7.566
707
82.96
3.0001%
to 3.5000%
1
246,500
0.10
5.950
756
85.00
3.5001%
to 4.0000%
6
1,739,740
0.68
7.051
697
84.14
4.0001%
to 4.5000%
18
4,223,080
1.65
7.238
667
75.77
4.5001%
to 5.0000%
37
7,907,910
3.08
7.410
680
78.16
5.0001%
to 5.5000%
185
37,752,618
14.72
8.400
634
86.66
5.5001%
to 6.0000%
211
48,120,978
18.76
8.548
624
79.34
6.0001%
to 6.5000%
351
95,260,865
37.15
7.973
643
81.37
6.5001%
to 7.0000%
150
36,132,194
14.09
8.491
613
80.85
7.0001%
to 7.5000%
37
8,502,933
3.32
8.875
627
80.00
7.5001%
to 8.0000%
45
12,725,094
4.96
9.217
619
88.09
8.0001%
to 8.5000%
4
840,111
0.33
9.586
630
97.03
8.5001%
to 9.0000%
1
264,732
0.10
10.510
546
90.00
9.0001%
to 9.5000%
3
292,823
0.11
11.427
540
79.96
9.5001%
to 10.0000%
1
176,596
0.07
11.910
570
95.00
Total:
1,059
$
256,441,362
100.00
%
8.281
%
634
81.89
%
(1)
As
of the Cut-off Date, the weighted average Gross Margin is expected
to be
approximately 6.1390%.
Initial
Periodic Rate Cap of the Adjustable-Rate Mortgage Loans(1)
Initial
Periodic Rate Cap (%)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
1.000%
18
$
4,199,592
1.64
%
7.701
%
659
73.83
%
1.500%
5
809,171
0.32
7.528
653
81.90
2.000%
440
102,305,760
39.89
8.192
633
79.69
3.000%
587
147,916,401
57.68
8.343
635
83.69
5.000%
6
715,939
0.28
12.249
536
62.43
6.000%
3
494,499
0.19
8.827
702
95.12
Total:
1,059
$
256,441,362
100.00
%
8.281
%
634
81.89
%
(1)
As
of the Cut-off Date, the weighted average Initial Periodic Rate
Cap is
expected to be approximately
2.5749%.
A-9
Periodic
Rate Cap of the Adjustable-Rate Mortgage Loans(1)
Periodic
Rate Cap (%)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
1.000%
771
$
189,628,598
73.95
%
8.236
%
634
82.85
%
1.500%
259
62,243,371
24.27
8.239
640
80.07
2.000%
15
2,369,629
0.92
10.349
581
66.89
3.000%
13
2,028,487
0.79
11.160
543
66.20
8.000%
1
171,278
0.07
11.500
503
70.00
Total:
1,059
$
256,441,362
100.00
%
8.281
%
634
81.89
%
(1)
As
of the Cut-off Date, the weighted average Periodic Rate Cap is
expected to
be approximately 1.1511%.
Maximum
Mortgage Interest Rate of the Adjustable-Rate Mortgage
Loans(1)
Range
of Maximum Mortgage Interest Rates (%)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
11.501%
to 12.000%
1
$
246,500
0.10
%
5.950
%
756
85.00
%
12.001%
to 12.500%
28
10,398,428
4.05
6.321
683
74.85
12.501%
to 13.000%
71
21,971,588
8.57
6.805
678
79.44
13.001%
to 13.500%
101
30,888,969
12.05
7.235
657
79.08
13.501%
to 14.000%
131
35,777,519
13.95
7.616
644
79.86
14.001%
to 14.500%
123
32,789,762
12.79
7.988
631
81.66
14.501%
to 15.000%
210
48,107,421
18.76
8.489
627
84.75
15.001%
to 15.500%
105
22,162,566
8.64
8.938
628
89.07
15.501%
to 16.000%
117
23,175,274
9.04
9.364
612
88.05
16.001%
to 16.500%
48
9,037,659
3.52
9.751
618
86.16
16.501%
to 17.000%
43
7,428,021
2.90
10.193
599
80.69
17.001%
to 17.500%
21
3,750,482
1.46
10.876
588
73.19
17.501%
to 18.000%
23
4,341,310
1.69
11.105
578
73.94
18.001%
to 18.500%
17
2,791,178
1.09
10.943
554
65.35
18.501%
to 19.000%
12
2,068,166
0.81
12.025
552
62.44
19.001%
to 19.500%
7
1,272,654
0.50
11.410
530
68.48
19.501%
to 20.000%
1
233,865
0.09
11.990
507
60.00
Total:
1,059
$
256,441,362
100.00
%
8.281
%
634
81.89
%
(1)
As
of the Cut-off Date, the weighted average Maximum Mortgage Interest
Rate
is expected to be approximately
14.5839%.
A-10
Minimum
Mortgage Interest Rate of the Adjustable-Rate Mortgage
Loans(1)
Range
of Minimum Mortgage Interest Rates (%)
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
<=
2.000
59
$
12,770,703
4.98
%
9.037
%
607
83.04
%
5.501
- 6.000
5
1,478,738
0.58
6.551
667
72.35
6.001
- 6.500
39
13,910,381
5.42
6.329
681
73.52
6.501
- 7.000
93
27,953,361
10.90
6.840
676
79.78
7.001
- 7.500
123
36,469,142
14.22
7.328
653
78.75
7.501
- 8.000
158
43,057,902
16.79
7.828
639
79.88
8.001
- 8.500
106
27,361,217
10.67
8.293
632
83.67
8.501
- 9.000
182
39,503,349
15.40
8.806
622
86.48
9.001
- 9.500
91
17,873,989
6.97
9.285
627
91.00
9.501
- 10.000
99
17,656,637
6.89
9.819
601
88.54
10.001
- 10.500
32
5,966,621
2.33
10.384
592
82.25
10.501
- 11.000
31
5,089,019
1.98
10.779
586
76.63
11.001
- 11.500
25
4,249,220
1.66
11.099
554
66.57
11.501
- 12.000
13
2,813,127
1.10
11.844
553
66.05
12.001
>=
3
287,958
0.11
12.577
574
81.92
Total:
1,059
$
256,441,362
100.00
%
8.281
%
634
81.89
%
(1)
As
of the Cut-off Date, the weighted average Minimum Mortgage Interest
Rate
is expected to be approximately
8.2363%.
A-11
Next
Adjustment Date for the Adjustable-Rate Mortgage Loans
Month
of Next Adjustment Date
Number
of
Mortgage
Loans
Aggregate
Cut-off Date Principal Balance
%
of Mortgage Loans by Cut-off Date Principal
Balance
Weighted
Average Mortgage Interest Rate (%)
Weighted
Average Credit Score
Weighted
Average Combined Loan-to-Value Ratio (%)
June
2007
1
$
124,970
0.05
%
11.750
%
576
54.80
%
July
2007
2
446,000
0.17
7.670
681
84.95
September
2007
4
743,043
0.29
9.081
608
70.36
October
2007
2
235,770
0.09
8.813
562
62.41
November
2007
1
130,400
0.05
7.540
584
80.00
March
2008
2
170,993
0.07
8.439
555
82.08
April
2008
3
480,592
0.19
8.896
523
86.44
May
2008
2
426,645
0.17
9.384
515
81.27
June
2008
5
631,787
0.25
9.324
590
69.92
July
2008
17
4,072,263
1.59
9.928
573
69.41
August
2008
9
1,225,707
0.48
9.624
570
79.77
September
2008
9
2,094,315
0.82
9.228
592
78.94
October
2008
146
34,863,632
13.60
8.553
632
81.01
November
2008
66
15,711,247
6.13
8.424
635
84.23
December
2008
91
27,047,746
10.55
8.113
641
83.87
January
2009
94
26,326,900
10.27
8.210
632
82.28
February
2009
134
27,309,164
10.65
8.559
623
86.98
March
2009
214
48,889,676
19.06
8.277
640
81.43
May
2009
2
294,504
0.11
9.174
520
90.00
June
2009
1
323,000
0.13
7.950
614
95.00
August
2009
2
872,614
0.34
9.383
735
96.76
September
2009
2
394,389
0.15
8.923
608
95.61
October
2009
17
4,281,437
1.67
8.397
617
77.99
November
2009
17
5,489,649
2.14
8.086
623
77.40
December
2009
22
6,233,246
2.43
7.257
652
81.53
January
2009
19
6,570,681
2.56
8.037
632
81.28
February
2010
29
5,575,296
2.17
8.727
603
83.62
March
2010
71
14,645,159
5.71
8.043
640
79.96
April
2010
1
134,635
0.05
7.875
789
90.00
June
2009
1
53,290
0.02
9.375
642
80.00
September
2011
1
247,201
0.10
6.875
599
79.51
October
2011
20
6,070,430
2.37
7.147
686
76.77
November
2011
39
10,130,666
3.95
7.755
657
77.88
December
2011
4
1,441,282
0.56
7.540
635
83.68
January
2012
3
1,055,547
0.41
7.102
660
78.94
February
2012
1
160,061
0.06
6.500
694
100.00
March
2012
5
1,537,424
0.60
7.061
720
84.81
Total:
1,059
$
256,441,362
100.00
%
8.281
%
634
81.89
%
A-12
The
following tables have been prepared based on the assumptions described in
this
prospectus supplement under “Yield, Prepayment and Maturity Considerations” and
should be read in conjunction with that section.
Percentage
of Original Principal Balance Outstanding(1)
at the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
17.53
1.81
1.27
1.00
0.83
0.70
0.54
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates
to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
B-1
Percentage
of Original Principal Balance Outstanding(1)
at the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
28.24
6.90
4.51
3.00
2.03
1.70
1.28
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates
to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
B-2
Percentage
of Original Principal Balance Outstanding(1)
at the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
29.65
13.28
8.79
6.38
3.73
2.35
1.49
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
B-3
Percentage
of Original Principal Balance Outstanding(1)
at the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
29.03
8.70
5.77
4.78
4.90
3.75
1.76
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates
to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
B-4
Percentage
of Original Principal Balance Outstanding(1)at
the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
29.00
8.70
5.76
4.62
4.63
3.90
1.82
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates
to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
B-5
Percentage
of Original Principal Balance Outstanding(1)
at the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
28.98
8.70
5.75
4.54
4.28
3.82
1.80
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates
to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
B-6
Percentage
of Original Principal Balance Outstanding(1)
at the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
28.96
8.70
5.75
4.50
4.12
3.60
1.73
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates
to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
B-7
Percentage
of Original Principal Balance Outstanding(1)
at the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
28.94
8.70
5.75
4.46
4.00
3.45
1.69
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates
to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
B-8
Percentage
of Original Principal Balance Outstanding(1)
at the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
28.93
8.70
5.75
4.44
3.91
3.33
1.67
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates
to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
B-9
Percentage
of Original Principal Balance Outstanding(1)
at the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
28.92
8.70
5.75
4.41
3.84
3.25
1.63
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates
to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
B-10
Percentage
of Original Principal Balance Outstanding(1)
at the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
28.92
8.70
5.75
4.39
3.79
3.18
1.63
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates
to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
B-11
Percentage
of Original Principal Balance Outstanding(1)
at the
Specified
Percentages of the Applicable Prepayment Assumption
Weighted
Avg. Life to Optional
Termination Date
(in years)(2)(3)
28.92
8.70
5.75
4.38
3.75
3.13
1.63
(1)
Rounded
to the nearest whole percentage except where otherwise indicated.
If
applicable, an * represents less than one-half of one percent but
greater
than zero.
(2)
The
weighted average life of any class of Certificates is determined
by (i)
multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of Certificates
by the number of years from the date of issuance of the Certificates
to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reduction
in
the Certificate Principal Balance of such class of
Certificates.
(3)
Assumes
an optional purchase of the Mortgage Loans on the earliest Distribution
Date on which it is permitted.
You
should carefully consider the risk factors beginning on page 7 of
this
prospectus.
The
securities of any series and the underlying assets will not be insured
or
guaranteed by any governmental agency or instrumentality or any other
entity other than as expressly described in the prospectus supplement
for
that series.
The
securities of each series will represent interests in, or will represent
debt obligations of, 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 securities
only if
accompanied by the prospectus supplement for that series. The securities
of each series are not deposits or other obligations of a bank and
are not
insured by the FDIC.
Each
Issuing Entity—
·
will
issue a series of asset-backed certificates or asset-backed notes
that
will consist of one or more classes; and
·
may
own—
·
a
pool or pools of single family and/or multifamily mortgage loans,
which
may include sub-prime mortgage loans, and are secured by either first
or
junior liens on one- to four-family residential properties or primarily
residential properties consisting of five or more residential dwelling
units and which may include limited retail, office or other commercial
space;
·
a
pool or pools of home improvement installment sales contracts or
installment loans that are unsecured; and
·
a
pool or pools of manufactured housing installment sales contracts
and
installment loan agreements secured by a security interest in a new
or
used manufactured home, and if indicated in the accompanying prospectus
supplement, by real property.
Each
Series of Securities—
·
will
represent ownership interest in the related issuing entity or will
represent debt obligations of the related issuing entity;
·
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 accompanying prospectus supplement; and
·
will
be paid only from the assets of the related issuing
entity.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved the securities or determined that this prospectus is accurate or
complete. Any representation to the contrary is a criminal
offense.
IMPORTANT
NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE ACCOMPANYING
PROSPECTUS SUPPLEMENT
1
SUMMARY
OF PROSPECTUS
2
RISK
FACTORS
7
Risks
Associated with the Securities
7
Risks
Associated with the Assets
12
DESCRIPTION
OF THE TRUST FUNDS
18
Assets
18
Mortgage
Loans
19
Unsecured
Home Improvement Loans
21
Contracts
22
Pre-Funding
Account
22
Accounts
23
USE
OF PROCEEDS
23
YIELD
CONSIDERATIONS
23
General
23
Pass-Through
Rate and Interest Rate
23
Timing
of Payment of Interest
24
Payments
of Principal; Prepayments
24
Prepayments—Maturity
and Weighted Average Life
25
Other
Factors Affecting Weighted Average Life
26
THE
DEPOSITOR
28
THE
SPONSOR
29
DESCRIPTION
OF THE SECURITIES
30
General
30
Distributions
30
Available
Distribution Amount
31
Distributions
of Interest on the Securities
32
Distributions
of Principal of the Securities
32
Categories
of Classes of Securities
33
Components
36
Distributions
on the Securities of Prepayment Charges
36
Allocation
of Losses and Shortfalls
36
Advances
in Respect of Delinquencies
36
Reports
to Securityholders
37
Termination
39
Definitive
Form
40
Book-Entry
Registration and Definitive Securities
40
Mandatory
Auction of Certificates
46
DESCRIPTION
OF THE AGREEMENTS
47
Agreements
Applicable to a Series
47
Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements
47
Material
Terms of the Indenture
62
DESCRIPTION
OF CREDIT SUPPORT
64
Subordination
65
Limited
Guarantee
66
Financial
Guaranty Insurance Policy or Surety Bond
66
Letter
of Credit
66
Pool
Insurance Policy
67
Special
Hazard Insurance Policy
68
Mortgagor
Bankruptcy Bond
68
Reserve
Fund
69
Cross
Collateralization
69
Overcollateralization
69
Excess
Interest
69
CASH
FLOW AGREEMENTS
70
Guaranteed
Investment Contracts
70
Yield
Maintenance Agreements
70
Swap
Agreements
70
CERTAIN
LEGAL ASPECTS OF MORTGAGE LOANS
71
General
71
Types
of Mortgage Instruments
71
Interest
in Real Property
72
Condominiums
72
Cooperatives
72
Leaseholds
73
Land
Sale Contracts
73
Foreclosure
74
Junior
Mortgages
77
Rights
of Redemption
77
Anti-Deficiency
Legislation, the Bankruptcy Code and Other Limitations on
Lenders
78
Enforceability
of Certain Provisions
80
Environmental
Considerations
80
Due-on-Sale
Clauses
82
Prepayment
Charges
82
Subordinate
Financing
82
Applicability
of Usury Laws
83
Alternative
Mortgage Instruments
83
Homeowners
Protection Act of 1998
84
Texas
Home Equity Loans
84
Servicemembers
Civil Relief Act
84
Forfeiture
for Drug, RICO and Money Laundering Violations
85
CERTAIN
LEGAL ASPECTS OF THE CONTRACTS
85
General
85
Security
Interests in the Manufactured Homes
86
Enforcement
of Security Interests in Manufactured Homes
87
Servicemembers
Civil Relief Act
87
Consumer
Protection Laws
88
Transfers
of Manufactured Homes; Enforceability of Due-on-Sale
Clauses
88
Applicability
of Usury Laws
88
FEDERAL
INCOME TAX CONSEQUENCES
88
General
88
REMICS
90
i
Grantor
Trust Funds
111
Standard
Securities
111
Stripped
Securities
114
Partnership
Trust Funds
117
STATE
AND OTHER TAX CONSEQUENCES
122
ERISA
CONSIDERATIONS
123
LEGAL
INVESTMENT
126
METHODS
OF DISTRIBUTION
128
LEGAL
MATTERS
129
FINANCIAL
INFORMATION
129
RATING
129
Reports
to Securityholders
129
WHERE
YOU CAN FIND MORE INFORMATION
130
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
130
INDEX
OF PROSPECTUS DEFINITIONS
131
ii
IMPORTANT
NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information
is provided to you about the securities 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
securities, including your series, and (b) the accompanying prospectus
supplement, which will describe the specific terms of your series of securities,
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 securities.
The
securities are not being offered in any state where the offer is not permitted.
The depositor does not claim that the information in this prospectus or the
accompanying prospectus supplement is accurate as of any date other than the
dates stated on their respective covers.
Cross-references
are included in this prospectus and in the accompanying prospectus supplement
to
captions in these materials where you can find further related discussions.
The
table of contents in this prospectus and the table of contents included in
the
accompanying prospectus supplement provide the pages on which these captions
are
located.
You
can
find a listing of the pages where capitalized terms used in this prospectus
are
defined under the caption “Index of Prospectus Definitions” beginning on page
131 in this prospectus.
The
depositor’s principal executive office is located at 214 North Tryon Street,
Charlotte, North Carolina28255 and the depositor’s telephone number is
(704) 386-2400.
1
SUMMARY
OF PROSPECTUS
This
summary highlights selected information from this document and does not contain
all of the information that you need to consider in making an investment
decision. Please read this entire prospectus and the accompanying prospectus
supplement carefully to understand all of the terms of a series of
securities.
This
summary provides an overview of certain calculations, cash flows and other
information to aid your understanding of the terms of the securities and is
qualified by the full description of these calculations, cash flows and other
information in the prospectus and the prospectus supplement.
RELEVANT
PARTIES FOR EACH SERIES OF SECURITIES
Title
of Securities
Asset-backed
certificates and asset-backed notes issuable in series.
Depositor
Asset
Backed Funding Corporation, a wholly-owned indirect subsidiary of Bank of
America Corporation. The depositor will acquire the underlying assets from
the
sponsor, and will transfer them to each trust. It is not expected that the
depositor will have any business operations other than offering asset-backed
certificates and asset-backed notes and related activities.
Issuing
Entity
With
respect to each series of certificates and/or notes, the trust to be formed
pursuant to either a pooling and servicing agreement or a deposit trust
agreement.
Sponsor
Bank
of
America, National Association or another entity named in the related prospectus
supplement. The sponsor will sell the underlying assets to the depositor on
the
closing date specified in the related prospectus supplement by means of a
purchase agreement between the sponsor and the depositor. The sponsor may be
an
affiliate of the depositor.
Servicer
The
entity or entities named as servicer in the related prospectus supplement.
Each
servicer will perform certain servicing functions related to the underlying
assets serviced by it in accordance with the related pooling and servicing
agreement or underlying servicing agreement. A servicer may be an affiliate
of
the depositor.
Master
Servicer
The
entity, if any, named as master servicer in the related prospectus supplement
that will perform certain administration, calculation and reporting functions
with respect to the trust and will supervise the servicers. The master servicer
may be an affiliate of the depositor.
Trustee
/ Indenture Trustee
The
entity named as trustee or indenture trustee in the related prospectus
supplement. The trustee or indenture trustee generally will be responsible
under
each pooling and servicing agreement or indenture for providing administrative
services on behalf of the trust for a series. To the extent specified in the
related prospectus supplement, a securities administrator may perform certain
of
the duties of the trustee.
RELEVANT
DATES
Cut-off
Date
The
date
specified in the related prospectus supplement which generally represents the
first date after which payments on or collection related to the underlying
assets, together with any proceeds thereof, will begin to be paid to the issuing
entity.
Closing
Date
The
date
when the certificates and/or notes of any series are initially issued as
specified in the related prospectus supplement.
Distribution
Date
The
monthly, quarterly or other periodic date specified in the related prospectus
supplement on which distributions will be made to holders of the certificates
and/or notes.
2
DESCRIPTION
OF SECURITIES
Each
series of certificates will be issued pursuant to a pooling and servicing
agreement and will include one or more classes representing an ownership
interest in a segregated pool of mortgage loans, unsecured home improvement
loans and/or manufactured housing installment sales contracts and other assets
of the trust. If a series of securities includes notes, such notes will
represent debt obligations of the related trust fund formed pursuant to a
deposit trust agreement and will be secured by the assets of the trust pursuant
to an indenture. A class of securities 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 related prospectus supplement, from
any credit enhancements or cash flow agreements described in this
prospectus.
See
“Description of the Securities” in this prospectus.
Interest
Distributions
For
each
series of securities, interest on each class of securities (other than a class
of securities entitled to receive only principal) will accrue during each period
specified in the prospectus supplement and will be distributed to the holders
of
the related classes of securities on each distribution date in accordance with
the particular terms of each class of securities. The terms of each class of
securities will be described in the related prospectus supplement.
See
“Description of the Securities—Distributions of Interest on the Securities” in
this prospectus.
Principal
Distributions
For
each
series of securities, principal payments (including prepayments) on the related
mortgage loans, unsecured home improvement loans and/or manufactured housing
installment sales contracts will be distributed to holders of the related
securities or otherwise applied as described in the related prospectus
supplement on each distribution date. Distributions in reduction of principal
balance will be allocated among the classes of securities of a series in the
manner specified in the applicable prospectus supplement.
See
“Description of the Securities—Distribution of Principal of the Securities” in
this prospectus.
Denominations
Each
class of securities of a series will be issued in the minimum denominations
set
forth in the related prospectus supplement.
Registration
of the Securities
The
securities will be issued either:
·
in
book-entry form initially held through The Depository Trust Company
in the
United States, or Clearstream or Euroclear in Europe;
or
·
in
fully registered, certificated
form.
See
“Description of the Securities—General” and “—Book-Entry Registration and
Definitive Securities” in this prospectus.
ASSETS
OF THE TRUST
The
trust
related to each series will consist primarily of any of the following
assets:
·
a
segregated pool of single family and/or multifamily mortgage loans
which
may include sub-prime mortgage
loans;
·
home
improvement installment sales contracts or installment loans that
are
unsecured;
3
·
manufactured
housing installment sales contracts and installment loan agreements;
and
·
certain
other property.
You
should refer to the applicable prospectus supplement for the precise
characteristics or expected characteristics of the assets and a description
of
the other property, such as cash flow agreements or derivative instruments,
if
any, included in a particular trust.
See
“Description of the Trust Funds” in this prospectus.
OPTIONAL
TERMINATION OF THE TRUST
The
related prospectus supplement may provide that the party specified in the
related prospectus supplement (which may be a securityholder) may
·
repurchase
all or part of the assets in the trust fund and thereby cause early
retirement of some or all of the securities under the circumstances
and in
the manner specified in the related prospectus supplement;
or
·
auction
all or part of the assets in the trust fund and thereby cause early
retirement of the some or all of securities under the circumstances
and in
the manner specified in the related prospectus
supplement.
If
an
election is made to treat the issuing entity (or one or more segregated pools
of
assets of such issuing entity) as one or more “real estate mortgage investment
conduits,” any optional termination or redemption will be permitted only
pursuant to a “qualified liquidation,” as defined under Section 860F of the
Internal Revenue Code of 1986, as amended.
See
“Description of the Securities—Termination” and “Yield Considerations” in this
prospectus.
PREFUNDING
ACCOUNT
The
related prospectus supplement may provide that the depositor deposit a specified
amount in a pre-funding account on the date the securities are issued. In this
case, the deposited funds may only be used to acquire the additional assets
for
the trust during a set period after the initial issuance of the securities.
Any
amounts remaining in the account at the end of the period will be distributed
as
a prepayment of principal to the holders of the related securities.
See
“Description of the Trust Funds—Prefunding Account” in this
prospectus.
CREDIT
ENHANCEMENT
If
so
specified in the applicable prospectus supplement, the securities 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:
·
overcollateralization
·
excess interest
·
surety bond
·
cross-collateralization
·
financial guaranty insurance policy
·
reserve fund
·
spread account
·
mortgage pool insurance policy
·
letter of credit
·
limited guarantee
Any
credit support will be described in detail in the applicable prospectus
supplement.
4
See
“Description of Credit Support” in this prospectus.
In
addition, if specified in the applicable prospectus supplement, amounts received
under one or more guaranteed investment contracts, swap agreements or interest
rate cap or floor agreements (also called yield maintenance agreements) may
also
be used to provide credit enhancement for one or more classes of a series.
See
“Cash Flow Agreements” in this prospectus.
RATING
OF SECURITIES
The
securities of any series will not be offered pursuant to this prospectus and
a
prospectus supplement unless each offered security is rated in one of the four
highest rating categories by at least one nationally recognized statistical
rating agency.
·
A
security rating is not a recommendation to buy, sell or hold the
securities on 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 securities.
See
“Risk
Factors—Risks Associated with the Securities—Ratings Assigned to the Securities
Will Have Limitations” and “Ratings” in this prospectus.
TAX
STATUS OF THE SECURITIES
The
securities of each series offered will be:
·
regular
interests and residual interests in a trust fund treated as a
REMIC;
·
interests
in a trust fund treated as a grantor
trust;
·
interests
in a trust fund treated as a partnership;
or
·
debt
obligations secured by assets of a
trust.
·
If
one or more REMIC elections are made, securities that are regular
interests will be treated as newly issued debt instruments of the
REMIC
for most federal income tax purposes and must be accounted for under
an
accrual method of accounting. Securities 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
security having taxable income without a corresponding distribution
of
cash to pay taxes currently due.
For
additional information see “Federal Income Tax Consequences” in this prospectus
and in the prospectus supplement.
ERISA
CONSIDERATIONS
If
you
are a fiduciary of any employee benefit plan or arrangement, including an
individual retirement account, subject to the Employee Retirement Income
Security Act of 1974, as amended, the Internal Revenue Code of 1986, as amended,
or any federal, state or local law which is materially similar to ERISA or
the
Code, you should carefully review with your legal advisors whether the purchase
or holding of securities could give rise to a transaction that is prohibited
or
not otherwise permissible under ERISA, the Code or similar law.
For
additional information see “ERISA Considerations” in this prospectus and in the
prospectus supplement.
5
LEGAL
INVESTMENT
The
applicable prospectus supplement will specify whether the class or classes
of
securities offered will constitute “mortgage related securities” for purposes of
the Secondary Mortgage Market Enhancement Act of 1984, as amended. If your
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities, then
you
may be subject to restrictions on investment in the securities. You should
consult your own legal advisors for assistance in determining the suitability
of
the securities for you and the consequences of the purchase, ownership and
sale
of the securities.
For
additional information see “Legal Investment” in this prospectus and in the
prospectus supplement.
6
RISK
FACTORS
You
should consider, among other things, the following factors in connection with
the purchase of securities as well as the specific risk discussed in the
applicable prospectus supplement under “Risk Factors.”
Risks
Associated with the Securities
Securities
May Not be Liquid.
The
liquidity of your securities may be limited. You should consider
that:
·
a
secondary market for the securities 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 securities of any
series;
·
the
prospectus supplement for any series of securities may indicate that
an
underwriter intends to establish a secondary market in the securities
of
that series, but no underwriter will be obligated to do so;
and
·
the
securities generally will not be listed on any securities
exchange.
The
secondary market for mortgage-backed securities has experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity can have
a
severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit, or interest rate risk (such as securities
that
receive only payments of principal or interest or subordinated securities),
or
that have been structured to meet the investment requirements of limited
categories of investors. Consequently, you may not be able to sell your
securities readily or at prices that will enable you to realize your desired
yield. The market values of the securities are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to
you.
Limited
Source of Payments - No Recourse to Depositor, Sponsor, Master Servicer,
Servicer or Trustee.
Except
for any related insurance policies and any reserve fund or other external credit
enhancement described in the applicable prospectus supplement:
·
the
assets included in the related trust fund will be the sole source
of
payments on the securities of a
series;
·
the
securities of any series will not represent an interest in or obligation
of the depositor, the sponsor, the master servicer, the servicer,
the
trustee or any of their affiliates, except for any representing parties’
limited obligations relating to certain breaches of its representations
and warranties and limited obligations of the servicer with respect
to its
servicing obligations; and
·
neither
the securities of any series nor the related underlying assets will
be
guaranteed or insured by any governmental agency or instrumentality
or any
other entity.
Consequently,
in the event that payments on the assets underlying your series of securities
are insufficient or otherwise unavailable to make all payments required on
your
securities, there will be no recourse to the depositor, the sponsor, the master
servicer, the servicer, the trustee or any of their affiliates or, except as
specified in the applicable prospectus supplement, any other
entity.
Credit
Enhancement is Limited in Amount and Coverage.
With
respect to each series of securities, credit enhancement may be provided in
limited amounts to cover certain types of losses on the underlying assets.
Credit enhancement will be provided in one or more of the forms referred to
in
this prospectus, including, but not limited to: subordination of other classes
of securities of the same series; excess interest; overcollateralization;
cross-collateralization; a financial guaranty insurance policy; a reserve fund;
a surety bond; a spread account; a mortgage pool insurance policy; a letter
of
credit; a limited guarantee; or any combination of the preceding types of credit
enhancement. See
“Description of Credit Support” in this prospectus.
In
addition, if specified in the applicable prospectus supplement, amounts received
under any cash flow agreement described under “Description of the
Certificates—Cash Flow Agreements” may also be used to provide credit
enhancement for one or more classes of certificates.
7
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;
and
·
the
credit enhancement may provide only very limited coverage as to certain
types of losses, and may provide no coverage as to certain types
of
losses.
None
of
the depositor, the sponsor, the master servicer, the servicer, the trustee
or
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 securities.
Rate
of Prepayment on Assets May Adversely Affect Average Lives and Yields on the
Securities.
The
yield on the securities of each series will depend in part on the rate of
principal payment on the assets (including prepayments, liquidations due to
defaults and asset repurchases). Such yield may be adversely affected, depending
upon whether a particular security is purchased at a premium or a discount,
by a
higher or lower than anticipated rate of prepayments on the related assets.
In
particular:
·
the
yield on principal-only or interest-only securities will be extremely
sensitive to the rate of prepayments on the related assets;
and
·
the
yield on certain classes of securities, such as companion securities,
may
be relatively more sensitive to the rate of prepayments of specified
assets than other classes of
securities.
The
rate
of prepayments on assets is influenced by a number of factors,
including:
·
the
prevailing mortgage market interest
rates;
·
local
and national economic conditions;
·
homeowner
mobility; and
·
the
ability of the borrower to obtain
financing.
If
you
are purchasing securities at a discount, and specifically if you are purchasing
principal-only securities, you should consider the risk that if principal
payments on the mortgage loans, or, in the case of any ratio strip securities,
the related mortgage loans, occur at a rate slower than you expected, your
yield
will be lower than you expected.
If
you
are purchasing securities at a premium, or are purchasing an interest-only
security, you should consider the risk that if principal payments on the
mortgage loans or, in the case of any interest-only securities entitled to
a
portion of interest paid on certain mortgage loans with higher mortgage interest
rate, 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 securities,
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.
If
you
are purchasing any inverse floating rate securities, you should also 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.
8
Timing
of Prepayments on the Mortgage Loans May Result in Interest Shortfalls on the
Securities.
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 securityholders. To partially mitigate this reduction in yield,
the
pooling agreement, indenture and/or underlying servicing agreements relating
to
a series may provide, to the extent specified in the applicable prospectus
supplement, that for specified types of principal prepayments received, the
applicable servicer or the master servicer will be obligated, on or before
each
distribution date, to pay an amount equal to the lesser of (i) the aggregate
interest shortfall with respect to the distribution date resulting from those
principal prepayments by mortgagors and (ii) all or a portion of the servicer’s
or the master servicer’s, as applicable, servicing compensation for the
distribution date as specified in the applicable prospectus supplement or other
mechanisms specified in the applicable prospectus supplement. 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
securities as described in the related prospectus supplement. No comparable
interest shortfall coverage will be provided by the servicer or the master
servicer 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 subordinated securityholders or any other credit
support arrangements described in this prospectus.
Ratings
Assigned to the Securities Will Have Limitations. The ratings assigned to your
securities will not:
· assess
the likelihood that principal prepayments (including those caused by defaults)
on the related assets will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood
of
early optional termination or redemption of the series of securities;
and
·
address
the possibility that prepayments at higher or lower rates than anticipated
by an
investor may cause such investor to experience a lower than anticipated yield
or
that an investor purchasing a security at a significant premium might fail
to
recoup its initial investment under certain prepayment scenarios.
In
addition, the ratings of any series of securities by any applicable rating
agency may be lowered following the initial issuance of the securities. The
lowering of a rating on a series or class of securities may adversely affect
the
market value of such securities and the liquidity of such securities. None
of
the depositor, the sponsor or any of their affiliates will have any obligation
to maintain any rating of any series of securities.
Book-Entry
System for Certain Classes of Securities May Decrease Liquidity and Delay
Payment.
Since
transactions in the classes of securities of a Series issued in book-entry
form
can be effected only through The Depository Trust Company, Clearstream,
Euroclear, participating organizations, indirect participants and certain
banks:
·
you
may
experience delays in your receipt of payments on book entry securities because
distributions will be made by the trustee, or a paying agent on behalf of the
trustee, to Cede & Co., as nominee for The Depository Trust Company, rather
than directly to you;
·
your
ability to pledge such securities to persons or entities that do not participate
in The Depository Trust Company, Clearstream or Euroclear may be limited due
to
the lack of a physical certificate; and
·
you
may
experience delays in your receipt of payments on book-entry securities 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.
See
“Description of the Securities—Book-Entry Registration and Definitive
Securities” in this prospectus.
Risk
of Loss May Be Greater on Subordinated Securities.
The
rights of holders of subordinated securities will be subordinate:
9
·
to
the
rights of the servicer and any master servicer (to the extent of their servicing
fees, including any unpaid servicing fees, and reimbursement for certain
unreimbursed advances and unreimbursed liquidation expenses); and
·
the
holders of senior securities to the extent described in the related prospectus
supplement.
As
a
result of the foregoing, investors must be prepared to bear the risk that
they
may be subject to delays in payment and may not recover their initial
investments in the subordinated securities. See
“Description of Credit Support” in this prospectus.
The
yields on the subordinated securities may be extremely sensitive to the loss
experience of the related assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the assets exceed the rate
and
amount of such losses assumed by an investor, the yield to maturity on the
subordinated securities may be lower than anticipated.
Special
Powers of the FDIC in the Event of Insolvency of the Bank of America, National
Association, as Sponsor, Could Delay or Reduce Distributions on the
Securities.
If
specified in the related prospectus supplement, the assets may be acquired
by
Bank of America, National Association, as sponsor. Bank of America, National
Association is a national bank whose deposits are insured to the applicable
limits by the FDIC. If Bank of America, National Association 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
it.
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
assets; or
·
request
a stay of proceedings to liquidate claims or otherwise enforce contractual
and legal remedies against Bank of America, National
Association.
If
the
FDIC were to take any of those actions, distributions on the securities could
be
delayed or reduced.
By
statute, the FDIC as conservator or receiver of Bank of America, National
Association is authorized to repudiate any “contract” of Bank of America,
National Association upon payment of “actual direct compensatory damages.” This
authority may be interpreted by the FDIC to permit it to repudiate a transfer
of
mortgage loans by Bank of America, National Association 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 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. Any transactions involving Bank of America, National Association
as
sponsor contemplated by this prospectus and the related prospectus supplement
will be structured so that this FDIC regulation should apply to the transfer
of
the assets from Bank of America, National Association to the
depositor.
10
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
Bank of
America, National Association’s transfer of the assets to the depositor. In that
event the depositor could be limited to seeking recovery based upon its security
interest in the assets. 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 Bank of America, National
Association’s transfer of the assets for a reasonable period following its
appointment as conservator or receiver for Bank of America, National
Association. If the FDIC were to refuse to recognize Bank of America, National
Association’s transfer of the assets, distributions on the related securities
could be delayed or reduced.
Insolvency
of the Depositor May Delay or Reduce Collections on Assets.
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 related
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 assets to the related trust will be
structured so that the trustee has no recourse to the depositor.
If
the
depositor were to become the subject of a proceeding under the bankruptcy laws,
a court could conclude that the transfer of the assets from the depositor to
the
trust should not be characterized as an absolute transfer, and accordingly,
that
the assets should be included as part of the depositor’s estate. Under these
circumstances, the bankruptcy proceeding could delay or reduce distributions
on
the securities. In addition, a bankruptcy proceeding could result in the
temporary disruption of distributions on the securities.
Cash
Flow Agreements and External Credit Enhancements are Subject to Third Party
Risk.
The
assets of a trust may, if specified in the related prospectus supplement,
include cash flow agreements, such as swap, cap, floor or similar agreements,
which will require the counterparty to the trust (or the trustee acting on
behalf of the trust) to make payments to the trust under the circumstances
described in the prospectus supplement. If payments on the securities of the
related series depend in part on payments to be received under one or these
agreements, the ability of the trust to make payments on the securities will
be
subject to the credit risk of the counterparty.
In
addition, the ratings assigned to the securities of a series may depend in
part
on the ratings assigned to the provider of certain types of external credit
enhancement, such as a mortgage pool insurance policy, surety bond, financial
guaranty insurance policy or limited guarantee. Any reduction in the ratings
assigned to the provider of one of these types of external credit enhancement
could result in the reduction of the ratings assigned to the securities of
the
series. A reduction in the ratings assigned to the securities of a series is
likely to affect adversely the liquidity and market value of the
securities.
See
“Description of Credit Support” and “Cash Flow Agreements” in this
prospectus.
Amounts
Received from an Auction and a Related Swap Agreement May Be Insufficient to
Assure Completion of the Auction.
If
specified in the prospectus supplement for a series, one or more classes of
securities may be subject to a mandatory auction. If you hold a class of
securities subject to a mandatory auction, on the distribution date specified
in
the related prospectus supplement for the auction your security will be
transferred to successful auction bidders, thereby ending your investment in
that security. If the security balance of your class of auction securities
plus,
if applicable, accrued interest, after application of all distributions and
realized losses on the distribution date of the auction, is greater than the
amount received in the auction, a counterparty will be obligated, pursuant
to a
swap agreement, to pay the amount of that difference to the administrator of
the
auction for distribution to the holders of the class of auction securities.
Auction bidders will be permitted to bid for all or a portion of a class of
auction securities. If the counterparty under the swap agreement defaults on
its
obligations, no bids for all or a portion of a class of auction securities
will
be accepted unless the amount of the bids are equal to the security balance
of a
class of auction securities plus, if applicable, accrued interest, after
application of all distributions and realized losses on the distribution date
of
the auction (or the pro
rata
portion
of this price). If the counterparty under the swap agreement defaults and no
bids for a class of auction securities or portion of a class are accepted or
there are no bids for the class or portion of the class, all or a portion of
the
securities of the class will not be transferred to auction bidders. In the
event
this happens, you will retain the non-transferred portion of your securities
after the distribution date for the auction.
11
See
“Description of the Securities—Mandatory Auction of the Auction Securities” in
this prospectus.
Servicing
Transfer Following Event of Default May Result in Payment Delays or
Losses.
Following the occurrence of an event of default under a pooling and servicing
agreement, indenture or underlying servicing agreement, the trustee for the
related series may, in its discretion or pursuant to direction from
securityholders, remove the defaulting master servicer or servicer and succeed
to its responsibilities, or may petition a court to appoint a successor master
servicer or servicer. The trustee or the successor master servicer or servicer
will be entitled to reimbursement of its costs of effecting the servicing
transfer from the predecessor master servicer or servicer, or from the assets
of
the related trust if the predecessor fails to pay. In the event that
reimbursement to the trustee or the successor master servicer or servicer
is
made from trust assets, the resulting shortfall will be borne by holders
of the
related securities, to the extent not covered by any applicable credit support.
In addition, during the pendency of a servicing transfer or for some time
thereafter, mortgagors of the related mortgage loans may delay making their
monthly payments or may inadvertently continue making payments to the
predecessor servicer, potentially resulting in delays in distributions on
the
related securities.
Risks
Associated with the Assets
Sub-Prime
Mortgage Loans May Experience Greater Rates of Delinquency and
Foreclosure.
All or
a portion of the mortgage loans underlying a series of securities may consist
of
mortgage loans underwritten in accordance with the underwriting for sub-prime
mortgage loans. A sub-prime mortgage loan is a mortgage loan that is ineligible
for purchase by Fannie Mae or the Freddie Mac due to borrower credit
characteristics, high loan-to-value ratios, high debt-to-income ratios, property
characteristics, loan documentation guidelines or other credit characteristics
that do not meet Fannie Mae or Freddie Mac underwriting guidelines. As a
consequence:
·
delinquencies
and foreclosures may be expected to be more likely with respect to sub-prime
mortgage loans than with respect to mortgage loans originated in accordance
with
Fannie Mae or Freddie Mac underwriting guidelines; and
·
changes
in the values of the mortgaged properties may have a greater effect on the
loss
experience of sub-prime mortgage loans than on mortgage loans originated in
accordance with Fannie Mae or Freddie Mac underwriting guidelines.
In
the
event these mortgage loans do become delinquent or subject to liquidation,
you
may face delays in receiving payment and may suffer losses if the credit
enhancements for the series are insufficient to cover the delays and
losses.
Mortgage
Loans Secured by Multifamily Properties May Experience Greater Rates of
Delinquency and Foreclosure.
The
ability of a borrower to repay a loan secured by an income-producing property
typically is dependent primarily upon the successful operation of such property
rather than upon the existence of independent income or assets of the borrower;
thus, the value of an income-producing property typically is directly related
to
the net operating income derived from such property. If the net operating income
of the property is reduced (for example, if rental or occupancy rates decline
or
real estate tax rates or other operating expenses increase), the borrower’s
ability to repay the loan may be impaired. In addition, the concentration of
default, foreclosure and loss risk for a pool of mortgage loans secured by
multifamily properties may be greater than for a pool of mortgage loans secured
by single family properties of comparable aggregate unpaid principal balance
because the pool of mortgage loans secured by multifamily properties is likely
to consist of a smaller number of higher balance loans.
12
General
Economic Conditions Affect Mortgage Loan Performance.
General
economic conditions have an impact on the ability of borrowers to repay mortgage
loans. Loss of earnings, illness and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event
of
personal bankruptcy of a borrower under a mortgage loan, it is possible that
the
holders of the related securities could experience a loss with respect to
such
mortgagor’s mortgage loan. In conjunction with a mortgagor’s bankruptcy, a
bankruptcy court may suspend or reduce the payments of principal and interest
to
be paid with respect to such mortgage loan, thus delaying the amount received
by
the holders of the related securities with respect to such mortgage loan.
Moreover, if a bankruptcy court prevents the transfer of the related mortgaged
property to the related trust, any remaining balance on such mortgage loan
may
not be recoverable.
Real
Estate Market Conditions Affect Mortgage Loan Performance.
An
investment in the securities which are secured by or represent interests
in
mortgage loans may be affected by, among other things, a decline in real
estate
values. There is no assurance that the values of the mortgaged properties
will
remain at the levels existing 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 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.
Geographic
Concentration May Increase Rates of Loss and Delinquency.
The
assets underlying certain series of securities may be concentrated in certain
regions. Any concentration may present risk considerations in addition to those
generally present for similar asset-backed securities without a concentration
in
a particular region. At various times, certain geographic regions will
experience weaker economic conditions and housing markets and, consequently,
will experience higher rates of delinquency and loss on mortgage loans
generally. In addition, certain states have experienced natural disasters,
including earthquakes, fires, floods and hurricanes, which may not be fully
insured against and may adversely affect property values. See the applicable
table or tables in Appendix A to the related prospectus supplement detailing
the
geographic concentration of assets for listings of the locations and
concentrations of assets underlying the securities of a series.
Any
deterioration in housing prices in a state or region due to adverse economic
conditions, natural disaster or other factors, and any deterioration of economic
conditions in a state or region that adversely affects the ability of borrowers
to make payments on the assets, may result in losses on the assets. Any losses
may adversely affect the yield to maturity of the related securities. Any
increase in the market value of properties located in a state or region would
reduce the combined loan-to-value ratios of the related assets and could,
therefore, make alternative sources of financing available to the borrowers
at
lower interest rates, which could result in an increased rate of prepayment
of these assets.
See
“The
Mortgage Pool” and Appendix A in the related prospectus supplement for further
information regarding the geographic concentration of the assets underlying
the
securities of any series.
Risk
of
Loss May Be Greater on Junior Mortgage Loans. Certain of the mortgage loans
underlying the securities of a series may be secured by mortgages junior or
subordinate to one or more other mortgages, and the related more senior
mortgages may not be included in the trust fund. Although little data is
available, the rate of default of second or more junior mortgage loans may
be
greater than that of mortgage loans secured by senior liens on comparable
properties. A primary risk to holders of mortgage loans secured by junior
mortgages is the possibility that adequate funds will not be received in
connection with a foreclosure of the related senior mortgage to satisfy fully
both the senior mortgage and the mortgage that is junior or subordinate. In
such
case, holders of the securities would bear:
·
the
risk of delay in distributions while a deficiency judgment against
the
borrower is obtained; and
·
the
risk of loss if the deficiency judgment is not realized
upon.
13
Moreover,
deficiency judgments may not be available in certain jurisdictions. In addition,
a junior mortgagee may not foreclose on the property securing a junior mortgage
unless it forecloses subject to the more senior mortgage.
In
servicing junior mortgages, many servicers advance funds to keep the senior
mortgage current if the mortgagor is in default thereunder, but only to the
extent that they determine such advances will be recoverable from future
payments and collections on that mortgage loan or otherwise. Such practice
may
not be followed in servicing loans more junior than second mortgages or may
be
modified at any time. The related trust will have no source of funds to satisfy
any senior mortgage or make payments due to any senior mortgagee. The junior
mortgages securing the mortgage loans are subject and subordinate to any
senior
mortgage affecting the related mortgaged property, including limitations
and
prohibitions which may be contained in such senior mortgage upon subordinate
financing.
Special
Risks of Certain Assets.
Certain
assets that may be included in the Trust may involve additional uncertainties
not present in other types of assets. Certain of the assets may provide for
escalating or variable payments that may be larger than the initial payment
amount; however, the borrowers under such assets are generally approved on
the
basis of the initial payment amount and the borrower’s income may not be
sufficient to enable them to pay the increased payment amounts. Therefore,
in
such cases the likelihood of default may increase.
Certain
of the assets underlying a series of securities may be delinquent in respect
of
the payment of principal and interest. In addition, certain of the mortgagors
under the mortgage loans underlying a series of securities may be subject
to
personal bankruptcy proceedings. Credit enhancement provided with respect
to a
particular series of securities may not cover all losses related to such
mortgage loans. Prospective investors should consider the risk that the
inclusion in a trust of delinquent assets and mortgage loans with respect
to
which the mortgagor is the subject of bankruptcy proceedings may cause the
rate
of the defaults and prepayments on such assets to increase and, in turn,
may
cause losses to exceed the available credit enhancement for such series and
affect the yield on the securities of such series. See
“The Mortgage Pool” in the related prospectus supplement.
Alternatives
to Foreclosure May Adversely Affect Yield. Certain assets underlying a series
of
securities may
become
delinquent after the closing date. A servicer may either foreclose on any such
asset or work out an agreement with the borrower if the delinquency is not
cured, which may involve waiving or modifying certain terms of the asset. If
a
servicer extends the payment period or accepts a lesser amount than stated
in
the note or contract in satisfaction of the note or contract, the yield on
the
related securities may be reduced.
Defaulted
Assets May Experience Delays in Liquidation and Liquidation Proceeds May Be
Less
than the Outstanding Principal Balance of the Asset. Even assuming the
applicable collateral provide adequate security for the assets underlying a
series of securities, substantial delays could result in connection with the
liquidation of defaulted assets. This could result in corresponding delays
in
the receipt of the related proceeds by the related trust. Further, liquidation
expenses such as legal fees, real estate taxes and maintenance and preservation
expenses will reduce the portion of liquidation proceeds payable to you. If
the
applicable collateral fails to provide adequate security for the asset, you
will
incur a loss on your investment if the credit enhancements are insufficient
to
cover the loss.
Liquidation
Expenses May be Disproportionate.
Liquidation expenses with respect to defaulted assets do not vary directly
with
the outstanding principal balance of the assets at the time of default.
Therefore, assuming that the servicer and master servicer took the same steps
in
realizing upon a defaulted asset having a small remaining principal balance
as
they would in the case of a defaulted asset having a large remaining principal
balance, the amount realized after expenses of liquidation would be smaller
as a
percentage of the outstanding principal balance of the small asset than would
be
the case with the defaulted asset having a large remaining principal balance.
Because the average outstanding principal balance of the assets is small
relative to the size of the average outstanding principal balance of the loans
in a typical pool consisting only of conventional purchase-money mortgage loans,
net liquidation proceeds on liquidated assets may also be smaller as a
percentage of the principal balance of the assets than would be the case in
a
typical pool consisting only of conventional purchase-money mortgage
loans.
14
Balloon
Payment Assets May Have a Greater Default Risk at Maturity. Certain of the
underlying a series of securities may provide for a lump-sum payment of the
unamortized principal balance of the mortgage loan at the maturity of the
asset.
See “The Mortgage Pool” in the related prospectus supplement.
Because
borrowers under this type of asset are required to make a relatively large
single payment upon maturity, it is possible that the default risk associated
with such assets is greater than that associated with fully-amortizing mortgage
loans. The ability of a mortgagor on this type of asset to repay the mortgage
loan upon maturity frequently depends upon the mortgagor’s ability:
·
to
refinance the asset, 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 related 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 related 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 securities will contain provisions protective
of the mortgagee, to the extent described in the applicable prospectus
supplement.
Increased
Risk of Loss if Assets are Delinquent.
A
portion of the assets may be delinquent upon the issuance of the related
securities. Credit enhancement provided with respect to a particular series
of
securities may not cover all losses related thereto. You should consider the
risk that the inclusion of such assets in the trust fund for a series may cause
the rate of defaults and prepayments on the assets to increase and, in turn,
may
cause losses to exceed the available credit enhancement for such series and
affect the yield on the securities of such series.
Violations
of Federal, State and Local Laws May Adversely Affect Ability to Collect on
Loans.
The
mortgage loans may also be subject to federal, state and local laws,
including:
·
the
Federal Truth in Lending Act and Regulation Z promulgated under that act, which
require certain disclosures to the borrowers regarding the terms of the
residential loans;
·
the
Equal
Credit Opportunity Act and Regulation B promulgated under that act, which
prohibit discrimination on the basis of age, race, color, sex, religion, marital
status, national origin, receipt of public assistance or the exercise of any
right under the Consumer Credit Protection Act, in the extension of
credit;
15
·
the
Fair
Credit Reporting Act, which regulates the use and reporting of information
related to the borrower’s credit experience; and
·
for
mortgage loans that were originated or closed after November 7, 1989, the
Home
Equity Loan Consumer Protection Act of 1988, which requires additional
disclosures, limits changes that may be made to the loan documents without
the
borrower’s consent. This act also restricts a lender’s ability to declare a
default or to suspend or reduce a borrower’s credit limit to certain enumerated
events.
Certain
mortgage loans are subject to the Riegle Community Development and Regulatory
Improvement Act of 1994 which incorporates the Home Ownership and Equity
Protection Act of 1994. These provisions may:
· impose
additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with high interest rates or high up-front
fees
and charges;
· apply
on
a mandatory basis to all mortgage loans originated on or after October 1,1995;
·
impose
specific statutory liabilities on creditors who fail to comply with their
provisions; and
·
affect
the enforceability of the related loans.
In
addition, any assignee of the creditor would generally be subject to all
claims
and defenses that the consumer could assert against the creditor, including,
without limitation, the right to rescind the mortgage loan. Violations of
certain provisions of these laws may limit the ability of the servicer to
collect all or part of the principal of or interest on the mortgage loans,
may
entitle the mortgagor to a refund of amounts previously paid and may subject
the
depositor, the servicer, the master servicer or the trust to damages and
administrative enforcement. As a result, these violations or alleged violations
could result in shortfalls in the distributions due on your
securities.
In
the
past few years, a number of legislative proposals have been introduced at both
the federal, state and local level that are designed to discourage predatory
lending practices. Some states have enacted, or may enact, laws or regulations
that prohibit inclusion of some provisions in mortgage loans that have mortgage
interest rates or origination costs in excess of prescribed levels, and require
that borrowers be given certain disclosures prior to the consummation of such
mortgage loans. In some cases, state and local laws may impose requirements
and
restrictions greater than those in the Home Ownership and Equity Protection
Act
of 1994. Lawsuits have been brought in various states making claims against
assignees of high cost loans for violations of state law. Named defendants
in
these cases include numerous participants within the secondary mortgage market,
including some securitization trusts. The seller of the assets, either directly
or indirectly, to the depositor will make representations and warranties with
respect to each asset relating to compliance with federal, state and local laws
at the time of origination, that none of the mortgage loans are subject to
the
Home Ownership and Equity Protection Act of 1994 and that none of the mortgage
loans are “high cost” loans within the meaning of such federal, state and local
laws. In the event of a breach of any such representations, the party specified
in the related prospectus supplement will be required to cure such breach or
repurchase or replace the affected mortgage loan. In addition, such party will
be required to reimburse the related trust fund for any damages or costs
incurred by such trust fund as a result of a breach of the representation as
to
compliance with federal, state and local laws. To the extent Bank of America,
National Association is the sponsor of a series, it will be also make the
representations and warranties above and cure or repurchase the affected
mortgage loan and reimburse the trust fund for any costs and damages to the
extent the seller of the assets fails to do so. To the extent no party fulfills
this reimbursement obligation for financial or other reasons, shortfalls in
the
distributions due on your securities could occur. See
“Description of the Agreements—Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements—Representations and Warranties;
Repurchases” in this prospectus.
16
The
home
improvement contracts are also subject to the Preservation of Consumers’ Claims
and Defenses regulations of the Federal Trade Commission and other similar
federal and state statutes and regulations. These laws:
·
protect
the homeowner from defective craftsmanship or incomplete work by a
contractor;
·
permit
the obligated party to withhold payment if the work does not meet the quality
and durability standards agreed to by the homeowner and the contractor;
and
·
subject
any person to whom the seller of the goods assigns its consumer credit
transaction to all claims and defenses which the obligated party in a credit
sale transaction could assert against such seller.
Market
Values of Manufactured Homes May Increase the Risk of Loss.
Manufactured homes generally depreciate in value. Thus investors should expect
that, as a general matter, the market value of any manufactured home will
be
lower than the outstanding principal balance of the related installment
contract. As a result, investors must be prepared to bear the risk of loss
resulting from any delinquency or liquidation loss on the contracts in a
trust
fund, to the extent not covered by the applicable credit support.
Risk
of Loss May Be Greater on Unsecured Home Improvement Loans.
The
obligations of the borrower under any unsecured home improvement loan included
in a trust fund will not be secured by an interest in the related real estate
or
any other property. In the event of a default, the trust fund will have recourse
only against the borrower’s assets generally, along with all other general
unsecured creditors of the borrower. In a bankruptcy or insolvency proceeding,
the obligations of the borrower under an unsecured home improvement loan
may be
discharged in their entirety. As a result, the trust fund may suffer losses.
In
addition, a borrower on an unsecured home improvement loan may not demonstrate
the same degree of concern over performance of the borrower’s obligations as if
such obligations were secured by the real estate or other assets owned by
such
borrower.
Risks
of Loss May Increase Due to Defective Security Interest and Effects of Certain
Other Legal Aspects of the Contracts.
The
seller of the assets, either directly or indirectly, to the depositor will
represent that a contract is secured by a security interest in a manufactured
home. Perfection of such security interests and the right to realize upon
the
value of the manufactured homes as collateral for the contracts are subject
to a
number of federal and state laws, including the Uniform Commercial Code.
The
steps necessary to perfect the security interest in a manufactured home will
vary from state to state. Because of the expense and administrative
inconvenience involved, the servicer or the master servicer will not amend
any
certificates of title to change the lienholder specified therein from the
seller
of the assets to the trustee and will not deliver any certificate of title
to
the trustee or note thereon the trustee’s interest. Consequently, in some
states, in the absence of such an amendment, the assignment to the trustee
of
the security interest in the manufactured home may not be effective or such
security interest may not be perfected and, may not be effective against
creditors of the seller of the assets or a trustee in bankruptcy of such
seller.
In
addition, numerous federal and state consumer protection laws impose
requirements on lending under installment sales contracts and installment loan
agreements such as the contracts, and the failure by the lender or seller of
goods to comply with such requirements could give rise to liabilities of
assignees for amounts due under such agreements and claims by such assignees
may
be subject to set-off as a result of such lender’s or seller’s noncompliance.
These laws would apply to the trustee as assignee of the contracts. The seller
of the assets of the contracts will warrant that each contract complies with
all
requirements of law and will make certain warranties relating to the validity,
subsistence, perfection and priority of the security interest in each
manufactured home securing a contract. A breach of any such warranty that
materially adversely affects any contract would create an obligation of the
seller of the assets to repurchase, or if permitted by the applicable agreement,
substitute for, such contract unless such breach is cured. If the credit support
is exhausted and recovery of amounts due on the contracts is dependent on
repossession and resale of manufactured homes securing contracts that are in
default, certain other factors may limit the ability to realize upon the
manufactured home or may limit the amount realized by securityholders to less
than the amount due.
17
DESCRIPTION
OF THE TRUST FUNDS
Assets
The
primary assets of each Trust Fund (the “Assets”) will include (i) a segregated
pool of single family and/or multifamily mortgage loans which may include
sub-prime mortgage loans (the “Mortgage
Loans”),
including without limitation, Home Equity Loans, Home Improvement Contracts
and
Land Sale Contracts, (ii) home improvement installment sales contracts or
installment loans that are unsecured (the “Unsecured
Home Improvement Loans”),
(iii) manufactured housing installment sales contracts and installment loan
agreements (the “Contracts”)
or
(iv) a combination of Mortgage Loans, Unsecured Home Improvement Loans
and/or Contracts. The Mortgage Loans will not be guaranteed or insured by
the
Depositor or any of its affiliates. The Mortgage Loans will be guaranteed
or
insured by a governmental agency or instrumentality or other person only
if and
to the extent expressly provided in the related prospectus supplement. If
specified in the related prospectus supplement, the sponsor of a Series may
have
purchased the Assets from a prior holder (an “Asset
Seller”),
which
prior holder may or may not be the originator of such Mortgage Loan, Unsecured
Home Improvement Loan or Contract.
The
Assets included in the Trust Fund for a Series may be subject to various
types
of payment provisions. Such Assets may consist of (1) ”Level
Payment Assets,“
which
may provide for the payment of interest and full repayment of principal in
level
monthly payments with a fixed rate of interest computed on their declining
principal balances; (2) ”Adjustable
Rate Assets,“
which
may provide for periodic adjustments to their rates of interest to equal
the sum
(which may be rounded) of a fixed margin and an index; (3) ”Buy
Down Assets,“
which
are Assets for which funds have been provided by someone other than the related
obligors to reduce the obligors’ monthly payments during the early period after
origination of such Assets; (4) ”Increasing
Payment Assets,“
as
described below; (5) ”Interest
Reduction Assets,“
which
provide for the one-time reduction of the interest rate payable thereon;
(6) ”GEM
Assets,“
which
provide for (a) monthly payments during the first year after origination
that are at least sufficient to pay interest due thereon, and (b) an
increase in such monthly payments in subsequent years at a predetermined
rate
resulting in full repayment over a shorter term than the initial amortization
terms of such Assets; (7) ”GPM
Assets,“
which
allow for payments during a portion of their terms which are or may be less
than
the amount of interest due on the unpaid principal balances thereof, and
which
unpaid interest will be added to the principal balances of such Assets and
will
be paid, together with interest thereon, in later years; (8) ”Step-up
Rate Assets”
which
provide for interest rates that increase over time; (9) ”Balloon
Payment Assets”
which
are mortgage loans that are not fully amortizing over their terms and, thus,
will require a lump-sum payment at their stated maturity;
(10) ”Convertible
Assets”
which
are Adjustable Rate Assets subject to provisions pursuant to which, subject
to
certain limitations, the related obligors may exercise an option to convert
the
adjustable interest rate to a fixed interest rate; and (11) ”Bi-weekly
Assets,“
which
provide for obligor payments to be made on a bi-weekly basis.
The
applicable prospectus supplement will set forth the relevant index or indices
with respect to the Adjustable Rate Assets in the related Trust Fund. The
indices will be one or more of the following: one-month, three-month, six-month
or one-year LIBOR (an average of the interest rate on one-month, three-month,
six-month or one-year dollar-denominated deposits traded between banks in
London), CMT (weekly or monthly average yields of U.S. treasury short and
long-term securities, adjusted to a constant maturity), COFI (an index of the
weighted average interest rate paid by savings institutions in Nevada, Arizona
and California), MTA (a one-year average of the monthly average yields of U.S.
treasury securities) or the Prime Rate (an interest rate charged by banks for
short-term loans to their most creditworthy customers).
An
Increasing Payment Asset is an Asset that provides for monthly payments that
are
fixed for an initial period to be specified in the related prospectus supplement
and which increase thereafter (at a predetermined rate expressed as a percentage
of the monthly payment during the preceding payment period, subject to any
caps
on the amount of any single monthly payment increase) for a period to be
specified in the related prospectus supplement from the date of origination,
after which the monthly payment is fixed at a level-payment amount so as to
fully amortize the Asset over its remaining term to maturity. The scheduled
monthly payment with respect to an Increasing Payment Asset is the total amount
required to be paid each month in accordance with its terms and equals the
sum
of (1) the obligor’s monthly payments referred to in the preceding sentence
and (2) in the case of certain Increasing Payment Assets, payments made by
the respective Servicers pursuant to buy-down or subsidy agreements. The
obligor’s initial monthly payments for each Increasing Payment Asset are set at
the level-payment amount that would apply to an otherwise identical Level
Payment Asset having an interest rate a certain number of percentage points
below the Asset Rate of such Increasing Payment Asset. The obligor’s monthly
payments on each Increasing Payment Asset, together with any payments made
thereon by the related Servicers pursuant to buy-down or subsidy agreements,
will in all cases be sufficient to allow payment of accrued interest on such
Increasing Payment Asset at the related interest rate, without negative
amortization. An obligor’s monthly payments on such an Asset may, however, not
be sufficient to result in any reduction of the principal balance of such Asset
until after the period when such payments may be increased.
18
The
Securities will be entitled to payment only from the assets of the related
Trust
Fund and will not be entitled to payments in respect of the assets of any
other
trust fund established by the Depositor. If specified in the related prospectus
supplement, the assets of a Trust Fund will consist of securities representing
beneficial ownership interests in, or indebtedness of, another trust fund
that
contains the Assets.
Mortgage
Loans
General
Each
Mortgage Loan will generally be secured by a lien on (i) a one-to
four-family residential property or a security interest in shares issued
by a
cooperative housing corporation (a “Single
Family Property”
and
the
related Mortgage Loan a “Single
Family Mortgage Loan”)
or
(ii) a primarily residential property which consists of five or more
residential dwelling units, and which may include limited retail, office
or
other commercial space (a “Multifamily
Property”
and
the
related Mortgage Loan a “Multifamily
Mortgage Loan”).
Single Family Properties and Multifamily Properties are sometimes referred
to
herein collectively as “Mortgaged
Properties.”
To
the
extent specified in the related prospectus supplement, the Mortgage Loans
will
be secured by first and/or junior mortgages or deeds of trust or other similar
security instruments creating a first or junior lien on Mortgaged Property.
The
Mortgaged Properties may include stock, shares or membership certificates
issued
by private, nonprofit, cooperative housing corporations, known as “Cooperatives,”
and
in
the related proprietary leases or occupancy agreements granting exclusive
rights
to occupy specific dwelling units in such Cooperatives’ buildings. The Mortgaged
Properties may include leasehold interests in properties, the title to which
is
held by third party lessors. The term of any such leasehold shall exceed
the
term of the related mortgage note by at least five years or such other time
period specified in the related prospectus supplement. The Mortgage Loans
may
include (i) closed-end and/or revolving home equity loans or certain
balances thereof (“Home
Equity Loans”)
and/or
(ii) secured home improvement installment sales contracts and secured
installment loan agreements (“Home
Improvement Contracts”).
In
addition, the Mortgage Loans may include certain Mortgage Loans evidenced
by
contracts (“Land
Sale Contracts”)
for
the sale of properties pursuant to which the mortgagor promises to pay the
amount due thereon to the holder thereof with fee title to the related property
held by such holder until the mortgagor has made all of the payments required
pursuant to such Land Sale Contract, at which time fee title is conveyed
to the
mortgagor. The Originator of each Mortgage Loan will have been a person other
than the Depositor. The related prospectus supplement will indicate if any
person who originated the Mortgage Loans (each an “Originator”)
is an
affiliate of the Depositor. If any Originator or group of affiliated Originators
originated 10% or more of the Mortgage Loans in a Trust Fund, the applicable
prospectus supplement will disclose the identity of the Originator and, if
such
Originator or group of affiliated Originators originated 20% or more of the
Mortgage Loans, the applicable prospectus supplement will provide information
about the Originator’s form of organization and, to the extent material, a
description of the Originator’s origination program and how long it has been
engaged in originating mortgage loans of the same type. The Mortgage Loans
will
be evidenced by promissory notes (the “Mortgage Notes”) secured by mortgages,
deeds of trust or other security instruments (the “Mortgages”)
creating a lien on the Mortgaged Properties.
Combined
Loan-to-Value Ratio
The
“Combined
Loan-to-Value Ratio”
of
a
Mortgage Loan at any given time is the ratio (expressed as a percentage) of
(i) the sum of (a) the outstanding principal balance of the Mortgage
Loan at origination plus (b) in the case of a second lien Mortgage Loan,
the outstanding principal balance of the first lien on the related Mortgaged
Property at the date of origination of the Mortgage Loan over (ii) the
Value of the related Mortgaged Property. The “Value“
of
a
Mortgaged Property is generally the lesser of: (i) an amount determined by
an
appraisal done at origination of the Mortgage Loan and (ii) other than in the
case of a refinanced Mortgage Loan, the purchase price paid for the related
Mortgaged Property by the Mortgagor with the proceeds of the Mortgage Loan.
The
value of a Mortgaged Property as of the date of initial issuance of the related
Series of Securities may be less than the Value at origination and will
fluctuate from time to time based upon changes in economic conditions and the
real estate market.
19
Mortgage
Loan Information in Prospectus Supplements
Each
prospectus supplement will contain information, as of the dates specified
in
such prospectus supplement and to the extent then applicable and specifically
known to the Depositor, with respect to the Mortgage Loans, including
(i) the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Mortgage Loans as of the
applicable cut-off date (the “Cut-off
Date“)
specified in the prospectus supplement, (ii) the type of property securing
the Mortgage Loans, (iii) the occupancy status, (iv) the purpose, (v) the
documentation type, (vi) the weighted average (by principal balance) of the
original and remaining terms to maturity of the Mortgage Loans, (vii) the
earliest and latest origination date and maturity date of the Mortgage Loans,
(viii) the range of the Loan-to-Value Ratios at origination of the Mortgage
Loans, (ix) the credit scores of the Mortgagors, (x) the Mortgage Interest
Rates or range of Mortgage Interest Rates and the weighted average Mortgage
Interest Rate borne by the Mortgage Loans, (xi) the geographic distribution
of the Mortgaged Properties, (xii) information with respect to the
prepayment provisions, if any, of the Mortgage Loans, (xiii) with respect
to Mortgage Loans with adjustable Mortgage Interest Rates (“ARM
Loans”),
the
index, the frequency of the adjustment dates, the range of margins added
to the
index, and the maximum Mortgage Interest Rate or monthly payment variation
at
the time of any adjustment thereof and over the life of the ARM Loan,
(xiv) information regarding the payment characteristics of the Mortgage
Loans, including without limitation balloon payment and other amortization
provisions, (xv) the number of Mortgage Loans that are delinquent and the
number of days or ranges of the number of days such Mortgage Loans are
delinquent and (xvi) the material underwriting standards used for the
Mortgage Loans. If specific information respecting the Mortgage Loans is
not
known to the Depositor at the time Securities are initially offered, more
general information of the nature described above will be provided in the
prospectus supplement, and specific information will be set forth in a report
which will be available to purchasers of the related Securities at or before
the
initial issuance thereof and will be filed as part of a Current Report on
Form
8-K with the Commission after such initial issuance. Notwithstanding the
foregoing, the characteristics of the Mortgage Loans included in a Trust
Fund
will not vary by more than five percent (by aggregate principal balance as
of
the Cut-off Date) from the characteristics thereof that are described in
the
related prospectus supplement.
The
related prospectus supplement will specify whether the Mortgage Loans include
(i) Home Equity Loans, which may be secured by Mortgages that are junior to
other liens on the related Mortgaged Property and/or (ii) Home Improvement
Contracts originated by a home improvement contractor and secured by a Mortgage
on the related Mortgaged Property that is junior to other liens on the Mortgaged
Property. The home improvements purchased with the Home Improvement Contracts
typically include replacement windows, house siding, roofs, swimming pools,
kitchen and bathroom remodeling goods, solar heating panels, patios, decks,
room
additions and garages. The related prospectus supplement will specify whether
the Home Improvement Contracts are partially insured under Title I of the
National Housing Act of 1934 (the “National
Housing Act”)
and,
if so, the limitations on such insurance. In addition, the related prospectus
supplement will specify whether the Mortgage Loans contain certain Mortgage
Loans evidenced by Land Sale Contracts.
Payment
Provisions of the Mortgage Loans
All
of
the Mortgage Loans will provide for payments of principal, interest or both,
on
due dates that occur monthly, quarterly or semi-annually or at such other
interval as is specified in the related prospectus supplement or for payments
in
another manner described in the related prospectus supplement. Each Mortgage
Loan may provide for no accrual of interest or for accrual of interest thereon
at an interest rate (a “Mortgage
Interest Rate”)
that
is fixed over its term or that adjusts from time to time, or that may be
converted from an adjustable to a fixed Mortgage Interest Rate or a different
adjustable Mortgage Interest Rate, or from a fixed to an adjustable Mortgage
Interest Rate, from time to time pursuant to an election or as otherwise
specified on the related Mortgage Note, in each case as described in the related
prospectus supplement. Each Mortgage Loan may provide for scheduled payments
to
maturity or payments that adjust from time to time to accommodate changes in
the
Mortgage Interest Rate or to reflect the occurrence of certain events or that
adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
related prospectus supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related prospectus supplement. Each Mortgage Loan may contain
prohibitions on prepayment (a “Lock-out
Period”
and,
the date of expiration thereof, a “Lock-out
Date”)
or
require payment of a premium or a yield maintenance penalty (a “Prepayment
Charge”)
in
connection with a prepayment, in each case as described in the related
prospectus supplement. In the event that holders of any Class or Classes of
Offered Securities will be entitled to all or a portion of any Prepayment
Charges collected in respect of Mortgage Loans, the related prospectus
supplement will specify the method or methods by which any such amounts will
be
allocated. See
“—Assets” above.
20
Revolving
Credit Line Loans
As
more
fully described in the related prospectus supplement, the Mortgage Loans
may
consist, in whole or in part, of revolving Home Equity Loans or certain balances
thereof (“Revolving
Credit Line Loans”).
Interest on each Revolving Credit Line Loan, excluding introductory rates
offered from time to time during promotional periods, may be computed and
payable monthly on the average daily outstanding principal balance of such
loan.
From time to time prior to the expiration of the related draw period specified
in a Revolving Credit Line Loan, principal amounts on such Revolving Credit
Line
Loan may be drawn down (up to a maximum amount as set forth in the related
prospectus supplement) or repaid. If specified in the related prospectus
supplement, new draws by borrowers under the Revolving Credit Line Loans
will
automatically become part of the Trust Fund described in such prospectus
supplement. As a result, the aggregate balance of the Revolving Credit Line
Loans will fluctuate from day to day as new draws by borrowers are added
to the
Trust Fund and principal payments are applied to such balances and such amounts
will usually differ each day, as more specifically described in the related
prospectus supplement. Under certain circumstances, under a Revolving Credit
Line Loan, a borrower may, during the related draw period, choose an interest
only payment option, during which the borrower is obligated to pay only the
amount of interest which accrues on the loan during the billing cycle, and
may
also elect to pay all or a portion of the principal. An interest only payment
option may terminate at the end of the related draw period, after which the
borrower must begin paying at least a minimum monthly portion of the average
outstanding principal balance of the loan.
Unsecured
Home Improvement Loans
The
Unsecured Home Improvement Loans may consist of conventional unsecured home
improvement loans and FHA insured unsecured home improvement loans. The
Unsecured Home Improvement Loans will bear interest at a fixed or variable
annual percentage rate.
Unsecured
Home Improvement Loan Information in Prospectus Supplements
Each
prospectus supplement will contain information, as of the dates specified in
such prospectus supplement and to the extent then applicable and specifically
known to the Depositor, with respect to the Unsecured Home Improvement Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Unsecured Home
Improvement Loans as of the applicable Cut-Off Date, (ii) the weighted
average (by principal balance) of the original and remaining terms to maturity
of the Unsecured Home Improvement Loans, (iii) the earliest and latest
origination date and maturity date of the Unsecured Home Improvements Loans,
(iv) the interest rates or range of interest rates and the weighted average
interest rates borne by the Unsecured Home Improvement Loans, (v) the
geographic distributions of the Unsecured Home Improvement Loans,
(vi) information with respect to the prepayment provisions, if any, of the
Unsecured Home Improvement Loans, (vii) with respect to the Unsecured Home
Improvement Loans with adjustable interest rates (“ARM
Unsecured Home Improvement Loans”),
the
index, the frequency of the adjustment dates, the range of margins added to
the
index, and the maximum interest rate or monthly payment variation at the time
of
any adjustment thereof and over the life of the ARM Unsecured Home Improvement
Loan, (viii) information regarding the payment characteristics of the
Unsecured Home Improvement Loan, (ix) the number of Unsecured Home
Improvement Loans that are delinquent and the number of days or ranges of the
number of days such Unsecured Home Improvement Loans are delinquent,
(x) the material underwriting standards used for the Unsecured Home
Improvement Loans and (xi) the credit scores of the borrowers of the Unsecured
Home Improvement Loans. If specific information respecting the Unsecured Home
Improvement Loans is not known to the Depositor at the time Securities are
initially offered, more general information of the nature described above will
be provided in the prospectus supplement, and specific information will be
set
forth in a report which will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as part
of a Current Report on Form 8-K with the Commission after such initial issuance.
Notwithstanding the foregoing, the characteristics of the Unsecured Home
Improvement Loans included in a Trust Fund will not vary by more than five
percent (by aggregate principal balance as of the Cut-off Date) from the
characteristics thereof that are described in the related prospectus
supplement.
21
Contracts
General
To
the
extent provided in the related prospectus supplement, each Contract will
be
secured by a security interest in a new or used manufactured home (each,
a
“Manufactured
Home”).
Such
prospectus supplement will specify the states or other jurisdictions in which
the Manufactured Homes are located as of the related Cut-off Date. The method
of
computing the Loan-to-Value Ratio of a Contract will be described in the
related
prospectus supplement.
Contract
Information in Prospectus Supplements
Each
prospectus supplement will contain certain information, as of the dates
specified in such prospectus supplement and to the extent then applicable
and
specifically known to the Depositor, with respect to the Contracts, including
(i) the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Contracts as of the applicable
Cut-off Date, (ii) whether the Manufactured Homes were new or used as of
the origination of the related Contracts, (iii) the weighted average (by
principal balance) of the original and remaining terms to maturity of the
Contracts, (iv) the earliest and latest origination date and maturity date
of the Contracts, (v) the range of the Loan-to-Value Ratios at origination
of the Contracts, (vi) the Contract Rates or range of Contract Rates and
the weighted average Contract Rate borne by the Contracts, (vii) the state
or states in which most of the Manufactured Homes are located at origination,
(viii) information with respect to the prepayment provisions, if any, of
the Contracts, (ix) with respect to Contracts with adjustable Contract
Rates (“ARM
Contracts”),
the
index, the frequency of the adjustment dates, and the maximum Contract Rate
or
monthly payment variation at the time of any adjustment thereof and over
the
life of the ARM Contract, (x) the number of Contracts that are delinquent
and the number of days or ranges of the number of days such Contracts are
delinquent, (xi) information regarding the payment characteristics of the
Contracts, (xii) the material underwriting standards used for the
Contracts, and (xiii) the credit scores of the borrowers under the Contracts.
If
specific information respecting the Contracts is not known to the Depositor
at
the time Securities are initially offered, more general information of the
nature described above will be provided in the prospectus supplement, and
specific information will be set forth in a report which will be available
to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the Commission
after such initial issuance. Notwithstanding the foregoing, the characteristics
of the Contracts included in a Trust Fund will not vary by more than five
percent (by aggregate principal balance as of the Cut-off Date) from the
characteristics thereof that are described in the related prospectus
supplement.
Payment
Provisions of the Contracts
All
of
the Contracts will provide for payments of principal, interest or both, on
due
dates that occur monthly or at such other interval as is specified in the
related prospectus supplement or for payments in another manner described in
the
prospectus supplement. Each Contract may provide for no accrual of interest
or
for accrual of interest thereon at an annual percentage rate (a “Contract
Rate”)
that
is fixed over its term or that adjusts from time to time. Each Contract may
provide for scheduled payments to maturity or payments that adjust from time
to
time to accommodate changes in the Contract Rate as otherwise described in
the
related prospectus supplement. See
“—Assets” above.
Pre-Funding
Account
22
To
the
extent provided in a prospectus supplement, a portion of the proceeds of
the
issuance of Securities may be deposited into an account maintained with the
Trustee (a “Pre-Funding
Account”).
In
such event, the Depositor will be obligated (subject only to the availability
thereof) to sell at a predetermined price, and the Trust Fund for the related
Series of Securities will be obligated to purchase (subject to the availability
thereof), additional Assets (the “Subsequent
Assets”)
from
time to time (as frequently as daily) within the period (not to exceed three
months if a REMIC election has been made or one year in all other cases)
specified in the related prospectus supplement (the “Pre-Funding
Period”)
after
the issuance of such Series of Securities having an aggregate principal balance
approximately equal to the amount on deposit in the Pre-Funding Account (the
“Pre-Funded
Amount”)
for
such Series on the date of such issuance. The Pre-Funded Amount with respect
to
a Series will not exceed 50% of the aggregate initial Security Balance of
the
related Securities. Any Subsequent Assets will be required to satisfy certain
eligibility criteria more fully set forth in the applicable Agreement, which
eligibility criteria will be consistent with the eligibility criteria of
the
Assets initially included in the Trust Fund, subject to such exceptions as
are
expressly stated in the prospectus supplement. For example, the Subsequent
Assets will be subject to the same underwriting standards, representations
and
warranties as the Assets initially included in the Trust Fund. In addition,
certain conditions must be satisfied before the Subsequent Assets are
transferred into the Trust Fund such as the delivery to the Rating Agencies
and
the Trustee of certain opinions of counsel.
Any
portion of the Pre-Funded Amount remaining in the Pre-Funding Account at
the end
of the Pre-Funding Period will be used to prepay one or more Classes of
Securities in the amounts and in the manner specified in the related prospectus
supplement. In addition, if specified in the related prospectus supplement,
the
Depositor may be required to deposit cash into an account maintained by the
Trustee (the “Capitalized
Interest Account”)
for
the purpose of assuring the availability of funds to pay interest with respect
to the Securities during the Pre-Funding Period. Any amount remaining in
the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the related prospectus supplement.
Accounts
Each
Trust Fund will include one or more accounts, established and maintained
on
behalf of the Securityholders into which the person or persons designated
in the
related prospectus supplement will, to the extent described herein and in
such
prospectus supplement deposit all payments and collections received or advanced
with respect to the Assets and other assets in the Trust Fund. Such an account
may be maintained as an interest bearing or a non-interest bearing account,
and
funds held therein may be held as cash or invested in certain short-term,
investment grade obligations, in each case as described in the related
prospectus supplement. See
“Description of the Agreements—Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements—Collection Account and Related
Accounts.”
USE
OF PROCEEDS
The
Depositor will apply the net proceeds received from the sale of the Securities
to the purchase of Assets, or the repayment of the financing incurred in such
purchase. The Depositor expects to sell the Securities from time to time, but
the timing and amount of offerings of Securities will depend on a number of
factors, including the volume of Assets acquired by the Depositor, prevailing
interest rates, availability of funds and general market
conditions.
YIELD
CONSIDERATIONS
General
The
yield
on any Offered Security will depend on the price paid by the holder of the
Security (the “Securityholder”),
the
Pass-Through Rate of the Security, the receipt and timing of receipt of
distributions on the Security and the weighted average life of the Assets in
the
related Trust Fund (which may be affected by prepayments, defaults, liquidations
or repurchases). See
“Risk Factors—Risks Associated with the Securities—Rate of Prepayment on Assets
May Adversely Affect Average Lives and Yields on the
Securities.”
Pass-Through
Rate and Interest Rate
23
Securities
of any Class within a Series may have fixed, variable or adjustable Pass-Through
Rates or interest rates, which may or may not be based upon the interest
rates
borne by the Assets in the related Trust Fund. The prospectus supplement
with
respect to any Series of Securities will specify the Pass-Through Rate or
interest rate for each Class of such Securities or, in the case of a variable
or
adjustable Pass-Through Rate or interest rate, the method of determining
the
Pass-Through Rate or interest rate; the effect, if any, of the prepayment
of any
Asset on the Pass-Through Rate or interest rate of one or more Classes of
Securities; and whether the distributions of interest on the Securities of
any
Class will be dependent, in whole or in part, on the performance of any obligor
under a Cash Flow Agreement.
If
so
specified in the related prospectus supplement, the effective yield to maturity
to each holder of Securities entitled to payments of interest will be below
that
otherwise produced by the applicable Pass-Through Rate or interest rate and
purchase price of such Security because, while interest may accrue on each
Asset
during a certain period (each, an “Interest
Accrual Period”),
the
distribution of such interest will be made on a day which may be several
days,
weeks or months following the period of accrual.
Timing
of Payment of Interest
Each
payment of interest on the Securities (or addition to the Security Balance
of a
Class of Accrual Securities) on the monthly, quarterly or other periodic
date
specified in the related prospectus supplement on which distributions will
be
made to holders of Securities (a “Distribution
Date“)
will
include interest accrued during the Interest Accrual Period for such
Distribution Date. As indicated above under “—Pass-Through Rate and Interest
Rate,” if the Interest Accrual Period ends on a date other than the day before a
Distribution Date for the related Series, the yield realized by the holders
of
such Securities may be lower than the yield that would result if the Interest
Accrual Period ended on such day before the Distribution Date.
Payments
of Principal; Prepayments
The
yield
to maturity on the Securities will be affected by the rate of principal payments
on the Assets (including principal prepayments on Mortgage Loans and Contracts
resulting from both voluntary prepayments by the borrowers and involuntary
liquidations). The rate at which principal prepayments occur on the Mortgage
Loans and Contracts will be affected by a variety of factors, including,
without
limitation, the terms of the Mortgage Loans and Contracts, the level of
prevailing interest rates, the availability of mortgage credit and economic,
demographic, geographic, tax, legal and other factors. In general, however,
if
prevailing interest rates fall significantly below the Mortgage Interest
Rates
on the Mortgage Loans comprising or underlying the Assets in a particular
Trust
Fund, such Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by
such
Mortgage Loans. In this regard, it should be noted that certain Assets may
consist of Mortgage Loans with different Mortgage Interest Rates. The rate
of
principal payments on some or all of the Classes of Securities of a Series
will
correspond to the rate of principal payments on the Assets in the related
Trust
Fund and is likely to be affected by the existence of Lock-out Periods and
Prepayment Charge provisions of the Mortgage Loans underlying or comprising
such
Assets, and by the extent to which the Servicer of any such Mortgage Loan
is
able to enforce such provisions. Mortgage Loans with a Lock-out Period or
a
Prepayment Charge provision, to the extent enforceable, generally would be
expected to experience a lower rate of principal prepayments than otherwise
identical Mortgage Loans without such provisions, with shorter Lock-out Periods
or with lower Prepayment Charges. Because of the depreciating nature of
manufactured housing, which limits the possibilities for refinancing, and
because the terms and principal amounts of manufactured housing contracts
are
generally shorter and smaller than the terms and principal amounts of mortgage
loans secured by site-built homes, changes in interest rates have a
correspondingly smaller effect on the amount of the monthly payments on
manufactured housing contracts than on the amount of the monthly payments
on
mortgage loans secured by site-built homes. Consequently, changes in interest
rates may play a smaller role in prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgage
on site-built homes. Conversely, local economic conditions and certain of
the
other factors mentioned above may play a larger role in the prepayment behavior
of manufactured housing contracts than they do in the prepayment behavior
of
loans secured by mortgages on site-built homes.
If
the
purchaser of a Security offered at a discount calculates its anticipated yield
to maturity based on an assumed rate of distributions of principal that is
faster than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. Conversely, if the purchaser
of
a Security offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of distributions of principal that is slower than
that
actually experienced on the Assets, the actual yield to maturity will be lower
than that so calculated. In either case, if so provided in the prospectus
supplement for a Series of Securities, the effect on yield on one or more
Classes of the Securities of such Series of prepayments of the Assets in the
related Trust Fund may be mitigated or exacerbated by any provisions for
sequential or selective distribution of principal to such Classes.
24
When
a
full prepayment is made on a Mortgage Loan or a Contract, the obligor generally
is charged interest on the principal amount of the Mortgage Loan or Contract
so
prepaid for the number of days in the month actually elapsed up to the date
of
the prepayment. Generally, the effect of prepayments in full will be to reduce
the amount of interest paid in the following month to holders of Securities
entitled to payments of interest because interest on the principal amount
of any
Mortgage Loan or Contract so prepaid will be paid only to the date of prepayment
rather than for a full month. A partial prepayment of principal is generally
applied so as to reduce the outstanding principal balance of the related
Mortgage Loan or Contract as of the Due Date in the month in which such partial
prepayment is received.
The
timing of changes in the rate of principal payments on the Assets may
significantly affect an investor’s actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor’s expectation.
In general, the earlier a principal payment is received on the Mortgage Loans
and distributed on a Security, the greater the effect on such investor’s yield
to maturity. The effect on an investor’s yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during
a
given period may not be offset by a subsequent like decrease (or increase)
in
the rate of principal payments.
The
Securityholder will bear the risk of being able to reinvest principal received
in respect of a Security at a yield at least equal to the yield on such
Security.
Prepayments—Maturity
and Weighted Average Life
The
rates
at which principal payments are received on the Assets included in or comprising
a Trust Fund and the rate at which payments are made from any credit support
or
Cash Flow Agreement for the related Series of Securities may affect the ultimate
maturity and the weighted average life of each Class of such Series. Prepayments
on the Mortgage Loans or Contracts comprising or underlying the Assets in
a
particular Trust Fund will generally accelerate the rate at which principal
is
paid on some or all of the Classes of the Securities of the related
Series.
If
so
provided in the prospectus supplement for a Series of Securities, one or
more
Classes of Securities may have a final scheduled Distribution Date, which
is the
date on or prior to which the stated principal amount (the “Security
Balance”)
thereof is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to such Series set forth therein. Weighted average
life
refers to the average amount of time that will elapse from the date of issue
of
a security until each dollar of principal of such security will be repaid
to the
investor. The weighted average life of a Class of Securities of a Series
will be
influenced by the rate at which principal on the Assets is paid to such Class,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term “prepayment” includes prepayments, in whole or in part, and
liquidations due to default).
In
addition, the weighted average life of the Securities may be affected by the
varying maturities of the Assets in a Trust Fund. If any Assets in a particular
Trust Fund have actual terms to maturity less than those assumed in calculating
final scheduled Distribution Dates for the Classes of Securities of the related
Series, one or more Classes of such Securities may be fully paid prior to their
respective final scheduled Distribution Dates, even in the absence of
prepayments. Accordingly, the prepayment experience of the Assets will, to
some
extent, be a function of the mix of Mortgage Interest Rates or Contract Rates
and maturities of the Mortgage Loans or Contracts comprising or underlying
such
Assets. See
“Description of the Trust Funds.”
Prepayments
on loans are also commonly measured relative to a prepayment standard or model,
such as the Constant Prepayment Rate (“CPR”)
prepayment model. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans
for
the life of such loans.
25
Neither
CPR nor any other prepayment model or assumption purports to be a historical
description of prepayment experience or a prediction of the anticipated rate
of
prepayment of any pool of loans, including the Mortgage Loans or Contracts
underlying or comprising the Assets.
The
prospectus supplement with respect to each Series of Securities may contain
tables, if applicable, setting forth the projected weighted average life
of each
Class of Offered Securities of such Series and the percentage of the initial
Security Balance of each such Class that would be outstanding on specified
Distribution Dates based on the assumptions stated in such prospectus
supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding
to
various percentages of CPR or such other standard specified in such prospectus
supplement. Such tables and assumptions are intended to illustrate the
sensitivity of the weighted average life of the Securities to various prepayment
rates and will not be intended to predict or to provide information that
will
enable investors to predict the actual weighted average life of the Securities.
It is unlikely that prepayment of any Mortgage Loans or Contracts comprising
or
underlying the Assets for any Series will conform to any particular level
of CPR
or any other rate specified in the related prospectus supplement.
Other
Factors Affecting Weighted Average Life
Type
of Asset
If
so
specified in the related prospectus supplement, a number of Mortgage Loans
may
have balloon payments due at maturity (which, based on the amortization schedule
of such Mortgage Loans, may be a substantial amount), and because the ability
of
a mortgagor to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property, there
is
a risk that a number of Balloon Payment Assets may default at maturity. The
ability to obtain refinancing will depend on a number of factors prevailing
at
the time refinancing or sale is required, including, without limitation,
real
estate values, the mortgagor’s financial situation, prevailing mortgage loan
interest rates, the mortgagor’s equity in the related Mortgaged Property, tax
laws and prevailing general economic conditions. The applicable prospectus
supplement will specify if the Depositor, the Servicer, the Master Servicer,
or
any of their affiliates will be obligated to refinance or repurchase any
Mortgage Loan or to sell the Mortgaged Property. In the case of defaults,
recovery of proceeds may be delayed by, among other things, bankruptcy of
the
mortgagor or adverse conditions in the market where the property is located.
In
order to minimize losses on defaulted Mortgage Loans, the Servicer may, to
the
extent and under the circumstances set forth in the related prospectus
supplement, be permitted to modify Mortgage Loans that are in default or
as to
which a payment default is reasonably foreseeable. Any defaulted balloon
payment
or modification that extends the maturity of a Mortgage Loan will tend to
extend
the weighted average life of the Securities and may thereby lengthen the
period
of time elapsed from the date of issuance of a Security until it is
retired.
With
respect to certain Mortgage Loans, including ARM Loans, the Mortgage Interest
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. With respect to certain
Contracts, the Contract Rate may be “stepped up” during its term or may
otherwise vary or be adjusted. Under the applicable underwriting standards,
the
mortgagor or obligor under each Mortgage Loan or Contract generally will be
qualified on the basis of the Mortgage Interest Rate or Contract Rate in effect
at origination. The repayment of any such Mortgage Loan or Contract may thus
be
dependent on the ability of the mortgagor or obligor to make larger level
monthly payments following the adjustment of the Mortgage Interest Rate or
Contract Rate. In addition, certain Mortgage Loans may be subject to temporary
buydown plans (“Buydown
Mortgage Loans”)
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
thereon (the “Buydown
Period”).
The
periodic increase in the amount paid by the mortgagor of a Buydown Mortgage
Loan
during or at the end of the applicable Buydown Period may create a greater
financial burden for the mortgagor, who might not have otherwise qualified
for a
mortgage, and may accordingly increase the risk of default with respect to
the
related Mortgage Loan.
The
Mortgage Interest Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Interest Rates are generally lower than
the
sum of the applicable index at origination and the related margin over such
index at which interest accrues), the amount of interest accruing on the
principal balance of such Mortgage Loans may exceed the amount of the minimum
scheduled monthly payment thereon. As a result, a portion of the accrued
interest on negatively amortizing Mortgage Loans may be added to the principal
balance thereof and will bear interest at the applicable Mortgage Interest
Rate.
The addition of any such deferred interest to the principal balance of any
related Class or Classes of Securities will lengthen the weighted average life
thereof and may adversely affect yield to holders thereof, depending upon the
price at which such Securities were purchased. In addition, with respect to
certain ARM Loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly payment
on such a Mortgage Loan would exceed the amount of scheduled principal and
accrued interest on the principal balance thereof, and since such excess will
be
applied to reduce the principal balance of the related Class or Classes of
Securities, the weighted average life of such Securities will be reduced and
may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased.
26
As
may be
described in the related prospectus supplement, the applicable Agreement
may
provide that all or a portion of the principal collected on or with respect
to
the related Mortgage Loans may be applied by the related Trustee to the
acquisition of additional Mortgage Loans during a specified period (rather
than
used to fund payments of principal to Securityholders during such period)
with
the result that the related securities possess an interest-only period, also
commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest-only or revolving period may, upon
the
occurrence of certain events to be described in the related prospectus
supplement, terminate prior to the end of the specified period and result
in the
earlier than expected amortization of the related Securities.
In
addition, and as may be described in the related prospectus supplement, the
related Agreement may provide that all or a portion of such collected principal
may be retained by the Trustee (and held in certain temporary investments,
including Mortgage Loans) for a specified period prior to being used to fund
payments of principal to Securityholders.
The
result of such retention and temporary investment by the Trustee of such
principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events
to be
described in the related prospectus supplement, resulting in the current
funding
of principal payments to the related Securityholders and an acceleration
of the
amortization of such Securities.
Termination
If
so
specified in the related prospectus supplement, a Series of Securities may
be
subject to optional early termination through the auction or repurchase of
some
or all of the Assets in the related Trust Fund by the party specified therein
(which may be a Securityholder), on any date on which the aggregate principal
balance of the Assets or the aggregate Security Balance of the Securities
of
such Series declines to a percentage specified in the related prospectus
supplement (not to exceed 10%) of the aggregate initial principal balance
of
such Assets or initial Security Balance of such Securities, as the case may
be,
under the circumstances and in the manner set forth therein; however, any
such
optional termination or redemption will be permitted only pursuant to a
“qualified liquidation,” as defined under Section 860F of the Internal Revenue
Code of 1986, as amended. In addition, if so provided in the related prospectus
supplement, certain Classes of Securities may be purchased or redeemed in
the
manner set forth therein. See
“Description of the Securities—Termination.”
Defaults
The
rate
of defaults on the Assets will also affect the rate, timing and amount of
principal payments on the Assets and thus the yield on the Securities. In
general, defaults on mortgage loans or contracts are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans and Contracts will be affected by the general
economic condition of the region of the country in which the related Mortgage
Properties or Manufactured Homes are located. The risk of delinquencies and
loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
27
Foreclosures
The
number of foreclosures or repossessions and the principal amount of the Mortgage
Loans or Contracts comprising or underlying the Assets that are foreclosed
or
repossessed in relation to the number and principal amount of Mortgage Loans
or
Contracts that are repaid in accordance with their terms will affect the
weighted average life of the Mortgage Loans or Contracts comprising or
underlying the Assets and that of the related Series of Securities.
Refinancing
At
the
request of a mortgagor, the Servicer may allow the refinancing of a Mortgage
Loan or Contract in any Trust Fund by accepting a prepayment in full and
permitting a new loan secured by a mortgage on the same property. In the
event
of such a refinancing, the new loan would not be included in the related
Trust
Fund and, therefore, such refinancing would have the same effect as a prepayment
in full of the related Mortgage Loan or Contract. A Servicer may, from time
to
time, implement programs designed to encourage refinancing. Such programs
may
include, without limitation, modifications of existing loans, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In addition,
Servicers may encourage the refinancing of Mortgage Loans or Contracts,
including defaulted Mortgage Loans or Contracts, that would permit creditworthy
borrowers to assume the outstanding indebtedness of such Mortgage Loans or
Contracts.
Due-on-Sale
Clauses
Acceleration
of mortgage payments as a result of certain transfers of underlying Mortgaged
Property is another factor affecting prepayment rates that may not be reflected
in the prepayment standards or models used in the relevant prospectus
supplement. A number of the Mortgage Loans comprising or underlying the Assets
may include “due-on-sale clauses” that allow the holder of the Mortgage Loans to
demand payment in full of the remaining principal balance of the Mortgage
Loans
upon sale, transfer or conveyance of the related Mortgaged Property. With
respect to any Mortgage Loans, the Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do
so
under applicable law; provided, however, that the Servicer will not take
any
action in relation to the enforcement of any due-on-sale provision which
would
adversely affect or jeopardize coverage under any applicable insurance policy.
See
“Certain Legal Aspects of Mortgage Loans—Due-on-Sale Clauses” and “Description
of the Agreements—Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements—Due-on-Sale Provisions.”
The
Contracts, in general, prohibit the sale or transfer of the related Manufactured
Homes without the consent of the Servicer and permit the acceleration of
the
maturity of the Contracts by the Servicer upon any such sale or transfer
that is
not consented to. It is expected that the Servicer will permit most transfers
of
Manufactured Homes and not accelerate the maturity of the related Contracts.
In
certain cases, the transfer may be made by a delinquent obligor in order
to
avoid a repossession of the Manufactured Home. In the case of a transfer
of a
Manufactured Home after which the Servicer desires to accelerate the maturity
of
the related Contract, the Servicer’s ability to do so will depend on the
enforceability under state law of the “due-on-sale clause.”See
“Certain Legal Aspects of the Contracts—Transfers of Manufactured Homes;
Enforceability of Due-on-Sale Clauses.”
THE
DEPOSITOR
The
Depositor is a direct wholly-owned subsidiary of Banc of America Mortgage
Capital Corporation and was incorporated in the State of Delaware on July 23,1997. The principal executive offices of the Depositor are located at 214 North
Tryon Street, Charlotte, North Carolina28255. Its telephone number is
(704) 386-2400.
The
Depositor will have limited obligations and rights under each Agreement after
the Closing Date for any Series.
28
The
Depositor and any director, officer, employee or agent of the Depositor shall
be
indemnified by the Trust Fund and held harmless against any loss, liability
or
expense incurred in connection with any legal action relating to the applicable
Agreement or the Securities, other than any loss, liability or expense related
to any specific Asset or Assets and any loss, liability or expense incurred
by
reason of willful misfeasance, bad faith or negligence in the performance
of its
duties under the applicable Agreement or by reason of reckless disregard
of its
obligations and duties under such Agreement.
To
the
extent Bank of America is not the Sponsor of a Series, information regarding
the
Depositor’s securitization program will be provided in the related prospectus
supplement.
The
Depositor does not have, nor is it expected in the future to have, any
significant assets.
THE
SPONSOR
Bank
of
America, National Association (“Bank
of America”)
or
another entity which will be named in the applicable prospectus supplement
will
act as the Sponsor of a particular Series of Securities.
The
Depositor’s securitization program principally is used to finance portfolios of
sub-prime mortgage loans secured by first or junior liens on one- to four-family
residential properties acquired by Bank of America or its affiliates from
third
parties. The Depositor’s securitization program may also be used by third
parties that are not Bank of America affiliates to securitize mortgage loans
on
a “rent-a-shelf” basis, whereby a third party transfers the mortgage loans to
the Depositor simultaneously with the transfer by the Depositor of the mortgage
loans to the applicable Trust and issuance of the related Series of Securities.
In that event, the unaffiliated third party, rather than Bank of America,
will
be the Sponsor of the transaction.
The
table
below sets forth the aggregate Security Balance of Securities issued in Trusts
formed by the Depositor during the periods indicated:
2002
2003
2004
2005
2006
$
2,024,400,000
$
1,863,910,000
$
7,125,266,000
$
7,280,662,000
$
5,542,006,000
Bank
of
America is an indirect wholly-owned subsidiary of Bank of America Corporation.
Bank of America is engaged in a general consumer banking, commercial banking,
and trust business, offering a wide range of commercial, corporate,
international, financial market, retail and fiduciary banking services. Bank
of
America is a national banking association chartered by the Office of the
Comptroller of the Currency (the “OCC”)
and is
subject to the regulation, supervision and examination of the OCC.
Bank
of
America and its affiliates have been active in the securitization market since
inception. Bank of America has sponsored publicly offered securitization
transactions since 1977. Bank of America and its affiliates have been involved
with the origination of auto loans, student loans, home equity loans, credit
card receivables, manufactured housing contracts, residential mortgage loans
and
commercial mortgage loans, as well as less traditional asset classes. Bank
of
America and its affiliates have also participated in a variety of collateralized
loan obligation transactions, synthetic securitizations, and asset-backed
commercial paper programs. Bank of America and its affiliates have served as
sponsors, issuers, dealers, and servicers in a wide array of securitization
transactions. Bank of America currently does not rely on securitization as
a
material funding source.
An
affiliate of Bank of America owns all of the Depositor’s equity. Banc of America
Securities LLC, which may act as an underwriter of the Securities, is an
affiliate of Bank of America and assists Bank of America and the Depositor
in
connection with the selection of mortgage loans for various transactions. See
“Method of Distribution” in the applicable prospectus supplement.
Bank
of
America’s headquarters and its executive offices are located at 101 South Tryon
Street, Charlotte, North Carolina28255, and the telephone number is (704)
386-5478.
29
More
information about the Sponsor’s material roles and duties for a Series of
Securities will be described in the applicable prospectus
supplement.
DESCRIPTION
OF THE SECURITIES
General
A
separate common law trust will serve as the Issuing Entity and will issue
the
asset-backed certificates (the “Certificates”)
of a
series (each, a “Series“)
(including any Class of Certificates not offered hereby). The Certificates
will
represent the entire beneficial ownership interest in the trust fund (the
“Trust“
or
the
“Trust
Fund“)
created pursuant to the applicable Agreement. If a Series of Securities includes
asset-backed notes (the “Notes”
and,
together with the Certificates, the “Securities”),
such
Notes will represent indebtedness of the related Trust Fund and will be issued
and secured pursuant to an Indenture. Each Series of Securities will consist
of
one or more classes (each, a “Class“)
of
Securities that may (i) provide for the accrual of interest thereon based
on fixed, variable or adjustable rates; (ii) be senior (the “Senior
Certificates“
or
the
“Senior
Notes“
and,
collectively, “Senior
Securities”)
or
subordinate (the “Subordinated
Certificates“
or
the
“Senior
Notes“
and,
collectively, “Subordinated
Securities”)
to one
or more other Classes of Securities in respect of certain distributions on
the
Securities; (iii) be entitled either to (A) principal distributions,
with disproportionately low, nominal or no interest distributions or
(B) interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, “Strip
Securities”);
(iv) provide for distributions of accrued interest thereon commencing only
following the occurrence of certain events, such as the retirement of one
or
more other Classes of Securities of such Series (collectively, “Accrual
Securities”);
(v) provide for payments of principal as described in the related
prospectus supplement, from all or only a portion of the Assets in such Trust
Fund, to the extent of available funds, in each case as described in the
related
prospectus supplement; and/or (vi) provide for distributions based on a
combination of two or more components thereof with one or more of the
characteristics described in this paragraph including a Strip Security
component. If so specified in the related prospectus supplement, distributions
on one or more Classes of a Series of Securities may be limited to collections
from a designated portion of the Assets in the related Trust Fund (each such
portion of Assets, an “Asset
Group”).
Any
such Classes may include Classes of Securities of a Series offered pursuant
to
this prospectus and a related prospectus supplement (the “Offered
Securities”).
Each
Class of Offered Securities of a Series will be issued in minimum denominations
corresponding to the Security Balances or, in the case of certain Classes
of
Strip Securities, notional amounts or percentage interests specified in the
related prospectus supplement. The transfer of any Offered Securities may
be
registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge.
One
or more Classes of Securities of a Series may be issued in fully registered,
certificated form (“Definitive
Securities”)
or in
book-entry form (“Book-Entry
Securities”),
as
provided in the related prospectus supplement. See
“Risk Factors—Risks Associated with the Securities—Book-Entry
System for Certain Classes of Securities May Decrease Liquidity and Delay
Payment” and “Description of the Securities—Book-Entry Registration and
Definitive Securities.”
Definitive Securities will be exchangeable for other Securities of the same
Class and Series of a like aggregate Security Balance, notional amount or
percentage interest but of different authorized denominations. See
“Risk Factors—Risks Associated with the Securities—Securities May Not be
Liquid.”
Distributions
Distributions
on the Securities of each Series will be made by or on behalf of the Trustee
on
each Distribution Date as specified in the related prospectus supplement from
the Available Distribution Amount for such Series and such Distribution Date.
Distributions (other than the final distribution) will be made to the persons
in
whose names the Securities are registered at the close of business on the date
specified in the related prospectus supplement (the “Record
Date”),
and
the amount of each distribution will be determined as of the close of business
on the date specified in the related prospectus supplement (the “Determination
Date”).
All
distributions with respect to each Class of Securities on each Distribution
Date
will be allocated pro
rata
among
the outstanding Securityholders in such Class or by random selection or as
described in the related prospectus supplement. Payments will be made either
by
wire transfer in immediately available funds to the account of a Securityholder
at a bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make
such
payments no later than the date specified in the related prospectus supplement
(and, if so provided in the related prospectus supplement, holds Securities
in
the requisite amount specified therein), or by check mailed to the address
of
the person entitled thereto as it appears on the security register; provided,
however, that the final distribution in retirement of the Securities will be
made only upon presentation and surrender of the Securities at the location
specified in the notice to Securityholders of such final
distribution.
30
Available
Distribution Amount
All
distributions on the Securities of each Series on each Distribution Date
will be
made from the Available Distribution Amount described below, in accordance
with
the terms described in the related prospectus supplement. Generally, the
“Available
Distribution Amount”
for
each Distribution Date equals the sum of the following amounts:
(i)
the
total amount of all cash on deposit in the related Collection Account as
of the
corresponding Determination Date, exclusive of:
(a) all
scheduled payments of principal and interest collected but due on a date
subsequent to the related Collection Period (a “Collection
Period”
with
respect to any Distribution Date generally will commence on the second day
of
the month in which the immediately preceding Distribution Date occurs, or
the
day after the Cut-off Date in the case of the first Collection Period, and
will
end on the first day of the month of the related Distribution
Date),
(b) all
prepayments, together with related payments of the interest thereon and related
Prepayment Charges, all proceeds of any insurance policies to be maintained
in
respect of each Asset (to the extent such proceeds are not applied to the
restoration of the Asset or released in accordance with the normal servicing
procedures of a Servicer, subject to the terms and conditions applicable
to the
related Asset) (collectively, “Insurance
Proceeds”),
all
other amounts received and retained in connection with the liquidation of
Assets
in default in the Trust Fund (“Liquidation
Proceeds”),
and
other unscheduled recoveries received subsequent to the related Collection
Period,
(c) all
amounts in the Collection Account that are due or reimbursable to the Depositor,
the Trustee, an Asset Seller, a Servicer, the Master Servicer or any other
entity as specified in the related prospectus supplement or that are payable
in
respect of certain expenses of the related Trust Fund, and
(d) all
amounts received for a repurchase of an Asset from the Trust Fund for defective
documentation or a breach of representation or warranty received subsequent
to
the related Collection Period;
(ii) if
the
related prospectus supplement so provides, interest or investment income on
amounts on deposit in the Collection Account, including any net amounts paid
under any Cash Flow Agreements;
(iii) all
advances made by a Servicer or the Master Servicer or any other entity as
specified in the related prospectus supplement with respect to such Distribution
Date;
(iv) if
and to
the extent the related prospectus supplement so provides, amounts paid by a
Servicer or any other entity as specified in the related prospectus supplement
with respect to interest shortfalls resulting from prepayments during the
related Prepayment Period; and
(v) to
the
extent not on deposit in the related Collection Account as of the corresponding
Determination Date, any amounts collected under, from or in respect of any
credit support with respect to such Distribution Date.
31
As
described below, the entire Available Distribution Amount will be distributed
among the related Securities (including any Securities not offered hereby)
on
each Distribution Date, and accordingly will be released from the Trust Fund
and
will not be available for any future distributions.
The
related prospectus supplement for a Series of Securities will describe any
variation in the calculation of the Available Distribution Amount for such
Series.
Distributions
of Interest on the Securities
Each
Class of Securities (other than Classes of Strip Securities that have no
Pass-Through Rate or interest rate) may have a different Pass-Through Rate
or
interest rate, which will be a fixed, variable or adjustable rate at which
interest will accrue on such Class or a Component thereof (the “Pass-Through
Rate”).
The
related prospectus supplement will specify the Pass-Through Rate or interest
rate for each Class or component or, in the case of a variable or adjustable
Pass-Through Rate or interest rate, the method for determining the Pass-Through
Rate or interest rate. The related prospectus supplement will specify whether
interest on any Class of Securities will be calculated either on the basis
of a
360-day year consisting of twelve 30-day months or on the basis of the actual
number of days in the Interest Accrual Period and on a 360-day year or another
method specified in the such prospectus supplement.
Distributions
of interest in respect of the Securities of any Class will be made on each
Distribution Date (other than any Class of Accrual Securities, which will
be
entitled to distributions of accrued interest commencing only on the
Distribution Date, or under the circumstances, specified in the related
prospectus supplement, and any Class of Strip Securities that are not entitled
to any distributions of interest) based on the Accrued Security Interest
for
such Class and such Distribution Date, subject to the sufficiency of the
portion
of the Available Distribution Amount allocable to such Class on such
Distribution Date. Prior to the time interest is distributable on any Class
of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such Class will be added to the Security Balance thereof
on
each Distribution Date. With respect to each Class of Securities and each
Distribution Date (other than certain Classes of Strip Securities),
“Accrued
Security Interest”
will
be
equal to interest accrued during the related Interest Accrual Period on the
outstanding Security Balance thereof immediately prior to the Distribution
Date,
at the applicable Pass-Through Rate or interest rate, reduced as described
below. Accrued Security Interest on certain Classes of Strip Securities will
be
equal to interest accrued during the related Interest Accrual Period on the
outstanding notional amount thereof immediately prior to each Distribution
Date,
at the applicable Pass-Through Rate or interest rate, reduced as described
below, or interest accrual in the manner described in the related prospectus
supplement. The method of determining the notional amount for a certain Class
of
Strip Securities will be described in the related prospectus supplement.
Reference to notional amount is solely for convenience in certain calculations
and does not represent the right to receive any distributions of principal.
Accrued Security Interest on a Series of Securities generally will be reduced
in
the event of prepayment interest shortfalls, which are shortfalls in collections
of interest for a full Interest Accrual Period resulting from prepayments
prior
to the due date in such Interest Accrual Period on the Mortgage Loans or
Contracts comprising or underlying the Assets in the Trust Fund for such
Series.
The particular manner in which such shortfalls are to be allocated among
some or
all of the Classes of Securities of that Series will be specified in the
related
prospectus supplement. The related prospectus supplement will also describe
the
extent to which the amount of Accrued Security Interest that is otherwise
distributable on (or, in the case of Accrual Securities, that may otherwise
be
added to the Security Balance of) a Class of Offered Securities may be reduced
as a result of any other contingencies, including delinquencies, losses and
deferred interest on or in respect of the Mortgage Loans or Contracts comprising
or underlying the Assets in the related Trust Fund. Any reduction in the
amount
of Accrued Security Interest otherwise distributable on a Class of Securities
by
reason of the allocation to such Class of a portion of any deferred interest
on
the Mortgage Loans or Contracts comprising or underlying the Assets in the
related Trust Fund will generally result in a corresponding increase in the
Security Balance of such Class. See
“Risk Factors—Risk Associated with the Securities—Rate of Prepayment on Mortgage
Loans May Adversely Affect Average Lives and Yields on the Securities” and
“Yield Considerations.”
Distributions
of Principal of the Securities
The
Securities of each Series, other than certain Classes of Strip Securities,
will
have a Security Balance which, at any time, will equal the then maximum amount
that the holder will be entitled to receive in respect of principal out of
the
future cash flow on the Assets and other assets included in the related Trust
Fund. The outstanding Security Balance of a Security will be reduced to the
extent of distributions of principal thereon from time to time and, if and
to
the extent so provided in the related prospectus supplement, by the amount
of
losses incurred in respect of the related Assets, may be increased in respect
of
deferred interest on the related Mortgage Loans to the extent provided in the
related prospectus supplement and, in the case of Accrual Securities prior
to
the Distribution Date on which distributions of interest are required to
commence, will be increased by any related Accrued Security Interest. If so
specified in the related prospectus supplement, the initial aggregate Security
Balance of all Classes of Securities of a Series will be greater than the
outstanding aggregate principal balance of the related Assets as of the
applicable Cut-off Date. The initial aggregate Security Balance of a Series
and
each Class thereof will be specified in the related prospectus supplement.
Distributions of principal will be made on each Distribution Date to the Class
or Classes of Securities in the amounts and in accordance with the priorities
specified in the related prospectus supplement. Certain Classes of Strip
Securities with no Security Balance are not entitled to any distributions of
principal.
32
Categories
of Classes of Securities
The
Securities of any Series may be comprised of one or more Classes. Such
Classes,
in general, fall into different categories. The following chart identifies
and
generally defines certain of the more typical categories. The prospectus
supplement for a Series of Securities may identify the Classes which comprise
such Series by reference to the following categories or another category
specified in the applicable prospectus supplement.
Categories
of Classes
Definition
PRINCIPAL
TYPES
Accretion
Directed Class
A
Class that receives principal payments from the accreted interest
from
specified Accrual Classes. An Accretion Directed Class also may
receive
principal payments from principal paid on the Assets for the
related
Series.
Component
Class
A
Class consisting of two or more specified components (each, a
“Component”)
as described in the applicable prospectus supplement. The Components
of a
Class may have different principal and/or interest payment characteristics
but together constitute a single Class and do not represent severable
interests. Each Component may be identified as falling into one
or more of
the categories in this chart.
Lockout
Class
A
senior Class that is designed not to participate in or to participate
to a
limited extent in (i.e.,
to be “locked out” of), for a specified period, the receipt of
(1) principal prepayments on the Assets that are allocated
disproportionately to the senior Classes of such Series as a
group
pursuant to a “shifting interest” structure and/or (2) scheduled
principal payments on the Assets that are allocated to the senior
Classes
as a group. A Lockout Class will typically not be entitled to
receive, or
will be entitled to receive only a restricted portion of, distributions
or
principal prepayments and/or scheduled principal payments, as
applicable,
for a period of several years, during which time all or a portion
of such
principal payments that it would otherwise be entitled to receive
in the
absence of a “lockout” structure will be distributed in reduction of the
principal balances of other senior Classes. Lockout Classes are
designed
to minimize weighted average life volatility during the lockout
period.
33
Notional
Amount Class
A
Class having no principal balance and bearing interest on the related
notional amount. The notional amount is used for purposes of the
determination of interest distributions.
Pass-Through
Class
A
Class of Senior Securities that is entitled to receive all or a specified
percentage of the principal payments that are distributable to the
Senior
Securities or applicable group of Senior Securities (other than any
Ratio
Strip Class) in the aggregate on each Distribution Date until the
Security
Balances of all the Senior Securities or applicable group of Senior
Securities are reduced to zero and that is not designated as a Sequential
Pay Class.
Planned
Amortization Class
(also
sometimes referred to as a “PAC”)
A
Class that is designed to receive principal payments using a predetermined
principal balance schedule derived by assuming two constant prepayment
rates for the underlying Assets. These two rates are the endpoints
for the
“structuring range” for the Planned Amortization Class. The Planned
Amortization Classes in any Series of Securities may be subdivided
into
different categories (e.g., Planned Amortization Class I (“PAC
I”),
Planned Amortization Class II (“PAC
II”)
and so forth) derived using different structuring ranges and/or payment
priorities. A PAC is designed to provide protection against volatility
of
weighted average life if prepayments occur at a constant rate within
the
structuring range.
Ratio
Strip Class
A
Class that is entitled to receive a constant proportion, or “ratio strip,”
of the principal payments on the underlying Assets.
Scheduled
Amortization Class
A
Class that is designed to receive principal payments using a predetermined
principal balance schedule but is not designated as a Planned Amortization
Class or Targeted Amortization Class. The schedule is derived by
assuming
either two constant prepayment rates or a single constant prepayment
rate
for the underlying Assets. In the former case, the two rates are
the
endpoints for the “structuring range” for the Scheduled Amortization Class
and such range generally is narrower than that for a Planned Amortization
Class. Typically, the Support Class(es) for the applicable Series
of
Securities generally will represent a smaller percentage of the Scheduled
Amortization Class than a Support Class generally would represent
in
relation to a Planned Amortization Class or a Targeted Amortization
Class.
A Scheduled Amortization Class is generally less sensitive to weighted
average life volatility as a result of prepayments than a Support
Class
but more sensitive than a Planned Amortization Class or a Targeted
Amortization Class.
Senior
Securities
Classes
that are entitled to receive payments of principal and interest on
each
Distribution Date prior to the Classes of Subordinated
Securities.
Sequential
Pay Class
A
Class that is entitled to receive principal payments in a prescribed
sequence, that does not have a predetermined principal balance schedule
and that, in most cases, is entitled to receive payments of principal
continuously from the first Distribution Date on which it receives
principal until it is retired. A single Class is entitled to receive
principal payments before or after other Classes in the same Series
of
Securities may be identified as a Sequential Pay Class.
34
Subordinated
Securities
Classes
that are entitled to receive payments of principal and interest on
each
Distribution Date only after the Senior Securities and certain Classes
of
Subordinated Securities with higher priority of distributions have
received their full principal and interest
entitlements.
Super
Senior Class
A
Class of Senior Securities that will not bear its share of certain
losses
or is not allocated certain losses after the Classes of Subordinated
Securities are no longer outstanding and one or more specified Classes
of
Senior Securities bear such losses.
Super
Senior Support Class
A
Class of Senior Securities that bears certain losses allocated to
one or
more Classes of Senior Securities or is allocated certain losses
while one
or more Classes of Senior Securities are not allocated
losses.
Support
Class (also sometimes referred to as a “Companion
Class”)
A
Class that is entitled to receive principal payments on any Distribution
Date only if scheduled payments have been made on specified Planned
Amortization Classes, Targeted Amortization Classes and/or Scheduled
Amortization Classes.
Targeted
Amortization Class
(also
sometimes referred to as a “TAC”)
A
Class that is designed to receive principal payments using a predetermined
principal balance schedule derived by assuming a single constant
prepayment rate for the underlying Assets. A TAC is designed to provide
some protection against shortening of weighted average life if prepayments
occur at a rate exceeding the assumed constant prepayment rate used
to
derive the principal balances schedule of such
Class.
INTEREST
TYPES
Accrual
Class
A
Class that accretes the amount of accrued interest otherwise distributable
on such Class, which amount will be added as principal to the principal
balance of such Class on each applicable Distribution Date. Such
accretion
may continue until some specified event has occurred or until such
Accrual
Class is retired.
Fixed
Rate Class
A
Class with an interest rate that is fixed throughout the life of
the
Class.
Floating
Rate Class
A
Class with an interest rate that resets periodically based upon a
designated index and that varies directly with changes in such
index.
Interest
Only Class
A
Class that is entitled to receive some or all of the interest payments
made on the Assets and little or no principal. Interest Only Classes
have
either no principal balance, a nominal principal balance or a notional
amount. A nominal principal balance represents actual principal that
will
be paid on the Class. It is referred to as nominal since it is extremely
small compared to other Classes. A notional amount is the amount
used as a
reference to calculate the amount of interest due on an Interest
Only
Class that is not entitled to any distributions in respect of
principal.
35
Inverse
Floating Rate Class
A
Class with an interest rate that resets periodically based upon a
designated index and that varies inversely with changes in such index
and
with changes in the interest rate payable on the related Floating
Rate
Class.
Prepayment
Charge Class
A
Class that is only entitled to penalties or premiums, if any, due
in
connection with a full or partial prepayment of an
Asset.
Principal
Only Class
A
Class that does not bear interest and is entitled to receive only
distributions in respect of principal.
Step
Coupon Class
A
Class with a fixed interest rate that is reduced to a lower fixed
rate
after a specific period of time. The difference between the initial
interest rate and the lower interest rate will be supported by a
reserve
fund established on the Closing Date.
Variable
Rate Class
A
Class with an interest rate that resets periodically and is calculated
by
reference to the rate or rates of interest applicable to the
Assets.
Components
To
the
extent specified in the related prospectus supplement, distribution on a Class
of Securities may be based on a combination of two or more different Components
as described under “—General” above. To such extent, the descriptions set forth
under “—Distributions of Interest on the Securities” and “—Distributions of
Principal of the Securities” above also relate to Components of such a Class of
Securities. In such case, reference in such sections to Security Balance and
Pass-Through Rate or interest rate refer to the principal balance, if any,
of
any such Component and the Pass-Through Rate or interest rate, if any, on any
such Component, respectively.
Distributions
on the Securities of Prepayment Charges
If
so
provided in the related prospectus supplement, Prepayment Charges that are
collected on the Mortgage Loans in the related Trust Fund will be distributed
on
each Distribution Date to the Class or Classes of Securities entitled thereto
in
accordance with the provisions described in such prospectus
supplement.
Allocation
of Losses and Shortfalls
If
so
provided in the prospectus supplement for a Series of Securities consisting
of
one or more Classes of Subordinated Securities, on any Distribution Date
in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of such losses or shortfalls will be borne first by
a Class
of Subordinated Securities in the priority and manner and subject to the
limitations specified in such prospectus supplement. See
“Description of Credit Support” for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Assets
comprising such Trust Fund.
Advances
in Respect of Delinquencies
With
respect to any Series of Securities evidencing an interest in a Trust Fund,
if
so provided in the related prospectus supplement, the Servicer or another
entity
described therein will be required as part of its servicing responsibilities
to
advance on or before each Distribution Date its own funds or funds held in
the
Collection Account that are not included in the Available Distribution Amount
for such Distribution Date, in an amount equal to the aggregate of payments
of
principal (other than any balloon payments) and interest (net of related
servicing fees and Retained Interest) that were due on the Assets in such
Trust
Fund during the related Collection Period and were delinquent on the related
Determination Date, subject to the Servicer’s (or another entity’s) good faith
determination that such advances will be reimbursable from Related Proceeds
(as
defined below). In the case of a Series of Securities that includes one or
more
Classes of Subordinated Securities and if so provided in the related prospectus
supplement, the Servicer’s (or another entity’s) advance obligation may be
limited only to the portion of such delinquencies necessary to make the required
distributions on one or more Classes of Senior Securities and/or may be subject
to the Servicer’s (or another entity’s) good faith determination that such
advances will be reimbursable not only from Related Proceeds but also from
collections on other Assets otherwise distributable on one or more Classes
of
such Subordinated Securities. See
“Description of Credit Support.”
36
Advances
are intended to maintain a regular flow of scheduled interest and principal
payments to holders of the Class or Classes of Securities entitled thereto,
rather than to guarantee or insure against losses. Advances of the Servicer’s
(or another entity’s) funds will be reimbursable only out of related recoveries
on the Assets (including amounts received under any form of credit support)
respecting which such advances were made (as to any Assets, “Related
Proceeds”)
and
from any other amounts specified in the related prospectus supplement, including
out of any amounts otherwise distributable on one or more Classes of
Subordinated Securities of such Series; provided, however, that any such advance
will be reimbursable from any amounts in the Collection Account prior to any
distributions being made on the Securities to the extent that the Servicer
(or
such other entity) shall determine, based on its estimation of the value of
the
Mortgaged Property or Manufactured Home in relation to the sum of the unpaid
principal balance of the related Asset, accrued interest, the amount of
previously unreimbursed Advances and anticipated disposition expenses, that
such
advance (a “Nonrecoverable
Advance”)
is not
ultimately recoverable from Related Proceeds or, if applicable, from collections
on other Assets otherwise distributable on such Subordinated Securities. If
advances have been made by the Servicer from excess funds in the Collection
Account, the Servicer is required to replace such funds in the Collection
Account on any future Distribution Date to the extent that funds in the
Collection Account on such Distribution Date are less than payments required
to
be made to Securityholders on such date. If so specified in the related
prospectus supplement, the obligations of the Servicer (or another entity)
to
make advances may be secured by an advance facility, a cash advance reserve
fund, a surety bond, a letter of credit or another form of limited guaranty.
If
applicable, information regarding the characteristics of, and the identity
of
any obligor on, any such surety bond, will be set forth in the related
prospectus supplement.
If
specified in the related prospectus supplement, the Master Servicer or the
Trustee will be required to make advances, subject to certain conditions
described in the prospectus supplement, in the event of a Servicer
default.
Reports
to Securityholders
With
each
distribution to holders of any Class of Securities of a Series, the Servicer,
the Master Servicer or the Trustee, as provided in the related prospectus
supplement, will forward or cause to be forwarded to each such holder, to
the
Depositor and to such other parties as may be specified in the applicable
Agreement, a statement generally setting forth, in each case to the extent
applicable and available:
(i) the
Record Date, Interest Accrual Period, Determination Date and Distribution
Date;
(ii) the
amount of such distribution to holders of Securities of such Class applied
to
reduce the Security Balance thereof;
(iii) the
amount of such distribution to holders of Securities of such Class allocable
to
Accrued Security Interest;
(iv) the
aggregate Security Balance or notional amount, as the case may be, of each
Class
of Securities (including any Class of Securities not offered hereby) at the
beginning and at the close of business on such Distribution Date, separately
identifying any reduction in such Security Balance due to the allocation
of any
loss and increase in the Security Balance of a Class of Accrual Securities
in
the event that Accrued Security Interest has been added to such
balance;
37
(v) if
the
distribution to holders of Securities is less than the full amount that would
be
distributable if there were sufficient funds available, the total amount of
the
shortfall, the interest portion of the shortfall and the principal portion
of
the shortfall;
(vi) the
amount of such distribution allocable to Prepayment Charges;
(vii) the
amount of related servicing compensation and such other customary information
as
is required to enable Securityholders to prepare their tax returns;
(viii) the
amount by which the servicing fee for the related Prepayment Period has been
reduced by interest shortfalls due to prepayments;
(ix) the
aggregate amount of advances included in such distribution, the aggregate amount
of unreimbursed advances at the close of business on such Distribution Date
and
the amount of advances reimbursed since the previous Distribution
Date;
(x) the
aggregate principal balance of the Assets at the close of business on such
Distribution Date;
(xi) with
respect to any Mortgage Loan or Contract liquidated during the related
Collection Period, (a) the portion of such liquidation proceeds payable or
reimbursable to a Servicer (or any other entity) in respect of such Mortgage
Loan and (b) the amount of any loss to Securityholders;
(xii) the
number and aggregate principal amounts of Assets (A) delinquent (exclusive
of
Assets in foreclosure or bankruptcy), (B) in foreclosure, as of the close of
business on the last day of the calendar month preceding the Distribution Date
and (C) in bankruptcy as of the close of business on the last day of the
calendar month preceding the Distribution Date.
(xiii) with
respect to collateral acquired by the Trust Fund through foreclosure or
otherwise (a “REO Property”)
relating to a Mortgage Loan or Contract and included in the Trust Fund as of
the
end of the related Collection Period, the date of acquisition;
(xiv) with
respect to each REO Property relating to a Mortgage Loan or Contract and
included in the Trust Fund as of the end of the related Collection Period,
(a) the book value, (b) the principal balance of the related Mortgage
Loan or Contract immediately following such Distribution Date (calculated as
if
such Mortgage Loan or Contract were still outstanding taking into account
certain limited modifications to the terms thereof specified in the applicable
Agreement), (c) the aggregate amount of unreimbursed servicing expenses and
unreimbursed advances in respect thereof and (d) if applicable, the
aggregate amount of interest accrued and payable on related servicing expenses
and related advances;
(xv) with
respect to any such REO Property sold during the related Collection Period
(a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect
of such
REO Property or the related Mortgage Loan or Contract and (c) the amount of
any loss to Securityholders in respect of the related Mortgage
Loan;
(xvi) the
aggregate amount of principal prepayments made during the related Collection
Period;
(xvii) to
each
holder of a Security entitled to the benefits of payments under any form
of
credit enhancement:
(a) the
amounts so distributed under the form of credit enhancement on the applicable
Distribution Date; and
(b) the
amount of coverage remaining under the form of credit enhancement, after
giving
effect to any payments thereunder and other amounts charged thereto on the
Distribution Date;
38
(xviii) any
payments made or accrued relating to credit enhancement provided by a party,
identifying the general purpose of the payments and the party receiving the
payments;
(xix) the
aggregate unpaid Accrued Security Interest, if any, on each Class of Securities
at the close of business on such Distribution Date;
(xx) the
Pass-Through Rate or interest rate applicable to such Distribution Date, and,
if
available, the immediately succeeding Distribution Date, as calculated in
accordance with the method specified in the related prospectus
supplement;
(xxi) the
number and total principal balance of the Assets, the weighted average Mortgage
Interest Rate or Contract Rate and weighted average remaining term to maturity
of the Assets and cumulative prepayment amounts;
(xxii) any
material modifications, extensions or waivers to the Asset terms, fees,
penalties or payments since the previous Distribution Date or cumulatively
since
the Closing Date;
(xxiii) any
material breaches of representations and warranties relating to the Assets
or
material breaches of transaction covenants;
(xxiv) any
expenses or indemnification amounts paid by the related Trust Fund, the specific
purpose of each payment and the parties to whom these payments were
made;
(xxv) during
the Pre-Funding Period, the remaining Pre-Funded Amount and the portion of
the
Pre-Funding Amount used to acquire Subsequent Assets since the preceding
Distribution Date;
(xxvi) during
the Pre-Funding Period, the amount remaining in the Capitalized Interest
Account;
(xxvii) whether
any performance or servicing triggers were met; and
(xxviii)
the
aggregate amount of payments by the obligors of (a) default interest,
(b) late charges and (c) assumption and modification fees collected
during the related Collection Period.
In
addition, the Servicer, the Master Servicer or the Trustee, as provided in
the
related prospectus supplement, will include in the statement any information
specific to the Classes of Securities offered by the applicable prospectus
supplement and, within a reasonable period of time after the end of each
calendar year, shall furnish to each Securityholder of record at any time
during
the calendar year such information required by the Code and applicable
regulations thereunder to enable Securityholders to prepare their tax returns.
See
“Description of the Securities—Book-Entry Registration and Definitive
Securities.”
Termination
The
obligations created by the applicable Agreement for each Series of Securities
will terminate upon the payment to Securityholders of that Series of all
amounts
held in the Collection Account or by a Servicer, the Master Servicer, if
any, or
the Trustee and required to be paid to them pursuant to such Agreement following
the earlier of (i) the final payment or other liquidation of the last Asset
subject thereto or the disposition of all property acquired upon foreclosure
of
any Mortgage Loan or Contract subject thereto and (ii) upon the reduction
of the principal balance of all or a portion of the assets of Trust Fund
to a
percentage specified in the applicable prospectus supplement, the auction
or
purchase of some or all of such assets of the Trust Fund by the party entitled
to effect such termination, including a Securityholder, under the circumstances
and in the manner set forth in the related prospectus supplement. In no event,
however, will the Trust Fund continue beyond the date specified in the related
prospectus supplement. Written notice of termination of the applicable Agreement
will be given to each Securityholder, and the final distribution will be
made
only upon presentation and surrender of the Securities at the location to
be
specified in the notice of termination.
39
Definitive
Form
If
so
specified in the related prospectus supplement, Securities of a Series may
be
issued as Definitive Securities. Distributions of principal of, and interest
on,
Definitive Securities will be made directly to holders of Definitive Securities
in accordance with the procedures set forth in the Agreement. The Definitive
Securities of a Series offered hereby and by means of the applicable prospectus
supplement will be transferable and exchangeable at the office or agency
maintained by the Trustee or such other entity for such purpose set forth in
the
applicable prospectus supplement. No service charge will be made for any
transfer or exchange of Definitive Securities, but the Trustee or such other
entity may require payment of a sum sufficient to cover any tax or other
governmental charge in connection with such transfer or exchange.
In
the
event that an election is made to treat the Trust Fund (or one or more pools
of
segregated assets therein) as a REMIC, the Residual Securities thereof will
be
issued as Definitive Securities. No legal or beneficial interest in all or
a
portion of any Residual Security may be transferred without the receipt by
the
transferor and the Trustee of an affidavit described under “—Taxation
of Owners of Residual Securities—Tax-Related Restrictions on Transfer of
Residual Securities.”
Book-Entry
Registration and Definitive Securities
Persons
acquiring beneficial ownership interests (“Beneficial
Owners”)
in the
Book-Entry Securities will hold their Securities through DTC in the United
States, or Clearstream or Euroclear (in Europe) if they are participants of
those systems (the “Participants”),
or
indirectly through organizations which are participants in those systems (the
“Indirect
Participants”).
Each
Class of the Book-Entry Securities of a Series initially will be represented
by
one or more physical certificates registered in the name of Cede & Co., as
nominee of DTC, which will be the “holder” or “Securityholder” of those
Securities, as those terms are used in this prospectus and the applicable
prospectus supplement for a Series. No Beneficial Owner of a Book-Entry Security
will be entitled to receive a Definitive Security representing that person’s
interest in the Book-Entry Security, except as set forth below. Unless and
until
Definitive Securities are issued under the limited circumstances described
below, all references to actions taken by Securityholders or holders shall,
in
the case of the Book-Entry Securities, refer to actions taken by DTC upon
instructions from its DTC Participants, and all references in this prospectus
and the applicable prospectus supplement for a Series to distributions, notices,
reports and statements to Securityholders or holders shall, in the case of
the
Book-Entry Securities, refer to distributions, notices, reports and statements
to DTC or Cede & Co., as the registered holder of the Book-Entry Securities,
as the case may be, for distribution to Beneficial Owners in accordance with
DTC
procedures. Clearstream and Euroclear will hold omnibus positions on behalf
of
their Participants through customers’ securities accounts in Clearstream’s and
Euroclear’s names on the books of their respective depositaries which in turn
will hold those positions in customers’ securities accounts in the depositaries’
names on the books of DTC. Citibank will act as depositary for Clearstream
and
JPMorgan Chase Bank, National Association will act as depositary for Euroclear
(in those capacities, individually the “Relevant
Depositary”
and
collectively the “European
Depositaries”).
Investors may hold beneficial interest in the Book-Entry Securities in minimum
denominations of $1,000.
The
Beneficial Owner’s ownership of a Book-Entry Security will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a “Financial
Intermediary”)
that
maintains the beneficial owner’s account for that purpose. In turn, the
Financial Intermediary’s ownership of a Book-Entry Security will be recorded on
the records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner’s Financial Intermediary is not a DTC
Participant, and on the records of Clearstream or Euroclear, as
appropriate).
Beneficial
Owners will receive all distributions of principal of, and interest on, the
Book-Entry Securities from the Trustee through DTC and Participants. While
the
Book-Entry Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting
DTC
and its operations (the “Rules”),
DTC
is required to make book-entry transfers among Participants on whose behalf
it
acts with respect to the Book-Entry Securities and is required to receive
and
transmit distributions of principal of, and interest on, the Book-Entry
Securities. Participants and Indirect Participants with whom Beneficial Owners
have accounts for their Book-Entry Securities are similarly required to make
book-entry transfers and receive and transmit these distributions on behalf
of
their respective Beneficial Owners. Accordingly, although Beneficial Owners
will
not possess certificates representing their respective interests in the
Book-Entry Securities, the Rules provide a mechanism by which Beneficial
Owners
will receive distributions and will be able to transfer their
interest.
40
Securityholders
will not receive or be entitled to receive certificates representing their
respective interests in the Book-Entry Securities, except under the limited
circumstances described below. Unless and until Definitive Securities are
issued, Securityholders who are not Participants may transfer ownership of
Book-Entry Securities only through Participants and Indirect Participants by
instructing Participants and Indirect Participants to transfer Book-Entry
Securities, by book-entry transfer, through DTC, for the account of the
purchasers of the Book-Entry Securities, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC’s normal
procedures, transfers of ownership of Book-Entry Securities will be executed
through DTC and the accounts of the respective Participants at DTC will be
debited and credited. Similarly, the Participants and Indirect Participants
will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Securityholders.
Because
of time zone differences, credits of securities received in Clearstream or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. These credits or any transactions in securities settled
during this processing will be reported to the relevant Euroclear or Clearstream
Participants on that following business day. Cash received in Clearstream or
Euroclear as a result of sales of securities by or through a Clearstream
Participant or Euroclear Participant to a DTC Participant will be received
with
value on the DTC settlement date but will be available in the relevant
Clearstream or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures
relating to the Securities see “—Certain U.S. Federal Income Tax Documentation
Requirements” below and “Federal Income Tax Consequences—REMICs—Taxation of
Certain Foreign Investors” and “—Backup Withholding.”
Transfers
between Participants will occur in accordance with the Rules. Transfers between
Clearstream Participants and Euroclear Participants will occur in accordance
with their respective rules and operating procedures.
Cross-market
transfers between persons holding directly or indirectly through DTC, on the
one
hand, and directly or indirectly through Clearstream Participants or Euroclear
Participants, on the other, will be effected in accordance with the Rules on
behalf of the relevant European international clearing system by the Relevant
Depositary; however, these cross-market transfers will require delivery of
instructions to the relevant European international clearing system by the
counterparty in the system in accordance with its rules and procedures and
within established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant Depositary to take action
to
effect final settlement on its behalf by delivering or receiving securities
in
DTC, and making or receiving payment in accordance with normal procedures for
same day funds settlement applicable to DTC. Clearstream Participants and
Euroclear Participants may not deliver instructions directly to the European
Depositaries.
The
Depository Trust Company (“DTC”)
is a
limited purpose trust company organized under the laws of the State of New
York,
a member of the Federal Reserve System, a “clearing corporation” within the
meaning of the New York Uniform Commercial Code and a “clearing agency”
registered pursuant to Section 17A of the Securities Exchange Act of 1934,
as amended (the “Exchange
Act”).
DTC
performs services for its Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Securities, whether held for its own account or as a nominee for another
person.
In general, beneficial ownership of Book-Entry Securities will be subject
to the
Rules, as in effect from time to time.
Clearstream
International, a Luxembourg limited liability company, was formed in January
2000 through the merger of Cedel International and Deutsche Boerse
Clearing.
Clearstream
is registered as a bank in Luxembourg and is subject to regulation by the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
41
Clearstream
holds securities for its Participants and facilitates the clearance and
settlement of securities transactions by electronic book-entry transfers between
their accounts. Clearstream provides various services, including safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream also deals with domestic
securities markets in several countries through established depository and
custodial relationships. Clearstream has established an electronic bridge with
Euroclear Bank S.A./N.V. (which operates Euroclear) in Brussels to facilitate
settlement of trades between systems. Clearstream currently accepts over 200,000
securities issues on its books.
Clearstream’s
customers are world-wide financial institutions including underwriters,
securities brokers and dealers, banks, trust companies and clearing
corporations. Clearstream’s United States customers are limited to securities
brokers and dealers and banks. Currently, Clearstream has approximately 2,500
customers located in over 80 countries, including all major European countries,
Canada and the United States. Indirect access to Clearstream is available to
other institutions which clear through or maintain custodial relationship with
an account holder of Clearstream.
The
Euroclear System was created in 1968 to hold securities for its Participants
and
to clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled
in a
variety of currencies, including United States dollars. Euroclear provides
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to
the
arrangements for cross-market transfers with DTC described above. Euroclear
is
operated by Euroclear Bank S.A./N.V. (the “Euroclear
Operator”).
All
operations are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator. Euroclear plc establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
Securities
clearance accounts and cash accounts with the Euroclear Operator are governed
by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law. These terms
and
conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect
to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the terms and conditions
of Euroclear only on behalf of Euroclear Participants, and has no record of
or
relationship with persons holding through Euroclear Participants.
Distributions
on the Book-Entry Securities will be made on each Distribution Date by the
Trustee to Cede & Co., as nominee of DTC. DTC will be responsible for
crediting the amount of these distributions to the accounts of the applicable
DTC Participants in accordance with DTC’s normal procedures. Each DTC
Participant will be responsible for disbursing these distributions to the
Beneficial Owners of the Book-Entry Securities that it represents and to
each
Financial Intermediary for which it acts as agent. Each Financial Intermediary
will be responsible for disbursing funds to the Beneficial Owners of the
Book-Entry Securities that it represents.
Under
a
book-entry format, Beneficial Owners of the Book-Entry Securities may experience
some delay in their receipt of payments, since payments will be forwarded
by the
Trustee to Cede & Co. Distributions with respect to Securities held through
Clearstream or Euroclear will be credited to the cash accounts of Clearstream
Participants or Euroclear Participants in accordance with the relevant system’s
rules and procedures, to the extent received by the Relevant Depositary.
These
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See “Federal Income Tax
Consequences—REMICs—Taxation of Certain Foreign Investors” and “—Backup
Withholding.” Because DTC can only act on behalf of DTC Participants, the
ability of a Beneficial Owner to pledge Book-Entry Securities to persons
or
entities that do not participate in the depository system, or otherwise take
actions regarding their Book-Entry Securities, may be limited due to the
lack of
physical certificates for their Book-Entry Securities. In addition, issuance
of
the Book-Entry Securities in book-entry form may reduce the liquidity of
the
Book-Entry Securities in the secondary market since certain potential investors
may be unwilling to purchase Securities for which they cannot obtain physical
certificates.
42
DTC
has
advised the Depositor that, unless and until Definitive Securities are issued,
DTC will take any action the holders of the Book-Entry Securities are permitted
to take under the Pooling and Servicing Agreement only at the direction of
one
or more DTC Participants to whose DTC accounts the Book-Entry Securities are
credited, to the extent that these actions are taken on behalf of Financial
Intermediaries whose holdings include the Book-Entry Securities. Clearstream
or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Securityholder under the Pooling and Servicing Agreement on
behalf of a Clearstream Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect these actions on its behalf through DTC. DTC
may
take actions, at the direction of the related Participants, with respect to
some
Book-Entry Securities which conflict with actions taken with respect to other
Book-Entry Securities.
Definitive
Securities will be issued to beneficial owners of the Book-Entry Securities,
or
their nominees, rather than to DTC, only if (a) DTC advises the Trustee in
writing that DTC is no longer willing, qualified or able to discharge properly
its responsibilities as nominee and depository with respect to the Book-Entry
Securities and the Depositor or the Trustee is unable to locate a qualified
successor or (b) in the case of Securities of a Series that receive
distributions pursuant to request or random lot, if pro
rata
distributions cannot be made through the facilities of DTC.
Upon
the
occurrence of any event described in the immediately preceding paragraph, the
Trustee will be required to notify the applicable beneficial owners of the
occurrence of the event and the availability through DTC of Definitive
Securities. Upon surrender by DTC of the global certificate or certificates
representing the Book-Entry Securities and instructions for re-registration,
the
Trustee will issue Definitive Securities, and thereafter the Trustee will
recognize the holders of those Definitive Securities as Securityholders under
the Pooling and Servicing Agreement.
Although
DTC, Clearstream and Euroclear have agreed to the foregoing procedures in order
to facilitate transfers of Book-Entry Securities among participants of DTC,
Clearstream and Euroclear, they are under no obligation to perform or continue
to perform these procedures and these procedures may be discontinued at any
time.
In
the
event of the insolvency of DTC, a DTC Participant or an Indirect DTC Participant
in whose name Book-Entry Securities are registered, the ability of the
Beneficial Owners of the Book-Entry Securities to obtain timely payment and,
if
the limits of applicable insurance coverage by the Securities Investor
Protection Corporation are exceeded or if the coverage is otherwise unavailable,
ultimate payment, of amounts distributable with respect to the Book-Entry
Securities may be impaired.
Secondary
Market Trading
Since
the
purchaser determines the place of delivery, it is important to establish
at the
time of the trade where both the purchaser’s and seller’s accounts are located
to ensure that settlement can be made on the desired value date.
Trading
between DTC Participants.
Secondary market trading between DTC Participants will be settled using the
procedures applicable to prior mortgage loan asset-backed certificates issued
in
same-day funds.
Trading
between Clearstream and/or Euroclear Participants.
Secondary market trading between Clearstream Participants or Euroclear
Participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading
between DTC seller and Clearstream or Euroclear purchaser.
When
Book-Entry Securities are to be transferred from the account of a DTC
Participant to the account of a Clearstream Participant or a Euroclear
Participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream Participant or Euroclear Participant at least one business
day prior to settlement. Clearstream or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Book-Entry Securities against
payment. Payment will include interest accrued on the Book-Entry Securities
from
and including the last coupon payment date to and excluding the settlement
date,
on the basis of either a 360-day year comprised of 30-day months or the actual
number of days in the accrual period and a year assumed to consist of 360
days,
as applicable. For transactions settling on the 31st
of the
month, payment will include interest accrued to and excluding the first day
of
the following month. Payment will then be made by the respective Depositary
of
the DTC Participant’s account against delivery of the Book-Entry Securities.
After settlement has been completed, the Book-Entry Securities will be credited
to the respective clearing system and by the clearing system, in accordance
with
its usual procedures, to the Clearstream Participant’s or Euroclear
Participant’s account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the
Book-Entry Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e.,
the
trade fails), the Clearstream or Euroclear cash debt will be valued instead
as
of the actual settlement date.
43
Clearstream
Participants and Euroclear Participants will need to make available to the
respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Clearstream or Euroclear. Under this
approach, they may take on credit exposure to Clearstream or Euroclear until
the
Book-Entry Securities are credited to their accounts one day later.
As
an
alternative, if Clearstream or Euroclear has extended a line of credit to them,
Clearstream Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Clearstream Participants or Euroclear Participants purchasing
Book-Entry Securities would incur overdraft charges for one day, assuming they
cleared the overdraft when the Book-Entry Securities were credited to their
accounts. However, interest on the Book-Entry Securities would accrue from
the
value date. Therefore, in many cases the investment income on the Book-Entry
Securities earned during that one-day period may substantially reduce or offset
the amount of the overdraft charges, although this result will depend on each
Clearstream Participant’s or Euroclear Participant’s particular cost of
funds.
Since
the
settlement is taking place during New York business hours, DTC Participants
can
employ their usual procedures for sending Book-Entry Securities to the
respective European Depositary for the benefit of Clearstream Participants
or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC
Participants.
Trading
between Clearstream or Euroclear Seller and DTC Purchaser.
Due to
time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Book-Entry Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will
send
instructions to Clearstream or Euroclear through a Clearstream Participant
or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Book-Entry Securities to the DTC Participant’s
account against payment. Payment will include interest accrued on the Book-Entry
Securities from and including the last coupon payment to and excluding the
settlement date on the basis of either a 360-day year comprised of 30-day
months
or the actual number of days in the accrual period and a year assumed to
consist
of 360 days, as applicable. For transactions settling on the 31st
of the
month, payment will include interest accrued to and excluding the first day
of
the following month. The payment will then be reflected in the account of
the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant’s or Euroclear Participant’s
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred
over
that one-day period. If settlement is not completed on the intended value
date
(i.e.,
the
trade fails), receipt of the cash proceeds in the Clearstream Participant’s or
Euroclear Participant’s account would instead be valued as of the actual
settlement date.
Finally,
day traders that use Clearstream or Euroclear and that purchase Book-Entry
Securities from DTC Participants for delivery to Clearstream Participants
or
Euroclear Participants should note that these trades would automatically
fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
44
(a) borrowing
through Clearstream or Euroclear for one day (until the purchase side of the
day
trade is reflected in their Clearstream or Euroclear accounts) in accordance
with the clearing system’s customary procedures;
(b) borrowing
the Book-Entry Securities in the U.S. from a DTC Participant no later than
one
day prior to settlement, which would give the Book-Entry Securities sufficient
time to be reflected in their Clearstream or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering
the value dates for the buy and sell sides of the trade so that the value date
for the purchase from the DTC Participant is at least one day prior to the
value
date for the sale to the Clearstream Participant or Euroclear
Participant.
Certain
U.S. Federal Income Tax Documentation Requirements.
A
Beneficial Owner of Book-Entry Securities that is not a U.S. Person within
the
meaning of Section 7701(a)(30) of the Code (a “Non-U.S.
Holder”)
holding a Book-Entry Security through Clearstream, Euroclear or DTC may be
subject to U.S. withholding tax unless it provides certain documentation to
the
Trustee, a Paying Agent or any other entity required to withhold tax (any of
the
foregoing, a “U.S.
Withholding Agent”)
establishing an exemption from withholding. A Non-U.S. Holder may be subject
to
withholding unless each U.S. Withholding Agent receives:
(i) from
a
Non-U.S. Holder that is classified as a corporation for U.S. federal income
tax
purposes or is an individual, and is eligible for the benefits of the portfolio
interest exemption or an exemption (or reduced rate) based on a treaty, a duly
completed and executed IRS Form W-8BEN (or any successor form);
(ii) from
a
Non-U.S. Holder that is eligible for an exemption on the basis that the holder’s
income from the Book-Entry Securities is effectively connected to its U.S.
trade
or business, a duly completed and executed IRS Form W-8ECI (or any successor
form);
(iii) from
a
Non-U.S. Holder that is classified as a partnership for U.S. federal income
tax
purposes, a duly completed and executed IRS Form W-8IMY (or any successor form)
with all supporting documentation (as specified in the U.S. Treasury
regulations) required to substantiate exemptions from withholding on behalf
of
its partners; certain partnerships may enter into agreements with the IRS
providing for different documentation requirements and it is recommended that
those partnerships consult their tax advisors regarding these certification
rules;
(iv) from
a
Non-U.S. Holder that is an intermediary (i.e.,
a
person acting as a custodian, a broker, nominee or otherwise as an agent
for the
Beneficial Owner of Book-Entry Securities):
(a) if
the
intermediary is a “qualified intermediary” within the meaning of Section
1.1441-1(e)(5)(ii) of the U.S. Treasury regulations (a “Qualified
Intermediary”),
a
duly completed and executed IRS Form W-8IMY (or any successor or substitute
form):
(1) stating
the name, permanent residence address and employer identification number
of the
Qualified Intermediary and the country under the laws of which the Qualified
Intermediary is created, incorporated or governed,
(2) certifying
that the Qualified Intermediary has provided, or will provide, a withholding
statement as required under Section 1.1441-1(e)(5)(v) of the U.S. Treasury
regulations,
(3) certifying
that, with respect to accounts it identifies on its withholding statement,
the
qualified intermediary is not acting for its own account but is acting as
a
qualified intermediary, and
(4) providing
any other information, certifications, or statements that may be required
by the
IRS Form W-8IMY or accompanying instructions in addition to, or in lieu of,
the
information and certifications described in Section 1.1441-1(e)(3)(ii) or
1.1441-1(e)(5)(v) of the U.S. Treasury regulations; or
45
(b) if
the
intermediary is not a Qualified Intermediary, a duly completed and executed
IRS
Form W-8IMY (or any successor or substitute form):
(1) stating
the name and permanent residence address of the non-Qualified Intermediary
and
the country under the laws of which the non-Qualified Intermediary is created,
incorporated or governed,
(2) certifying
that the non-Qualified Intermediary is not acting for its own
account,
(3) certifying
that the non-Qualified Intermediary has provided, or will provide, a withholding
statement that is associated with the appropriate IRS Forms W-8 and W-9 required
to substantiate exemptions from withholding on behalf of the non-Qualified
Intermediary’s beneficial owners, and
(4) providing
any other information, certifications or statements that may be required by
the
IRS Form W-8IMY or accompanying instructions in addition to, or in lieu of,
the
information, certifications, and statements described in Section
1.1441-1(e)(3)(iii) or (iv) of the U.S. Treasury regulations; or
(v) from
a
Non-U.S. Holder that is a trust, depending on whether the trust is classified
for U.S. federal income tax purposes as the beneficial owner of Book-Entry
Securities, either an IRS Form W-8BEN or W-8IMY; any Non-U.S. Holder that is
a
trust should consult its tax advisors to determine which of these forms it
should provide.
All
Non-U.S. Holders will be required to update the above-listed forms and any
supporting documentation in accordance with the requirements under the U.S.
Treasury regulations. These forms generally remain in effect for a period
starting on the date the form is signed and ending on the last day of the third
succeeding calendar year, unless a change in circumstances makes any information
on the form incorrect. Under certain circumstances, an IRS Form W-8BEN, if
furnished with a taxpayer identification number, remains in effect until the
status of the beneficial owner changes, or a change in circumstances makes
any
information on the form incorrect.
In
addition, all holders, including holders that are U.S. Persons, holding
Book-Entry Securities through Clearstream, Euroclear or DTC may be subject
to
backup withholding unless the holder:
(a) provides
the appropriate IRS Form W-8 (or any successor or substitute form), duly
completed and executed, if the holder is a Non-U.S. Holder;
(b) provides
a duly completed and executed IRS Form W-9, if the Holder is a U.S. Person;
or
(c) can
be
treated as a “exempt recipient” within the meaning of Section 1.6049-4(c)(1)(ii)
of the U.S. Treasury regulations (e.g., a corporation or a financial institution
such as a bank).
This
summary does not deal with all of the aspects of U.S. federal income tax
withholding or backup withholding that may be relevant to investors that
are
Non-U.S. Holders. Those holders are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of Book-Entry
Securities.
Mandatory
Auction of Certificates
If
specified in the prospectus supplement for a series, one or more Classes
of
Securities (“Auction
Securities”)may
be
subject to a mandatory auction. Prior to a Distribution Date specified in
the
applicable prospectus supplement (the “Auction
Distribution Date”),
the
Trustee or another party specified in the prospectus supplement, in its capacity
as auction administrator (the “Auction
Administrator”),
will
solicit bids for the purchase of each Class of Auction Securities then
outstanding from third party investors.
46
On
the
Auction Distribution Date, the Auction Securities will be transferred to third
party investors, and upon this transfer the holders of each class of Auction
Securities will be entitled to receive an amount (the “Par
Price”)
equal
to the related Security Balance, plus, if applicable, accrued interest on that
Class Balance (following all distributions and the allocation of Realized Losses
on the Auction Distribution Date).
The
Auction Administrator will enter into a swap agreement pursuant to which the
counterparty will agree to pay the excess, if any, of the Par Price over the
amounts received for a Class of Auction Securities in the auction. If all or
a
portion of a Class of Auction Securities is not sold in the auction, the
counterparty will pay the Auction Administrator the Par Price (or portion of
the
Par Price) of the unsold Securities. If the amount received in the auction
is
greater than the Par Price, that excess will be paid by the Trust to the
counterparty to the swap agreement and will not be available for distribution
to
Securityholders.
If
the
counterparty defaults on its obligations under the swap agreement, no Securities
of a Class of Auction Securities will be transferred to third parties unless
bids equal to or higher than the applicable Par Price (or pro
rata
portion
in the case of a bid for less than all of a Class) are received. In addition,
if
the counterparty defaults and third party investors bid an amount equal to
or
higher than the pro
rata
portion
of the Par Price for some, but not all, of a Class of Auction Securities, only
a
portion of the Securities of such Class will be transferred to the successful
bidders on the Auction Distribution Date. If only a portion of a Class is
transferred, each holder of such Class will transfer only a pro
rata
portion
of its Securities on the Auction Distribution Date.
See
“Risk
Factors—Amounts Received from the Auction and the Swap Agreement May Be
Insufficient to Assure Completion of the Auction” in this
prospectus.
DESCRIPTION
OF THE AGREEMENTS
Agreements
Applicable to a Series
REMIC
Securities, Grantor Trust Securities
Securities
representing interests in a Trust Fund, or a portion thereof, that the Trustee
will elect to have treated as REMIC Securities or Grantor Trust Securities
will
be issued, and the related Trust Fund will be created, pursuant to a pooling
and
servicing agreement (a “Pooling and Servicing Agreement”) among the Depositor,
the Trustee and the Servicer, Servicers or Master Servicer, as applicable.
The
Assets of such Trust Fund will be transferred to the Trust Fund and thereafter
serviced in accordance with the terms of the Pooling and Servicing Agreement.
In
the event there are multiple Servicers of the Assets of such Trust Fund, each
Servicer may perform its servicing functions pursuant to a servicing agreement
(each, an “Underlying Servicing Agreement”).
Securities
That Are Partnership Interests for Tax Purposes and Notes
Partnership
Securities that are partnership interests for tax purposes will be issued,
and
the related Trust Fund will be created, pursuant to a Pooling and Servicing
Agreement.
A
Series
of Notes issued by a Trust Fund will be issued pursuant to an indenture (the
“Indenture”)
between the related Trust Fund and the Indenture Trustee named in the related
prospectus supplement. The Trust Fund will be established pursuant to a deposit
trust agreement (each, a “Deposit
Trust Agreement”)
between the Depositor and an owner trustee specified in the prospectus
supplement relating to such Series of Notes. The Assets securing payment on
the
Notes will be serviced in accordance with a servicing agreement (each, an
“Indenture
Servicing Agreement”)
between the related Trust Fund as issuer of the Notes, the Servicer and the
Indenture Trustee. The Pooling and Servicing Agreements, the Indenture Servicing
Agreements, the Underlying Servicing Agreements and the Indenture are referred
to each as an “Agreement.”
Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements
47
General
The
following summaries describe the material provisions that may appear in each
Pooling and Servicing Agreement and Underlying Servicing Agreement. The
prospectus supplement for a Series of Securities will describe the specific
provisions of the applicable Agreement relating to such Series. The provisions
of each Agreement will vary depending upon the nature of the Securities to
be
issued thereunder and the nature of the related Trust Fund. As used herein
with
respect to any Series, the term “Security”
refers
to all of the Securities of that Series, whether or not offered hereby and
by
the related prospectus supplement, unless the context otherwise requires.
A form
of a Pooling and Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this prospectus is a part.
The
servicers (the “Servicers“),
any
master servicer (the “Master
Servicer“)
and
the trustee (the “Trustee“)
or
indenture trustee (the “Indenture
Trustee“),
as
applicable, with respect to any Series of Securities will be named in the
related prospectus supplement. In the event there are multiple Servicers
for the
Assets in a Trust Fund, a Master Servicer may perform certain administration,
calculation and reporting functions with respect to such Trust Fund and
supervise the related Servicers pursuant to a Pooling and Servicing Agreement.
With respect to Series involving a Master Servicer, references in this
prospectus to the Servicer will apply to the Master Servicer where non-servicing
obligations are described. If specified in the related prospectus supplement,
a
securities administrator may be appointed pursuant to the Pooling and Servicing
Agreement for any Trust Fund to administer such Trust Fund.
Assignment
of Assets; Repurchases
At
the
time of issuance of any Series of Securities, the Depositor will assign (or
cause to be assigned) to the designated Trustee the Assets to be included
in the
related Trust Fund, together with all principal and interest to be received
on
or with respect to such Assets after the Cut-off Date, other than principal
and
interest due on or before the Cut-off Date and other than any Retained Interest.
The Trustee will, concurrently with such assignment, deliver the Securities
to
the Depositor in exchange for the Assets and the other assets comprising
the
Trust Fund for such Series. Each Asset will be identified in a schedule
appearing as an exhibit to the applicable Agreement. Such schedule will include
detailed information to the extent available and relevant (i) in respect of
each Mortgage Loan included in the related Trust Fund, including without
limitation, the state and zip code of the related Mortgaged Property and
type of
such property, the Mortgage Interest Rate and, if applicable, the applicable
index, margin, adjustment date and any rate cap information, the original
and
remaining term to maturity, the original and outstanding principal balance
and
balloon payment, if any, the Loan-to-Value Ratio as of the date indicated
and
payment and prepayment provisions, if applicable; and (ii) in respect of
each Contract included in the related Trust Fund, including without limitation
the outstanding principal amount and the Contract Rate.
With
respect to each Mortgage Loan, the Depositor generally will deliver or cause
to
be delivered to the Trustee (or a custodian for the Trustee) certain loan
documents, which will in most cases include the original Mortgage Note endorsed,
without recourse, in blank or to the order of the Trustee, the original Mortgage
(or a certified copy thereof) with evidence of recording indicated thereon
and
an assignment of the Mortgage to the Trustee in recordable form. Notwithstanding
the foregoing, a Trust Fund may include Mortgage Loans where the original
Mortgage Note is not delivered to the Trustee if the Depositor or Asset Seller
delivers to the Trustee or a custodian for the Trustee a copy or a duplicate
original of the Mortgage Note, together with an affidavit certifying that the
original thereof has been lost or destroyed. With respect to such Mortgage
Loans, the Trustee (or its nominee) may not be able to enforce the Mortgage
Note
against the related borrower. The Asset Seller or other entity specified in
the
related prospectus supplement will be required to agree to repurchase, or
substitute for, each such Mortgage Loan that is subsequently in default if
the
enforcement thereof or of the related Mortgage is materially adversely affected
by the absence of the original Mortgage Note. The applicable Agreement will
generally require the Depositor or another party specified in the related
prospectus supplement to promptly cause each such assignment of Mortgage to
be
recorded in the appropriate public office for real property records, unless
(i)
with respect to a particular state, the Trustee has received an opinion of
counsel acceptable to it that such recording is not required to make the
assignment effective against the parties to the Mortgage or subsequent
purchasers or encumbrancers of the Mortgaged Property or (ii) recordation in
a
state is not required by the Rating Agencies rating the Series in order to
obtain the initial ratings on the Securities described in the related prospectus
supplement.
48
Notwithstanding
the preceding paragraph, with respect to any Mortgage Loan which has been
recorded in the name of Mortgage Electronic Registration Systems, Inc.
(“MERS“)
or its
designee, no mortgage assignment in favor of the Trustee will be required
to be
prepared or delivered. Instead, the Master Servicer and the applicable Servicer
will be required to take all actions as are necessary to cause the applicable
Trust Fund to be shown as the owner of the related Mortgage Loan on the records
of MERS for purposes of the system of recording transfers of beneficial
ownership of mortgages maintained by MERS.
The
Trustee (or a custodian) will review such Mortgage Loan documents within
a
period of days specified in the related prospectus supplement after receipt
thereof, and the Trustee (or a custodian) will hold such documents in trust
for
the benefit of the Securityholders. If any such document is found to be missing
or defective in any material respect, the Trustee (or such custodian) shall
immediately notify the Asset Seller, the Servicer, the Depositor and any
other
entity specified in the related prospectus supplement. If the Asset Seller
or
other entity specified in the related prospectus supplement cannot cure the
omission or defect within a specified number of days after receipt of such
notice, then the Asset Seller or other entity specified in the related
prospectus supplement will be obligated, within a specified number of days
of
receipt of such notice, to repurchase the related Mortgage Loan from the
Trustee
at a price equal to the sum of the unpaid principal balance thereof, plus
unpaid
accrued interest at the interest rate for such Asset from the date as to
which
interest was last paid to the due date in the Collection Period in which
the
relevant purchase is to occur, plus any unpaid servicing fees and unreimbursed
advances that are payable to the Servicer or such other price as specified
in
the related prospectus supplement (the “Purchase
Price”)
or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the Servicer nor the Depositor will be obligated
to
repurchase or substitute for such Mortgage Loan if the Asset Seller or other
named entity defaults on its obligation. This repurchase or substitution
obligation constitutes the sole remedy available to the Securityholders or
the
Trustee for omission of, or a material defect in, a constituent
document.
Notwithstanding
the preceding two paragraphs, the documents with respect to Home Equity Loans,
Home Improvement Contracts and Unsecured Home Improvement Loans will be
delivered to the Trustee (or a custodian) only to the extent specified in the
related prospectus supplement. Generally such documents will be retained by
the
Servicer, which may also be the Asset Seller. In addition, assignments of the
related Mortgages to the Trustee will be recorded only to the extent specified
in the related prospectus supplement.
With
respect to each Contract, the Servicer (which may also be the Asset Seller)
generally will maintain custody of the original Contract and copies of documents
and instruments related to each Contract and the security interest in the
Manufactured Home securing each Contract. In order to give notice of the right,
title and interest of the Trustee in the Contracts, the Depositor will cause
UCC-1 financing statements to be authorized by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying
the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. The Contracts will be stamped or otherwise marked to reflect their
assignment from the Company to the Trust Fund only to the extent specified
in
the related prospectus supplement. Therefore, if, through negligence, fraud
or
otherwise, a subsequent purchaser were able to take physical possession of
the
Contracts without notice of such assignment, the interest of the Trustee in
the
Contracts could be defeated. See
“Certain Legal Aspects of the Contracts.”
While
the
Contract documents will not be reviewed by the Trustee or the Servicer, if
the
Servicer finds that any such document is missing or defective in any material
respect, the Servicer will be required to immediately notify the Depositor
and
the relevant Asset Seller or other entity specified in the related prospectus
supplement. If the Asset Seller or such other entity cannot cure the omission
or
defect within a specified number of days after receipt of such notice, then
the
Asset Seller or such other entity will be obligated, within a specified number
of days of receipt of such notice, to repurchase the related Contract from
the
Trustee at the Purchase Price or substitute for such Contract. There can be
no
assurance that an Asset Seller or such other entity will fulfill this repurchase
or substitution obligation, and neither the Servicer nor the Depositor will
be
obligated to repurchase or substitute for such Contract if the Asset Seller
or
such other entity defaults on its obligation. This repurchase or substitution
obligation constitutes the sole remedy available to the Securityholders or
the
Trustee for omission of, or a material defect in, a constituent document. To
the
extent specified in the related prospectus supplement, in lieu of curing any
omission or defect in the Asset or repurchasing or substituting for such Asset,
the Asset Seller may agree to cover any losses suffered by the Trust Fund as
a
result of such breach or defect.
49
Representations
and Warranties; Repurchases
To
the
extent provided in the related prospectus supplement the Asset Seller, the
Sponsor or the Depositor or any combination thereof will, with respect to
each
Asset, make or assign certain representations and warranties, as of a specified
date (the person making such representations and warranties, the “Warranting
Party”)
covering, by way of example, the following types of matters: (i) the
accuracy of the information set forth for such Asset on the schedule of Assets
appearing as an exhibit to the applicable Agreement; (ii) in the case of a
Mortgage Loan, the existence of title insurance insuring the lien priority
of
the Mortgage Loan or an opinion of counsel of the type customarily rendered
in
the applicable jurisdiction in lieu of a title insurance policy and, in the
case
of a Contract, that the Contract creates a valid first security interest
in or
lien on the related Manufactured Home; (iii) the authority of the
Warranting Party to sell the Asset; (iv) the payment status of the Asset;
(v) in the case of a Mortgage Loan, the existence of customary provisions
in the related Mortgage Note and Mortgage to permit realization against the
Mortgaged Property of the benefit of the security of the Mortgage; and
(vi) the existence of hazard insurance coverage on the Mortgaged Property
or Manufactured Home.
Any
Warranting Party shall be an Asset Seller or an affiliate thereof or such
other
person acceptable to the Depositor and shall be identified in the related
prospectus supplement.
Representations
and warranties made in respect of an Asset may have been made as of a date
prior
to the applicable Cut-off Date. A substantial period of time may have elapsed
between such date and the date of initial issuance of the related Series
of
Securities evidencing an interest in such Asset. In the event of a breach
of any
such representation or warranty, the Warranting Party will be obligated to
reimburse the Trust Fund for losses caused by any such breach or either cure
such breach or repurchase or replace the affected Asset as described below.
Since the representations and warranties may not address events that may
occur
following the date as of which they were made, the Warranting Party will
have a
reimbursement, cure, repurchase or substitution obligation in connection
with a
breach of such a representation and warranty only if the relevant event that
causes such breach occurs prior to such date. Although the Warranting Party
would have no such obligations if the relevant event that causes such breach
occurs after such date, the Sponsor specified in the applicable prospectus
supplement will generally be required by the applicable Rating Agencies to
make
representations and warranties that address this gap period.
Each
Agreement will provide that the Servicer and/or Trustee or such other entity
identified in the related prospectus supplement will be required to notify
promptly the relevant Warranting Party of any breach of any representation
or
warranty made by it in respect of an Asset that materially and adversely affects
the value of such Asset or the interests therein of the Securityholders. If
such
Warranting Party cannot cure such breach within a specified period following
the
date on which such party was notified of such breach, then such Warranting
Party
will be obligated to repurchase such Asset from the Trustee within a specified
period from the date on which the Warranting Party was notified of such breach,
at the Purchase Price therefor. If so provided in the prospectus supplement
for
a Series, a Warranting Party, rather than repurchase an Asset as to which a
breach has occurred, will have the option, within a specified period after
initial issuance of such Series of Securities, to cause the removal of such
Asset from the Trust Fund and substitute in its place one or more other Assets,
as applicable, in accordance with the standards described in the related
prospectus supplement. This reimbursement, repurchase or substitution obligation
will constitute the sole remedy available to Securityholders or the Trustee
for
a breach of representation by a Warranting Party.
The
Sponsor identified in the applicable prospectus supplement, if not the
Warranting Party, in addition to making representations and warranties regarding
the Assets covering any gap between the date the Warranting Party made its
representations and warranties and the Closing Date as described above, will
be
obligated to repurchase such Asset from the Trustee within a specified period
from the date on which it is notified of a breach of its representations and
warranties if it cannot cure such breach but only to the extent the Warranting
Party is not also obligated to repurchase such Asset from the Trustee. Neither
the Depositor nor the Servicer (except to the extent the Depositor or the
Servicer is the Warranting Party) will be obligated to purchase or substitute
for an Asset if a Warranting Party defaults on its obligation to do so, and
no
assurance can be given that Warranting Parties will carry out such obligations
with respect to the Assets.
A
Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under,
the
applicable Agreement. A breach of any such representation of the Servicer which
materially and adversely affects the interests of the Securityholders and which
continues unremedied for the number of days specified in the applicable
Agreement after the giving of written notice of such breach to the Servicer
by
the Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee
by the holders of Securities evidencing not less than 25% of the Voting Rights
or such other percentage specified in the related prospectus supplement, will
constitute an Event of Default under such Agreement. See
“—Events of Default under the Agreements” and “—Rights Upon Event of Default
under the Agreements.”
50
Collection
Account and Related Accounts
General.
The
Servicer will, as to each Trust Fund, establish and maintain or cause to
be
established and maintained one or more separate accounts for the collection
of
payments on the related Assets (collectively, the “Collection
Account”),
which
must meet the requirements set forth in the applicable prospectus supplement.
A
Collection Account may be maintained as an interest bearing or a non-interest
bearing account and, if interest bearing, the funds held therein may be invested
pending each succeeding Distribution Date in certain investments acceptable
to
the applicable Rating Agencies. Any interest or other income earned on funds
in
the Collection Account will generally be paid to the Servicer or its designee
as
additional servicing compensation. The Collection Account may be maintained
with
an institution that is an affiliate of the Servicer, if applicable, provided
that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies, a Collection Account
may contain funds relating to more than one Series of mortgage pass-through
certificates and may contain other funds respecting payments on mortgage
loans
belonging to the Servicer or serviced or master serviced by it on behalf
of
others. The Trustee or a securities administrator, if specified in the
applicable prospectus supplement, will, as to each Trust Fund, establish
and
maintain or cause to be established and maintained a separate account into
which
it will deposit amounts remitted by the Servicer or Master Servicer for
distribution to Securityholders (the “Distribution
Account”),
which
must meet the requirements set forth in the applicable prospectus
supplement.
Deposits.
A
Servicer will deposit or cause to be deposited in the Collection Account for
one
or more Trust Funds on a daily basis, or such other period provided in the
applicable Agreement, the following payments and collections received, or
advances made, by the Servicer or the Trustee or on its behalf subsequent to
the
Cut-off Date (other than payments due on or before the Cut-off Date, and
exclusive of any amounts representing a Retained Interest):
(i) all
payments on account of principal, including principal prepayments, on the
Assets;
(ii) all
payments on account of interest on the Assets, including any default interest
collected, in each case net of any portion thereof retained by a Servicer as
its
servicing compensation and net of any Retained Interest;
(iii) Liquidation
Proceeds and Insurance Proceeds, together with the net proceeds on a monthly
basis with respect to any Assets acquired for the benefit of
Securityholders;
(iv) any
amounts paid under any instrument or drawn from any fund that constitutes credit
support for the related Series of Securities as described under “Description of
Credit Support”;
(v) any
advances made as described under “Description of the Securities—Advances in
Respect of Delinquencies”;
(vi) any
amounts paid under any Cash Flow Agreement, as described under “Cash Flow
Agreements”;
(vii) all
proceeds of any Asset or, with respect to a Mortgage Loan, property acquired
in
respect thereof purchased by the Depositor, the Sponsor, any Asset Seller or
any
other specified person as described under “—Assignment of Assets; Repurchases”
and “—Representations and Warranties; Repurchases,” all proceeds of any
defaulted Mortgage Loan purchased as described under “—Realization Upon
Defaulted Assets,” and all proceeds of any Asset purchased as described under
“Description of the Securities—Termination”;
51
(viii) any
amounts paid by a Servicer to cover certain interest shortfalls arising out
of
the prepayment of Assets in the Trust Fund as described under “Description of
the Agreements—Retained Interest; Servicing Compensation and Payment of
Expenses”;
(ix) to
the
extent that any such item does not constitute additional servicing compensation
to a Servicer, any payments on account of modification or assumption fees,
late
payment charges or Prepayment Charges on the Assets;
(x) all
payments required to be deposited in the Collection Account with respect
to any
deductible clause in any blanket insurance policy described under “—Hazard
Insurance Policies”;
(xi) any
amount required to be deposited by a Servicer or the Trustee in connection
with
losses realized on investments for the benefit of the Servicer or the Trustee,
as the case may be, of funds held in the Collection Account; and
(xii) any
other
amounts required to be deposited in the Collection Account as provided in
the
applicable Agreement and described in the related prospectus
supplement.
Withdrawals.
A
Servicer may, from time to time, make withdrawals from the Collection Account
for each Trust Fund for any of the following purposes:
(i) to
remit
to the Trustee or securities administrator for deposit in the Distribution
Account;
(ii) to
reimburse a Servicer for unreimbursed amounts advanced as described under
“Description of the Securities—Advances in Respect of Delinquencies,” such
reimbursement to be made out of amounts received which were identified and
applied by the Servicer as late collections of interest (net of related
servicing fees and Retained Interest) on and principal of the particular
Assets
with respect to which the advances were made or out of amounts drawn under
any
form of credit support with respect to such Assets;
(iii) to
reimburse a Servicer for unpaid servicing fees earned and certain unreimbursed
servicing advances and expenses incurred with respect to Assets and properties
acquired in respect thereof, such reimbursement to be made out of amounts that
represent Liquidation Proceeds and Insurance Proceeds collected on the
particular Assets and properties, and net income collected on the particular
properties, with respect to which such fees were earned or such expenses were
incurred or out of amounts drawn under any form of credit support with respect
to such Assets and properties;
(iv) to
reimburse a Servicer for any advances described in clause (ii) above and
any servicing expenses described in clause (iii) above which, in the
Servicer’s good faith judgment, will not be recoverable from the amounts
described in clauses (ii) and (iii), respectively, such reimbursement to be
made from amounts collected on other Assets;
(v) if
and to
the extent described in the related prospectus supplement, to pay a Servicer
interest accrued on the advances described in clause (ii) above and the
servicing expenses described in clause (iii) above while such advances and
servicing expenses remain outstanding and unreimbursed;
(vi) to
reimburse a Servicer, the Depositor, or any of their respective directors,
officers, employees and agents, as the case may be, for certain expenses, costs
and liabilities incurred thereby, as and to the extent described under “—Certain
Matters Regarding Servicers and the Master Servicer” and “The
Depositor”;
(vii) if
and to
the extent described in the related prospectus supplement, to pay the Trustee’s
fees;
(viii) to
reimburse the Trustee or any of its directors, officers, employees and agents,
as the case may be, for certain expenses, costs and liabilities incurred
thereby, as and to the extent described under “—Certain Matters Regarding the
Trustee”;
52
(ix) to
pay a
Servicer, as additional servicing compensation, interest and investment income
earned in respect of amounts held in the Collection Account;
(x) to
pay
the person entitled thereto any amounts deposited in the Collection Account
that
were identified and applied by the Servicer as recoveries of Retained
Interest;
(xi) to
pay
for costs reasonably incurred in connection with the proper management and
maintenance of any Mortgaged Property acquired for the benefit of
Securityholders by foreclosure or by deed in lieu of foreclosure or otherwise,
such payments to be made out of income received on such property;
(xii) if
one or
more elections have been made to treat the Trust Fund or designated portions
thereof as a REMIC, to pay any federal, state or local taxes imposed on the
Trust Fund or its assets or transactions, as and to the extent described
under
“Federal Income Tax Consequences—REMICs—Taxes That May Be Imposed on the REMIC
Pool” or in the applicable prospectus supplement, respectively;
(xiii) to
pay
for the cost of various opinions of counsel obtained pursuant to the applicable
Agreement for the benefit of Securityholders;
(xiv) to
pay
the person entitled thereto any amounts deposited in the Collection Account
in
error, including amounts received on any Asset after its removal from the
Trust
Fund whether by reason of purchase or substitution as contemplated by
“—Assignment of Assets; Repurchase” and “—Representations and Warranties;
Repurchases” or otherwise;
(xv) to
make
any other withdrawals permitted by the applicable Agreement; and
(xvi) to
clear
and terminate the Collection Account at the termination of the Trust
Fund.
Other
Collection Accounts.
Notwithstanding the foregoing, if so specified in the related prospectus
supplement, the applicable Agreement for any Series of Securities may provide
for the establishment and maintenance of a separate collection account into
which the Servicer will deposit on a daily basis the amounts described under
“—Deposits” above for one or more Series of Securities. Any amounts on deposit
in any such collection account will be withdrawn therefrom and deposited into
the appropriate Collection Account by a time specified in the related prospectus
supplement. To the extent specified in the related prospectus supplement, any
amounts which could be withdrawn from the Collection Account as described under
“—Withdrawals” above, may also be withdrawn from any such collection account.
The prospectus supplement will set forth any restrictions with respect to any
such collection account, including investment restrictions and any restrictions
with respect to financial institutions with which any such collection account
may be maintained.
Collection
and Other Servicing Procedures.
The
Servicer is required to make reasonable efforts to collect all scheduled
payments under the Assets and will follow or cause to be followed such
collection procedures as it would follow with respect to assets that are
comparable to the Assets and held for its own account, provided such procedures
are consistent with (i) the terms of the applicable Agreement and any
related hazard insurance policy or instrument of credit support, if any,
included in the related Trust Fund described herein or under “Description of
Credit Support,” (ii) applicable law and (iii) the general servicing
standard specified in the related prospectus supplement or, if no such standard
is so specified, its normal servicing practices (in either case, the
“Servicing
Standard”).
In
connection therewith, the Servicer will be permitted in its discretion to waive
any late payment charge or penalty interest in respect of a late payment on
an
Asset, subject to the terms and conditions of the applicable
agreement.
Each
Servicer will also be required to perform other customary functions of a
servicer of comparable assets, including maintaining hazard insurance policies
as described herein and in any related prospectus supplement, and filing and
settling claims thereunder; maintaining, to the extent required by the
applicable Agreement, escrow or impoundment accounts of obligors for payment
of
taxes, insurance and other items required to be paid by any obligor pursuant
to
the terms of the Assets; processing assumptions or substitutions in those cases
where the Servicer has determined not to enforce any applicable due-on-sale
clause; attempting to cure delinquencies; supervising foreclosures or
repossessions; inspecting and managing Mortgaged Properties or Manufactured
Homes under certain circumstances; and maintaining accounting records relating
to the Assets. The Servicer or such other entity specified in the related
prospectus supplement will be responsible for filing and settling claims in
respect of particular Assets under any applicable instrument of credit support.
See
“Description of Credit Support.”
53
The
Servicer may agree to modify, waive or amend any term of any Asset in a manner
consistent with the Servicing Standard so long as the modification, waiver
or
amendment is not materially adverse to Securityholders and will not change
the
Mortgage Interest Rate or Contract Rate, defer or forgive the payment thereof
of
any principal or interest payments, reduce the outstanding principal amount
(except for actual payments of principal) or extend the final maturity date
with
respect to such Asset. If a REMIC election has been made for the Trust Fund,
such modification, waiver or amendment may not affect adversely the status
of
any REMIC constituting part of the Trust Fund as a REMIC or cause any such
REMIC
to be subject to a tax on “prohibited transactions” or “contributions” pursuant
to the REMIC Provisions. The Servicer also may agree to any modification,
waiver
or amendment that would reduce the Principal Balance thereof, extend the
term of
the Asset or reduce the Mortgage Interest Rate or Contract rate by up to
50
basis points if, in its judgment, a material default on the Asset has occurred
or a payment default is reasonably foreseeable. The Servicer is required
to
notify the Trustee in the event of any modification, waiver or amendment
of any
Asset.
Notwithstanding
the foregoing to the contrary, in the event of a voluntary principal prepayment
in full of a Mortgage Loan, a Servicer may not waive any Prepayment Charge
or
portion thereof required by the terms of the related Mortgage Note unless
(i)
the related Mortgage Loan is in default or default is reasonably foreseeable
and
such waiver (A) is standard and customary in servicing mortgage loans similar
to
the Mortgage Loans and (B) the Servicer determines that such waiver would
maximize recovery of Liquidation Proceeds for such Mortgage Loan, taking
into
account the value of such Prepayment Charge, (ii) (A) the enforceability
thereof
is limited (1) by bankruptcy, insolvency, moratorium, receivership, or other
similar law relating to creditors’ rights generally or (2) due to acceleration
in connection with a foreclosure or other involuntary payment, or (B) the
enforceability is otherwise limited or prohibited by applicable law, (iii)
the
Servicer has not been provided with information sufficient to enable it to
collect the Prepayment Charge, (iv) the collection of such Prepayment Charge
would be considered “predatory” pursuant to written guidance published or issued
by an applicable federal, state, or local regulatory authority acting in
its
official capacity and having jurisdiction over such matters or (v) there
is a
certified class action in which a similar type of Prepayment Charge is being
challenged. The applicable prospectus supplement will specify if a particular
Servicer is not permitted to waive a Prepayment Charge pursuant to one or
more
of the clauses in the previous sentence. If the Servicer waives or does not
collect all or a portion of a Prepayment Charge relating to a voluntary
Principal Prepayment in full due to any action or omission of the Servicer,
other than as provided above, the Servicer generally will, on the date on
which
the principal prepayment in full is remitted to the Trustee, deliver to the
Trustee the amount of the Prepayment Charge from its own funds for distribution
in accordance with the terms of the applicable Agreement.
In
the
case of Multifamily Mortgage Loans, a mortgagor’s failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the Mortgage Loan debt, or may reflect the diversion of that income from the
servicing of the Mortgage Loan debt. In addition, a mortgagor under a
Multifamily Mortgage Loan that is unable to make Mortgage Loan payments may
also
be unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the Servicer will be
required to monitor any Multifamily Mortgage Loan that is in default, evaluate
whether the causes of the default can be corrected over a reasonable period
without significant impairment of the value of the related Mortgaged Property,
initiate corrective action in cooperation with the mortgagor if cure is likely,
inspect the related Multifamily Property and take such other actions as are
consistent with the applicable Agreement. A significant period of time may
elapse before the Servicer is able to assess the success of any such corrective
action or the need for additional initiatives. The time within which the
Servicer can make the initial determination of appropriate action, evaluate
the
success of corrective action, develop additional initiatives, institute
foreclosure proceedings and actually foreclose may vary considerably depending
on the particular Multifamily Mortgage Loan, the Multifamily Property, the
mortgagor, the presence of an acceptable party to assume the Multifamily
Mortgage Loan and the laws of the jurisdiction in which the Multifamily Property
is located.
54
Realization
Upon Defaulted Assets
Generally,
the Servicer is required to monitor any Assets which is in default, initiate
corrective action in cooperation with the mortgagor or obligor if cure is
likely, inspect the Asset and take such other actions as are consistent with
the
Servicing Standard. A significant period of time may elapse before the Servicer
is able to assess the success of such corrective action or the need for
additional initiatives.
Any
Agreement relating to a Trust Fund that includes Mortgage Loans or Contracts
may
grant to the Servicer and/or the holder or holders of certain Classes of
Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Mortgage Loan or Contract as to which
a
specified number of scheduled payments thereunder are delinquent. Any such
right
granted to the holder of an Offered Security will be described in the related
prospectus supplement. The related prospectus supplement will also describe
any
such right granted to any person if the predetermined purchase price is less
than the Purchase Price described under “—Representations and Warranties;
Repurchases.”
If
so
specified in the related prospectus supplement, the Servicer may offer to
sell
any defaulted Mortgage Loan or Contract described in the preceding paragraph
and
not otherwise purchased by any person having a right of first refusal with
respect thereto, if and when the Servicer determines, consistent with the
Servicing Standard, that such a sale would produce a greater recovery on
a
present value basis than would liquidation through foreclosure, repossession
or
similar proceedings. The applicable Agreement will provide that any such
offering be made in a commercially reasonable manner for a specified period
and
that the Servicer accept the highest cash bid received from any person
(including itself, an affiliate of the Servicer or any Securityholder) that
constitutes a fair price for such defaulted Mortgage Loan or Contract. In
the
absence of any bid determined in accordance with the applicable Agreement
to be
fair, the Servicer shall proceed with respect to such defaulted Mortgage
Loan or
Contract as described below. Any bid in an amount at least equal to the Purchase
Price described under “—Representations and Warranties; Repurchases” will in all
cases be deemed fair.
The
Servicer, on behalf of the Trustee, may at any time institute foreclosure
proceedings, exercise any power of sale contained in any mortgage, obtain
a deed
in lieu of foreclosure, or otherwise acquire title to a Mortgaged Property
securing a Mortgage Loan by operation of law or otherwise and may at any
time
repossess and realize upon any Manufactured Home, if such action is consistent
with the Servicing Standard and a default on such Mortgage Loan or Contract
has
occurred or, in the Servicer’s judgment, is imminent.
If
title
to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property by the close of the third calendar
year
after the year of acquisition, unless (i) the Internal Revenue Service (the
“IRS”)
grants
an extension of time to sell such property or (ii) the Trustee receives an
opinion of independent counsel to the effect that the holding of the property
by
the Trust Fund subsequent to the close of the third calendar year after the
year
of the acquisition of the property by the Trust Fund will not result in the
imposition of a tax on the Trust Fund or cause the Trust Fund to fail to qualify
as a REMIC under the Code at any time that any Securities are outstanding.
Subject to the foregoing, the Servicer will be required to (i) solicit bids
for any Mortgaged Property so acquired in such a manner as will be reasonably
likely to realize a fair price for such property and (ii) accept the first
(and, if multiple bids are contemporaneously received, the highest) cash bid
received from any person that constitutes a fair price.
The
limitations imposed by the applicable Agreement and the REMIC Provisions of
the
Code (if a REMIC election has been made with respect to the related Trust Fund)
on the ownership and management of any Mortgaged Property acquired on behalf
of
the Trust Fund may result in the recovery of an amount less than the amount
that
would otherwise be recovered. See
“Certain Legal Aspects of Mortgage Loans—Foreclosure.”
If
recovery on a defaulted Asset under any related instrument of credit support
is
not available, the Servicer nevertheless will be obligated to follow or cause
to
be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Asset. If the proceeds of any
liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued
thereon at the applicable interest rate, plus the aggregate amount of expenses
incurred by the Servicer in connection with such proceedings and which are
reimbursable under the applicable Agreement, the Trust Fund will realize a
loss
in the amount of such difference. The Servicer will be entitled to withdraw
or
cause to be withdrawn from the Collection Account out of the Liquidation
Proceeds recovered on any defaulted Asset, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Security, unreimbursed servicing expenses and
advances incurred with respect to the Asset and any unreimbursed advances of
delinquent payments made with respect to the Asset.
55
If
any
property securing a defaulted Asset is damaged the Servicer is not required
to
expend its own funds to restore the damaged property unless it determines
(i) that such restoration will increase the proceeds to Securityholders on
liquidation of the Asset after reimbursement of the Servicer for its expenses
and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds or Liquidation Proceeds.
As
servicer of the Assets, a Servicer, on behalf of itself, the Trustee and
the
Securityholders, will present claims to the obligor under each instrument
of
credit support, and will take such reasonable steps as are necessary to receive
payment or to permit recovery thereunder with respect to defaulted
Assets.
If
a
Servicer or its designee recovers payments under any instrument of credit
support with respect to any defaulted Assets, the Servicer will be entitled
to
withdraw or cause to be withdrawn from the Collection Account out of such
proceeds, prior to distribution thereof to Securityholders, amounts representing
its normal servicing compensation on such Asset, unreimbursed servicing expenses
incurred with respect to the Asset and any unreimbursed advances of delinquent
payments made with respect to the Asset. See
“—Hazard Insurance Policies” and “Description of Credit
Support.”
Hazard
Insurance Policies
Mortgage
Loans.
Generally, each Agreement for a Trust Fund comprised of Mortgage Loans will
require the Servicer to cause the mortgagor on each Mortgage Loan to maintain
a
hazard insurance policy providing for such coverage as is required under
the
related Mortgage or, if any Mortgage permits the holder thereof to dictate
to
the mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Such
coverage will be in general in an amount equal to the lesser of the principal
balance owing on such Mortgage Loan (but not less than the amount necessary
to
avoid the application of any co-insurance clause contained in the hazard
insurance policy) and the amount necessary to fully compensate for any damage
or
loss to the improvements on the Mortgaged Property on a replacement cost
basis
or such other amount specified in the related prospectus supplement. The
ability
of the Servicer to assure that hazard insurance proceeds are appropriately
applied may be dependent upon its being named as an additional insured under
any
hazard insurance policy and under any other insurance policy referred to
below,
or upon the extent to which information in this regard is furnished by
mortgagors. All amounts collected by the Servicer under any such policy (except
for amounts to be applied to the restoration or repair of the Mortgaged Property
or released to the mortgagor in accordance with the Servicer’s normal servicing
procedures, subject to the terms and conditions of the related Mortgage and
Mortgage Note) will be deposited in the Collection Account. The applicable
Agreement may provide that the Servicer may satisfy its obligation to cause
each
mortgagor to maintain such a hazard insurance policy by the Servicer’s
maintaining a blanket policy insuring against hazard losses on the Mortgage
Loans. If such blanket policy contains a deductible clause, the Servicer
will be
required to deposit in the Collection Account all sums that would have been
deposited therein but for such clause.
In
general, the standard form hazard insurance covers physical damage to or
destruction of the improvements of the property by fire, lightning, explosion,
smoke, windstorm and hail, subject to the conditions and exclusions specified
in
each policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance
with
different applicable state forms, and therefore will not contain identical
terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most such policies typically do not cover any physical damage resulting
from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry
rot,
vermin, domestic animals, riot, strike and civil commotion, and certain other
kinds of uninsured risks.
Each
Agreement for a Trust Fund comprised of Mortgage Loans will require the Servicer
to cause the mortgagor on each Mortgage Loan to maintain all such other
insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area). Any cost incurred by the Servicer in maintaining any such insurance
policy will be reimbursable to it as a servicing advance as described above
under “—Collection
Account and Related Accounts.”
56
Under
the
terms of the Mortgage Loans, mortgagors will generally be required to present
claims to insurers under hazard insurance policies maintained on the related
Mortgaged Properties. The Servicer, on behalf of the Trustee and
Securityholders, is obligated to present or cause to be presented claims
under
any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the Mortgage Loans. However, the ability of the Servicer
to
present or cause to be presented such claims is dependent upon the extent
to
which information in this regard is furnished to the Servicer by
mortgagors.
Contracts
Generally,
the terms of the applicable Agreement for a Trust Fund comprised of Contracts
will require the Servicer to cause to be maintained with respect to each
Contract one or more hazard insurance policies which provide, at a minimum,
the
same coverage as a standard form fire and extended coverage insurance policy
that is customary for manufactured housing, issued by a company authorized
to
issue such policies in the state in which the Manufactured Home is located,
and
in an amount which is not less than the maximum insurable value of such
Manufactured Home or the principal balance due from the obligor on the related
Contract, whichever is less; provided, however, that the amount of coverage
provided by each such hazard insurance policy shall be sufficient to avoid
the
application of any co-insurance clause contained therein. When a Manufactured
Home’s location was, at the time of origination of the related Contract, within
a federally designated special flood hazard area, the Servicer shall cause
such
flood insurance to be maintained, which coverage shall be at least equal
to the
minimum amount specified in the preceding sentence or such lesser amount
as may
be available under the federal flood insurance program. Each hazard insurance
policy caused to be maintained by the Servicer shall contain a standard loss
payee clause in favor of the Servicer and its successors and assigns. If
any
obligor is in default in the payment of premiums on its hazard insurance
policy
or policies, the Servicer shall pay such premiums out of its own funds, and
may
add separately such premium to the obligor’s obligation as provided by the
Contract, but may not add such premium to the remaining principal balance
of the
Contract.
The
Servicer may maintain, in lieu of causing individual hazard insurance policies
to be maintained with respect to each Manufactured Home, and shall maintain,
to
the extent that the related Contract does not require the obligor to maintain
a
hazard insurance policy with respect to the related Manufactured Home, one
or
more blanket insurance policies covering losses on the obligor’s interest in the
Contracts resulting from the absence or insufficiency of individual hazard
insurance policies. The Servicer shall pay the premium for such blanket policy
on the basis described therein and shall pay any deductible amount with respect
to claims under such policy relating to the Contracts.
Fidelity
Bonds and Errors and Omissions Insurance
Each
Agreement will require that the Servicer obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents
of
the Servicer. The applicable Agreement may allow the Servicer to self-insure
against loss occasioned by the errors and omissions of the officers, employees
and agents of the Servicer so long as certain criteria set forth in such
Agreement are met.
Due-on-Sale
Provisions
The
Mortgage Loans may contain clauses requiring the consent of the mortgagee to
any
sale or other transfer of the related Mortgaged Property, or due-on-sale clauses
entitling the mortgagee to accelerate payment of the Mortgage Loan upon any
sale, transfer or conveyance of the related Mortgaged Property. The Servicer
will generally enforce any due-on-sale clause to the extent it has knowledge
of
the conveyance or proposed conveyance of the underlying Mortgaged Property
and
it is entitled to do so under applicable law; provided, however, that the
Servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage under
any applicable insurance policy. Any fee collected by or on behalf of the
Servicer for entering into an assumption agreement will be retained by or on
behalf of the Servicer as additional servicing compensation. See
“Certain Legal Aspects of Mortgage Loans—Due-on-Sale Clauses.”
The
Contracts may also contain such clauses. The Servicer will generally permit
such
transfer so long as the transferee satisfies the Servicer’s then applicable
underwriting standards. The purpose of such transfers is often to avoid a
default by the transferring obligor. See
“Certain Legal Aspects of the Contracts—Transfers of Manufactured Homes;
Enforceability of “Due-on-Sale” Clauses.”
57
Retained
Interest; Servicing Compensation and Payment of Expenses
The
prospectus supplement for a Series of Securities will specify whether there
will
be any Retained Interest in the Assets, and, if so, the initial owner thereof.
If so, the Retained Interest will be established on a loan-by-loan basis
and
will be specified on an exhibit to the applicable Agreement. A “Retained
Interest”
in
an
Asset represents a specified portion of the interest payable thereon. The
Retained Interest will be deducted from mortgagor payments as received and
will
not be part of the related Trust Fund.
The
Servicer’s primary servicing compensation with respect to a Series of Securities
will come from the periodic payment to it of a portion of the interest payment
on each Asset or such other amount specified in the related prospectus
supplement. Since any Retained Interest and a Servicer’s primary compensation
are percentages of the principal balance of each Asset, such amounts will
decrease in accordance with the amortization of the Assets. The Servicing
Fee or
range of Servicing Fees relating to the Assets underlying the Securities
of a
Series will be specified in an expense table in the applicable prospectus
supplement. The prospectus supplement with respect to a Series of Securities
evidencing interests in a Trust Fund that includes Mortgage Loans or Contracts
may provide that, as additional compensation, the Servicer may retain all
or a
portion of assumption fees, modification fees, late payment charges or
Prepayment Charges collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Servicer pursuant to the applicable Agreement.
The
Servicer may, to the extent provided in the related prospectus supplement,
pay
from its servicing compensation certain expenses incurred in connection with
its
servicing and managing of the Assets, including, without limitation, payment
of
the fees and disbursements of the Trustee and independent accountants, payment
of expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses described in the related
prospectus supplement. Certain other expenses, including certain expenses
relating to defaults and liquidations on the Assets and, to the extent so
provided in the related prospectus supplement, interest thereon at the rate
specified therein may be borne by the Trust Fund.
If
and to
the extent provided in the related prospectus supplement, the Servicer may
be
required to apply a portion of the servicing compensation otherwise payable
to
it in respect of any Collection Period to certain interest shortfalls resulting
from the voluntary prepayment of any Assets in the related Trust Fund during
such period prior to their respective due dates therein.
Evidence
as to Compliance
Each
Servicer and Master Servicer will deliver annually to the Trustee or Master
Servicer, as applicable, on or before the date specified in the applicable
Agreement, an officer’s certificate stating that (i) a review of the
Servicer’s or Master Servicer’s activities during the preceding calendar year
and of performance under the applicable Agreement has been made under the
supervision of the officer, and (ii) to the best of the officer’s
knowledge, based on the review, the Servicer or Master Servicer has fulfilled
all its obligations under the applicable Agreement throughout the year, or,
if
there has been a default in the fulfillment of any obligation, specifying the
default known to the officer and the nature and status of the
default.
In
addition, each party that participates in the servicing and administration
of
more than 5% of the Assets comprising a Trust will deliver annually to the
Depositor and the Trustee, a report (an “Assessment
of Compliance”)
that
assesses compliance by that party with the servicing criteria set forth in
Item
1122(d) of Regulation AB (17 CFR 229.1122) and that contains the
following:
58
·
a
statement of the party’s responsibility for assessing compliance with the
servicing criteria applicable to it;
·
a
statement that the party used the criteria in Item 1122(d) of Regulation
AB to
assess compliance with the applicable servicing criteria;
·
the
party’s assessment of compliance with the applicable servicing criteria during
and as of the end of the prior calendar year, setting forth any material
instance of noncompliance identified by the party; and
·
a
statement that a registered public accounting firm has issued an Attestation
Report on the party’s Assessment of Compliance with the applicable servicing
criteria during and as of the end of the prior calendar year.
Each
party which is required to deliver an Assessment of Compliance will also
be
required to simultaneously deliver a report (an “Attestation
Report”)
of a
registered public accounting firm, prepared in accordance with the standards
for
attestation engagements issued or adopted by the Public Company Accounting
Oversight Board, that expresses an opinion, or states that an opinion cannot
be
expressed, concerning the party’s assessment of compliance with the applicable
servicing criteria.
Certain
Matters Regarding Servicers and the Master Servicer
The
Servicers and Master Servicer under each Agreement will be named in the related
prospectus supplement. The entities serving as Servicer or Master Servicer
may
be affiliates of the Depositor and may have other normal business relationships
with the Depositor or the Depositor’s affiliates. Reference herein to the
Servicer shall be deemed to be to the Master Servicer, if
applicable.
The
applicable Agreement will provide that the Servicer may resign from its
obligations and duties thereunder only (i) upon a determination that its
duties
under such Agreement are no longer permissible under applicable law or are
in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Servicer so causing such a conflict
being
of a type and nature carried on by the Servicer at the date of such Agreement
or
(ii) upon satisfaction of the following conditions: (a) the Servicer has
proposed a successor servicer to the Trustee in writing and such proposed
successor servicer is reasonably acceptable to the Trustee; and (b) each
Rating
Agency shall have delivered a letter to the Trustee, prior to the appointment
of
the successor servicer, stating that the proposed appointment of such successor
servicer as Servicer will not result in a reduction of the then-current ratings
of the Securities. No such resignation will become effective until the Trustee
or a successor servicer has assumed the Servicer’s obligations and duties under
the applicable Agreement.
Each
Agreement will further provide that neither any Servicer nor any director,
officer, employee, or agent of a Servicer will be under any liability to the
related Trust Fund or Securityholders for any action taken, or for refraining
from the taking of any action, in good faith pursuant to the applicable
Agreement; provided, however, that neither of any Servicer nor any such person
will be protected against any breach of a representation, warranty or covenant
made in such Agreement, or against any liability specifically imposed thereby,
or against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of obligations or duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that no Servicer will
be
under any obligation to appear in, prosecute or defend any legal action which
is
not incidental to its responsibilities under the applicable Agreement and which
in its opinion may involve it in any expense or liability. Any such Servicer
may, however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the applicable Agreement and the rights
and duties of the parties thereto and the interests of the Securityholders
thereunder. In such event, the legal expenses and costs of such action and
any
liability resulting therefrom will be expenses, costs and liabilities of the
Securityholders, and such Servicer will be entitled to be reimbursed therefor
from the Collection Account.
Any
person into which the Servicer or the Depositor may be merged or consolidated,
or any person resulting from any merger or consolidation to which the Servicer
or the Depositor is a party, or any person succeeding to the business of the
Servicer or the Depositor, will be the successor of the Servicer or the
Depositor, as the case may be, under the applicable Agreement.
59
Special
Servicers
If
and to
the extent specified in the related prospectus supplement, a special servicer
(a
“Special
Servicer”)
may be
a party to the applicable Agreement or may be appointed by the Servicer or
another specified party to perform certain specified duties in respect of
servicing the related Mortgage Loans that would otherwise be performed by
the
Servicer (for example, the workout and/or foreclosure of defaulted Mortgage
Loans). The rights and obligations of any Special Servicer will be specified
in
the related Agreement. The Servicer will be liable for the performance of
a
Special Servicer only if, and to the extent, set forth in such Agreement.
Each
Special Servicer will be required to deliver, to the extent applicable, the
documents described under “—Evidence as to Compliance.”
Events
of Default under the Agreements
Events
of
default under the applicable Agreement will generally include (i) any
failure by the Servicer to remit to the Trustee for distribution to
Securityholders, any required payment that continues after a grace period,
if
any; (ii) any failure by the Servicer duly to observe or perform in any
material respect any of its other covenants or obligations under the applicable
Agreement which continues unremedied for 30 days after written notice of
such
failure has been given to the Servicer by the Trustee or the Depositor, or
to
the Servicer, the Depositor and the Trustee by Securityholders evidencing
not
less than 25% of the Voting Rights; (iii) any breach of a representation or
warranty made by the Servicer under the applicable Agreement which materially
and adversely affects the interests of Securityholders and which continues
unremedied for 30 days after written notice of such breach has been given
to the
Servicer by the Trustee or the Depositor, or to the Servicer, the Depositor
and
the Trustee by the holders of Securities evidencing not less than 25% of
the
Voting Rights; (iv) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and certain actions
by or on behalf of the Servicer indicating its insolvency or inability to
pay
its obligations; and (v) if specified in the applicable prospectus supplement,
a
delinquency percentage exceeding a percentage specified in the related
prospectus supplement. Material variations to the foregoing events of default
(other than to shorten cure periods or eliminate notice requirements) will
be
specified in the related prospectus supplement.
The
manner of determining the “Voting
Rights”
of
a
Security or Class or Classes of Securities will be specified in the related
prospectus supplement.
Rights
Upon Event of Default under the Agreements
So
long
as an event of default under an Agreement remains unremedied, the Depositor
or
the Trustee may, and at the direction of holders of Securities generally
evidencing not less than 51% of the Voting Rights, the Trustee shall terminate
all of the rights and obligations of the Servicer under the applicable Agreement
and in and to the Mortgage Loans (other than as a Securityholder or as the
owner
of any Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Servicer under the applicable
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the related
prospectus supplement so specifies, then the Trustee will not be obligated
to
make such advances) and will be entitled to similar compensation arrangements.
In the event that the Trustee is unwilling or unable so to act, it may or,
at
the written request of the holders of Securities generally entitled to at least
51% of the Voting Rights, it shall appoint, or petition a court of competent
jurisdiction for the appointment of, a loan servicing institution acceptable
to
the Rating Agency with a net worth at the time of such appointment of at least
$15,000,000 (or such other amount specified in the related prospectus
supplement) to act as successor to the Servicer under the applicable Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity.
The
Trustee and any such successor may agree upon the servicing compensation to
be
paid, which in no event may be greater than the compensation payable to the
Servicer under the applicable Agreement.
The
Trustee or a successor servicer is entitled to be reimbursed for its costs
in
effecting a servicing transfer from the predecessor servicer. In the event
that
the predecessor servicer fails to reimburse the Trustee or successor servicer,
the Trustee or successor servicer will be entitled to reimbursement from the
assets of the related Trust.
60
The
holders of Securities representing generally at least 66 2/3%
of the
Voting Rights allocated to the respective Classes of Securities affected
by any
event of default will be entitled to waive such event of default; provided,
however, that an Event of Default involving a failure to distribute a required
payment to Securityholders described in clause (i) under “—Events of
Default under the Agreements” may be waived only by all of the Securityholders.
Upon any such waiver of an event of default, such event of default shall
cease
to exist and shall be deemed to have been remedied for every purpose under
the
applicable Agreement.
No
Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to
the
Trustee written notice of default and unless the holders of Securities generally
evidencing not less than 25% of the Voting Rights have made written request
upon
the Trustee to institute such proceeding in its own name as Trustee thereunder
and have offered to the Trustee reasonable indemnity, and the Trustee for
60
days has neglected or refused to institute any such proceeding. The Trustee,
however, is under no obligation to exercise any of the trusts or powers vested
in it by any Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or
in
relation thereto at the request, order or direction of any of the
Securityholders covered by such Agreement, unless such Securityholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
Amendment
Each
Agreement may be amended by the parties thereto, without the consent of any
Securityholders covered by the applicable Agreement, (i) to cure any
ambiguity or mistake, (ii) to correct, modify or supplement any provision
therein which may be inconsistent with any other provision therein or with
the
related prospectus supplement, (iii) to make any other provisions with
respect to matters or questions arising under the applicable Agreement which
are
not materially inconsistent with the provisions thereof, or (iv) to comply
with any requirements imposed by the Code; provided that, in the case of
clause
(iii), such amendment will not adversely affect in any material respect the
interests of any Securityholders covered by the applicable Agreement as
evidenced either by an opinion of counsel to such effect or the delivery
to the
Trustee of written notification from each Rating Agency that provides, at
the
request of the Depositor, a rating for the Offered Securities of the related
Series to the effect that such amendment or supplement will not cause such
Rating Agency to lower or withdraw the then current rating assigned to such
Securities. Each Agreement may also be amended by the Depositor, the Servicer
and the Trustee, with the consent of the Securityholders affected thereby
generally evidencing not less than 51% of the Voting Rights, for any purpose;
provided, however, no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, payments received or advanced on Assets
which
are required to be distributed on any Security without the consent of the
Securityholder or (ii) reduce the consent percentages described in this
paragraph without the consent of all the Securityholders covered by such
Agreement then outstanding. However, with respect to any Series of Securities
as
to which a REMIC election is to be made, the Trustee will not consent to
any
amendment of the applicable Agreement unless it shall first have received
an
opinion of counsel to the effect that such amendment will not result in the
imposition of a tax on the related Trust Fund or cause the related Trust
Fund to
fail to qualify as a REMIC at any time that the related Securities are
outstanding.
The
Trustee
The
Trustee under each Agreement will be named in the related prospectus supplement.
The commercial bank, national banking association, banking corporation or trust
company serving as Trustee may have a banking relationship with the Depositor
and its affiliates, with any Servicer and its affiliates and with any Master
Servicer and its affiliates. With respect to certain Series of Securities,
a
securities administrator will perform certain duties and functions normally
performed by the Trustee. Any securities administrator will be a party to the
applicable Agreement and will be named in the applicable prospectus supplement.
Any securities administrator will have obligations and rights similar to the
Trustee as described in this Prospectus.
Duties
of the Trustee
The
Trustee will make no representations as to the validity or sufficiency of any
Agreement, the Securities or any Asset or related document and is not
accountable for the use or application by or on behalf of any Servicer of any
funds paid to the Master Servicer or its designee in respect of the Securities
or the Assets, or deposited into or withdrawn from the Collection Account or
any
other account by or on behalf of the Servicer. If no Event of Default has
occurred and is continuing, the Trustee is required to perform only those duties
specifically required under the applicable Agreement. However, upon receipt
of
the various certificates, reports or other instruments required to be furnished
to it, the Trustee is required to examine such documents and to determine
whether they conform to the requirements of the applicable
Agreement.
61
Certain
Matters Regarding the Trustee
The
Trustee and any director, officer, employee or agent of the Trustee shall
be
reimbursed by the Trust Fund for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any of the
provisions of the applicable Agreement (including the reasonable compensation
and the expenses and disbursements of its counsel and of all persons not
regularly in its employ) except any such expense, disbursement or advance
as may
arise from its negligence or bad faith or which is the responsibility of
Securityholders or the Trustee under the Agreement. In addition, the Trustee
and
its officers, directors, employees and agents shall be indemnified by the
Trust
Fund from, and held harmless against, any and all losses, liabilities, damages,
claims or expenses incurred in connection with any legal action relating
to the
applicable Agreement or the Securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence
of
the Trustee in the performance of its duties thereunder or by reason of the
Trustee’s reckless disregard of obligations and duties thereunder.
Resignation
and Removal of the Trustee
The
Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Servicer
and
all Securityholders. Upon receiving such notice of resignation, the Depositor
is
required promptly to appoint a successor trustee acceptable to the Servicer.
If
no successor trustee shall have been so appointed and have accepted appointment
within 30 days after the giving of such notice of resignation, the resigning
Trustee may petition any court of competent jurisdiction for the appointment
of
a successor trustee.
If
at any
time the Trustee shall cease to be eligible to continue as such under the
applicable Agreement, or if at any time the Trustee shall become incapable
of
acting, or shall be adjudged bankrupt or insolvent, or a receiver of the
Trustee
or of its property shall be appointed, or any public officer shall take charge
or control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, or if a change in the financial
condition of the Trustee has adversely affected or will adversely affect
the
rating on any Class of the Securities, then the Depositor may remove the
Trustee
and appoint a successor trustee acceptable to the Servicer. Securityholders
of
any Series generally entitled to at least 51% of the Voting Rights for such
Series may at any time remove the Trustee without cause and appoint a successor
trustee.
Any
costs
associated with the appointment of a successor trustee are required to be paid
by the predecessor Trustee and, if not paid, will be reimbursed to the person
incurring such costs from the assets of the related Trust Fund. Notwithstanding
the foregoing, if the predecessor Trustee has been removed by a vote of the
holders of the Securities as provided in the paragraph above, any costs
associated with the appointment of a successor trustee will be reimbursed to
the
party incurring such costs from the assets of the related Trust
Fund.
Any
resignation or removal of the Trustee and appointment of a successor trustee
shall not become effective until acceptance of appointment by the successor
trustee.
Material
Terms of the Indenture
General
The
following summary describes the material provisions that may appear in each
Indenture. The prospectus supplement for a Series of Notes will describe the
specific provisions of the Indenture relating to such Series. The
provisions of each Indenture will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust
Fund.
A form
of an Indenture has been filed as an exhibit to the Registration Statement
of
which this prospectus is a part.
62
Events
of Default
Events
of
default under the Indenture for each Series of Notes will generally include:
(i) a default for thirty (30) days or more in the payment of any principal
of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Trust in the Indenture which continues for a period
of
sixty (60) days after notice thereof is given in accordance with the procedures
described in the related prospectus supplement; (iii) any representation or
warranty made by the Trust in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect
to or
affecting such Series having been incorrect in a material respect as of the
time
made, and such breach is not cured within sixty (60) days after notice thereof
is given in accordance with the procedures described in the related prospectus
supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust; or (v) any other event of
default provided with respect to Notes of that Series.
If
an
event of default with respect to the Notes of any Series at the time outstanding
occurs and is continuing, either the Indenture Trustee or the Securityholders
of
a majority of the then aggregate outstanding amount of the Notes of such
Series
may declare the principal amount (or, if the Notes of that Series are Accrual
Securities, such portion of the principal amount as may be specified in the
terms of that Series, as provided in the related prospectus supplement) of
all
the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the
Securityholders of a majority in aggregate outstanding amount of the Notes
of
such Series.
If,
following an event of default with respect to any Series of Notes, the Notes
of
such Series have been declared to be due and payable, the Indenture Trustee
may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration
of
acceleration if such collateral continues to provide sufficient funds for
the
payment of principal of and interest on the Notes of such Series as they
would
have become due if there had not been such a declaration. In addition, the
Indenture Trustee may not sell or otherwise liquidate the collateral securing
the Notes of a Series following an event of default, other than a default
in the
payment of any principal or interest on any Note of such Series for thirty
(30)
days or more, unless (a) the Securityholders of 100% of the then aggregate
outstanding amount of the Notes of such Series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding
Notes
of such Series at the date of such sale or (c) the Indenture Trustee
determines that such collateral would not be sufficient on an ongoing basis
to
make all payments on such Notes as such payments would have become due if
such
Notes had not been declared due and payable, and the Indenture Trustee obtains
the consent of the Securityholders of 66 2/3%
of the
then aggregate outstanding amount of the Notes of such Series.
In
the
event that the Indenture Trustee liquidates the collateral in connection with
an
event of default involving a default for thirty (30) days or more in the payment
of principal of or interest on the Notes of a Series, the Indenture provides
that the Indenture Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence
of
such an event of default, the amount available for distribution to the
Securityholders would be less than would otherwise be the case. However, the
Indenture Trustee may not institute a proceeding for the enforcement of its
lien
except in connection with a proceeding for the enforcement of the lien of the
Indenture for the benefit of the Securityholders after the occurrence of such
an
event of default.
To
the
extent provided in the related prospectus supplement, in the event the principal
of the Notes of a Series is declared due and payable, as described above, the
Securityholders of any such Notes issued at a discount from par may be entitled
to receive no more than an amount equal to the unpaid principal amount thereof
less the amount of such discount which is unamortized.
Subject
to the provisions of the Indenture relating to the duties of the Indenture
Trustee, in case an event of default shall occur and be continuing with respect
to a Series of Notes, the Indenture Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Securityholders of such Series, unless such holders
offered to the Indenture Trustee security or indemnity satisfactory to it
against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Indenture Trustee
or exercising any trust or power conferred on the Indenture Trustee with respect
to the Notes of such Series, and the Securityholders of a majority of the then
aggregate outstanding amount of the Notes of such Series may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of
the
Indenture that cannot be modified without the waiver or consent of all the
Securityholders of the outstanding Notes of such Series affected
thereby.
63
Discharge
of Indenture
The
Indenture will be discharged with respect to a Series of Notes (except with
respect to certain continuing rights specified in the Indenture) upon the
delivery to the Indenture Trustee for cancellation of all the Notes of such
Series or, with certain limitations, upon deposit with the Indenture Trustee
of
funds sufficient for the payment in full of all of the Notes of such
Series.
In
addition to such discharge with certain limitations, the Indenture will provide
that, if so specified with respect to the Notes of any Series, the related
Trust
Fund will be discharged from any and all obligations in respect of the Notes
of
such Series (except for certain obligations relating to temporary Notes and
exchange of Notes, to register the transfer of or exchange Notes of such
Series,
to replace stolen, lost or mutilated Notes of such Series, to maintain paying
agencies and to hold monies for payment in trust) upon the deposit with the
Indenture Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the
payment
of interest and principal in respect thereof in accordance with their terms
will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the maturity date
for
such Notes and any installment of interest on such Notes in accordance with
the
terms of the Indenture and the Notes of such Series. In the event of any
such
defeasance and discharge of Notes of such Series, holders of Notes of such
Series would be able to look only to such money and/or direct obligations
for
payment of principal and interest, if any, on their Notes until
maturity.
Indenture
Trustee’s Annual Report
The
Indenture Trustee for each Series of Notes will be required to mail each
year to
all related Securityholders a brief report relating to its eligibility and
qualification to continue as Indenture Trustee under the related Indenture,
any
amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of certain indebtedness owing by such Trust to the applicable
Indenture Trustee in its individual capacity, the property and funds physically
held by such Indenture Trustee as such and any action taken by it that
materially affects such Notes and that has not been previously
reported.
The
Indenture Trustee
The
Indenture Trustee for a Series of Notes will be specified in the related
prospectus supplement. The Indenture Trustee for any Series may resign at any
time, in which event the Depositor will be obligated to appoint a successor
trustee for such Series. The Depositor may also remove any such Indenture
Trustee if such Indenture Trustee ceases to be eligible to continue as such
under the related Indenture or if such Indenture Trustee becomes insolvent.
In
such circumstances the Depositor will be obligated to appoint a successor
trustee for the applicable Series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor trustee for any Series of
Notes
does not become effective until acceptance of the appointment by the successor
trustee for such Series.
The
bank
or trust company serving as Indenture Trustee may have a banking relationship
with the Depositor or any of its affiliates, a Servicer or any of its affiliates
or the Master Servicer or any of its affiliates.
DESCRIPTION
OF CREDIT SUPPORT
Credit
enhancement may be provided with respect to any Series of Securities only in
one
or more of the methods described below. The applicable prospectus supplement
will describe the material terms of such credit enhancement, including any
limits on the timing or amount of such credit enhancement or any conditions
that
must be met before such credit enhancement may be accessed. If the provider
of
the credit enhancement is liable or contingently liable to provide payments
representing 10% or more of the cash flow supporting any offered Class of
Securities, the applicable prospectus supplement will disclose the name of
the
provider, the organizational form of the provider, the general character of
the
business of the provider and the financial information required by Item
1114(b)(2) of Regulation AB (17 CFR 229.1114). Copies of the limited guarantee,
financial guaranty insurance policy, surety bond, letter of credit, pool
insurance policy, mortgagor bankruptcy bond, special hazard insurance policy
or
Cash Flow Agreement, if any, relating to a Series of Securities will be filed
with the Commission as an exhibit to a Current Report on Form 8-K.
64
Subordination
If
provided in the applicable prospectus supplement, one or more Classes of
Senior
Securities will be entitled to receive all or a disproportionate percentage
of
the payments of principal that are received from borrowers in advance of
their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the months of those payments or of other unscheduled
principal receipts or recoveries in the percentages and under the circumstances
or for the periods specified in the applicable prospectus supplement. This
type
of allocation of principal prepayments or other unscheduled receipts or
recoveries relating to principal to this Class or these Classes of Senior
Securities will have the effect of accelerating the amortization of these
Senior
Securities while increasing the interests evidenced by the Subordinated
Securities in the Trust Fund. Increasing the interests of the Subordinated
Securities relative to that of the Senior Securities is intended to preserve
the
availability of the subordination provided by the Subordinated
Securities.
If
specified in the applicable prospectus supplement, the rights of the holders
of
the Subordinated Securities of a Series of Securities for which credit
enhancement is provided through subordination to receive distributions with
respect to the Assets in the related Trust Fund will be subordinated to the
rights of the holders of the Senior Securities of the same Series. This
subordination is intended to enhance the likelihood of regular receipt by
holders of Senior Securities of the full amount of scheduled monthly payments
of
principal and interest due them and to provide limited protection to the
holders
of the Senior Securities against losses due to obligor defaults.
The
protection afforded to the holders of Senior Securities of a Series of
Securities for which credit enhancement is provided by the subordination
feature
described above will be effected by (i) the preferential right of these
holders to receive, prior to any distribution being made to the related
Subordinated Securities on each Distribution Date, current distributions
on the
related Assets of principal and interest due them on each Distribution Date
out
of the funds available for distribution on that date in the related Distribution
Account, (ii) by the right of these holders to receive future distributions
on the Assets that would otherwise have been payable to the holders of
Subordinated Securities and/or (iii) by the prior allocation to the
Subordinated Securities of all or a portion of losses realized on the related
Assets.
Losses
realized on liquidated Assets (other than, if specified in the applicable
prospectus supplement, Excess Special Hazard Losses, Excess Fraud Losses and
Excess Bankruptcy Losses as described below) will be allocated to the holders
of
Subordinated Securities through a reduction of the amount of principal payments
on the Assets to which these holders are entitled before any corresponding
reduction is made in respect of the Senior Security.
A
“Special
Hazard Loss”
is
a
loss on a liquidated Asset occurring as a result of a hazard not insured against
under a standard hazard insurance policy of the type described below under
“Description of the Agreements—Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements—Hazard Insurance Policies.” A
“Fraud
Loss”
is
a
loss on a liquidated Asset due to fraud in the origination of that Asset. A
“Bankruptcy
Loss”
is
a
loss on a liquidated Asset attributable to certain actions which may be taken
by
a bankruptcy court in connection with a Asset, including a reduction by a
bankruptcy court of the principal balance of or the interest rate on an Asset
or
an extension of its maturity. Special Hazard Losses in excess of the amount
specified in the applicable prospectus supplement (the “Special
Hazard Loss Amount”),
if
any, are “Excess
Special Hazard Losses.”
Fraud
Losses in excess of the amount specified in the applicable prospectus supplement
(the “Fraud
Loss Amount”),
if
any, are “Excess
Fraud Losses.”
Bankruptcy Losses in excess of the amount specified in the applicable prospectus
supplement (the “Bankruptcy
Loss Amount”),
if
any, are “Excess
Bankruptcy Losses.”
Any
Excess Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses
for a Series will be allocated on a pro
rata
basis
among the related Classes of Senior and Subordinated Securities. An allocation
of a loss on a “pro
rata”
basis
among two or more Classes of Securities means an allocation on a pro
rata
basis to
each of those Classes of Securities on the basis of their then-outstanding
Security Balances in the case of the principal portion of a loss or based on
accrued interest in the case of an interest portion of a loss.
65
Since
the
Special Hazard Loss Amount, Fraud Loss Amount and Bankruptcy Loss Amount,
if
any, for a Series of Securities are each expected to be less than the amount
of
principal payments on the Assets to which the holders of the Subordinated
Securities of the Series are initially entitled (the amount of principal
payments being subject to reduction, as described above, as a result of
allocation of losses on liquidated Assets that are not Special Hazard Losses,
Fraud Losses or Bankruptcy Losses), the holders of Subordinated Securities
of
that Series will bear the risk of Special Hazard Losses, Fraud Losses and
Bankruptcy Losses to a lesser extent than they will bear other losses on
liquidated Assets.
Although
the subordination feature described above is intended to enhance the likelihood
of timely payment of principal and interest to the holders of Senior Securities,
shortfalls could result in certain circumstances. For example, a shortfall
in
the payment of principal otherwise due the holders of Senior Securities could
occur if losses realized on the Assets in a Trust Fund were exceptionally
high
and were concentrated in a particular month.
The
holders of Subordinated Securities will not be required to refund any amounts
previously properly distributed to them, regardless of whether there are
sufficient funds on a subsequent Distribution Date to make a full distribution
to holders of each Class of Senior Securities of the same Series.
Limited
Guarantee
If
specified in the prospectus supplement for a Series of Securities, credit
enhancement may be provided in the form of a limited guarantee issued by
a
guarantor named in that prospectus supplement. The limited guarantee may
cover
deficiencies in amounts otherwise payable on some or all of the Securities
of a
Series. The limited guarantee may cover timely distributions of interest
or full
distributions of principal or both on the basis of a schedule of principal
distributions set forth in or determined in the manner specified in the related
prospectus supplement. The limited guarantee may provide additional protection
against losses on the Assets included in a Trust Fund, provide payment of
administrative expenses, or establish a minimum reinvestment rate on the
payments made on the Assets or principal payment rate on the Assets. A limited
guarantee will be limited in amount to the dollar amount or percentage of
the
principal balance of the Assets or Securities specified in the applicable
prospectus supplement.
Financial
Guaranty Insurance Policy or Surety Bond
If
specified in the prospectus supplement for a Series of Securities, credit
enhancement may be provided in the form of a financial guaranty insurance policy
or a surety bond issued by one or more insurers named in that prospectus
supplement. The financial guaranty insurance policy will guarantee, with respect
to one or more Classes of Securities of the related Series, timely distributions
of interest and ultimate distributions of principal at the dates set forth
in or
determined in the manner specified in the prospectus supplement. If specified
in
the prospectus supplement, the financial guaranty insurance policy will also
guarantee against any payment made to a Securityholder that is subsequently
recovered as a preferential transfer under the Bankruptcy Code.
Letter
of Credit
If
specified in the prospectus supplement for a Series of Securities, credit
enhancement may be provided by a letter of credit issued by a bank or other
financial institution specified in the applicable prospectus supplement. Under
the letter of credit, the provider will be obligated to pay up to an aggregate
fixed dollar amount, net of previous drawings on the letter, equal to the
percentage specified in the prospectus supplement of the unpaid principal
balance of the Assets or of one or more Classes of Securities. If specified
in
the prospectus supplement, the letter of credit may permit drawings in the
event
of losses not covered by insurance policies or other credit support, such as
losses arising from damage not covered by standard hazard insurance policies,
losses resulting from the bankruptcy of a borrower and the application of
certain provisions of the Bankruptcy Code, or losses resulting from denial
of
insurance coverage due to misrepresentations in connection with the origination
of an Asset. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments previously paid. The
obligations of the provider under the letter of credit for each Series of
Securities will expire at the earlier of the date specified in the prospectus
supplement or the termination of the Trust.
66
Pool
Insurance Policy
If
specified in the prospectus supplement relating to a Series of Securities,
credit enhancement may be provided by a mortgage pool insurance policy for
the
Mortgage Loans in the related Trust Fund. Each mortgage pool insurance policy,
in accordance with the limitations described in this prospectus and in the
prospectus supplement, if any, will cover all or a portion of any loss by
reason
of default on a Mortgage Loan in an amount equal to a percentage specified
in
the applicable prospectus supplement of the unpaid principal balance of the
Mortgage Loans. As described under “Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements—Due-on-Sale Provisions,” the
Servicer or the Master Servicer, as the case may be, generally will be required
to use its best efforts to maintain the mortgage pool insurance policy and
to
present claims to the pool insurer. The mortgage pool insurance policies,
however, are not blanket policies against loss, since claims may only be
made
respecting particular defaulted Mortgage Loans and only upon satisfaction
of
specified conditions precedent described below. The mortgage pool insurance
policies will generally not cover losses due to a failure to pay or denial
of a
claim under a primary mortgage insurance policy, regardless of the reason
for
nonpayment.
As
more
specifically provided in the related prospectus supplement, each mortgage
pool
insurance policy will provide for conditions under which claims may be presented
and covered under the policy. Upon satisfaction of these conditions, the
pool
insurer will have the option either (a) to purchase the property securing
the
defaulted Mortgage Loan at a price equal to its unpaid principal balance
plus
accrued and unpaid interest at the applicable Mortgage Interest Rate to the
date
of purchase plus certain Advances, or (b) to pay the amount by which the
sum of
the unpaid principal balance of the defaulted Mortgage Loan plus accrued
and
unpaid interest at the Mortgage Interest Rate to the date of payment of the
claim plus certain Advances exceeds the proceeds received from an approved
sale
of the Mortgaged Property, in either case net of certain amounts paid or
assumed
to have been paid under any related primary mortgage insurance
policy.
Securityholders
may experience a shortfall in the amount of interest payable on the related
Securities in connection with the payment of claims under a mortgage pool
insurance policy because the pool insurer is only required to remit unpaid
interest through the date a claim is paid rather than through the end of
the
month in which the claim is paid. In addition, Securityholders may also
experience losses with respect to the related Securities in connection with
payments made under a mortgage pool insurance policy to the extent that the
related Servicer expends funds to cover unpaid real estate taxes or to repair
the related Mortgaged Property in order to make a claim under a mortgage
pool
insurance policy, as those amounts will not be covered by payments under
the
policy and will be reimbursable to the related Servicer from funds otherwise
payable to the Securityholders. If any Mortgaged Property securing a defaulted
Mortgage Loan is damaged and proceeds, if any from the related hazard insurance
policy or applicable special hazard insurance policy are insufficient to
restore
the damaged property to a condition sufficient to permit recovery under the
mortgage pool insurance policy, a Servicer will generally not be required
to
expend its own funds to restore the damaged property unless it determines
that
(a) restoration will increase the proceeds to one or more Classes of Securities
on liquidation of the Mortgage Loan after reimbursement of the related Servicer
for its expenses and (b) the expenses will be recoverable by it through
Liquidation Proceeds or insurance proceeds.
A
mortgage pool insurance policy and some primary mortgage insurance policies
will
generally not insure against loss sustained by reason of a default arising
from,
among other things, fraud or negligence in the origination or servicing of
a
Mortgage Loan, including misrepresentation by the mortgagor, the seller or
other
persons involved in the origination of the Mortgage Loan, failure to construct
a
mortgaged property in accordance with plans and specifications or bankruptcy,
unless as specified in the related prospectus supplement, an endorsement to
the
mortgage pool insurance policy provides for insurance against that type of
loss.
The
original amount of coverage under each mortgage pool insurance policy will
be
reduced over the life of the related Series of Securities by the aggregate
amount of claims paid less the aggregate of the net amounts realized by the
pool
insurer upon disposition of all foreclosed properties. The amount of claims
paid
includes some expenses incurred by the related Servicer or Master Servicer
as
well as accrued interest on delinquent Mortgage Loans to the date of payment
of
the claim. Accordingly, if aggregate net claims paid under any mortgage pool
insurance policy reach the original policy limit, coverage under that mortgage
pool insurance policy will be exhausted and any further losses will be borne
by
the related Securities, to the extent not covered by other credit
enhancements.
67
Special
Hazard Insurance Policy
Any
insurance policy covering Special Hazard Losses obtained for a Trust will
be
issued by the insurer named in the related prospectus supplement. Each special
hazard insurance policy will be subject to limitations described in this
paragraph and in the related prospectus supplement, if any, and will protect
the
related Securityholders from Special Hazard Losses. Aggregate claims under
a
special hazard insurance policy will be limited to the amount set forth in
the
related Pooling and Servicing Agreement or Indenture and will be subject
to
reduction as described in the related Pooling and Servicing Agreement or
Indenture. A special hazard insurance policy will provide that no claim may
be
paid unless hazard and, if applicable, flood insurance on the Mortgaged Property
securing the Mortgage Loan or Manufactured Home securing the Contract has
been
kept in force and other protection and preservation expenses have been paid
by
the related Servicer or Master Servicer, as the case may be.
In
accordance with the foregoing limitations, a special hazard insurance policy
will provide that, where there has been damage to the Mortgaged Property
securing a foreclosed Mortgage Loan or Manufactured Home securing a foreclosed
Contract, title to which has been acquired by the insured, and to the extent
the
damage is not covered by the hazard insurance policy or flood insurance policy,
if any, maintained by the obligor or the related Servicer or Master Servicer,
as
the case may be, the insurer will pay the lesser of (i) the cost of repair
or
replacement of the related Mortgaged Property or Manufactured Home or (ii)
upon
transfer of the property to the insurer, the unpaid principal balance of
the
Mortgage Loan or Contract Rate at the time of acquisition of the related
property by foreclosure or deed in lieu of foreclosure, plus accrued interest
at
the Mortgage Interest Rate or Contract Rate to the date of claim settlement
and
certain expenses incurred by the related Servicer or Master Servicer, as
the
case may be, with respect to the related Mortgaged Property or Manufactured
Home.
If
the
Mortgaged Property or Manufactured Home is transferred to a third party in
a
sale approved by the special hazard insurer, the amount that the special
hazard
insurer will pay will be the amount under (ii) above reduced by the net proceeds
of the sale of the Mortgaged Property or Manufactured Home. If the unpaid
principal balance plus accrued interest and certain Advances is paid by the
special hazard insurer, the amount of further coverage under the related
special
hazard insurance policy will be reduced by that amount less any net proceeds
from the sale of the Mortgaged Property or Manufactured Home. Any amount
paid as
the cost of repair of the property will further reduce coverage by that amount.
Restoration of the property with the proceeds described under (i) above will
satisfy the condition under any mortgage pool insurance policy that the property
be restored before a claim under the policy may be validly presented with
respect to the defaulted Mortgage Loan secured by the related Mortgaged Property
or Contract secured by the related Manufactured Home. The payment described
under (ii) above will render presentation of a claim relating to an Asset
under
the related mortgage pool insurance policy unnecessary. Therefore, so long
as a
mortgage pool insurance policy remains in effect, the payment by the insurer
under a special hazard insurance policy of the cost of repair or of the unpaid
principal balance of the related Asset plus accrued interest and certain
Advances will not affect the total insurance proceeds paid to Securityholders,
but will affect the relative amounts of coverage remaining under the related
special hazard insurance policy and mortgage pool insurance policy.
Mortgagor
Bankruptcy Bond
If
specified in the related prospectus supplement, a bankruptcy bond to cover
losses resulting from proceedings under the federal Bankruptcy Code with respect
to a Mortgage Loan will be issued by an insurer named in the prospectus
supplement. Each bankruptcy bond will cover, to the extent specified in the
related prospectus supplement, certain losses resulting from a reduction by
a
bankruptcy court of scheduled payments of principal and interest on a Mortgage
Loan or a reduction by the court of the unpaid principal balance of a Mortgage
Loan and will cover certain unpaid interest on the amount of a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each bankruptcy bond will be set forth in the related
prospectus supplement.
68
Reserve
Fund
If
specified in the applicable prospectus supplement, credit enhancement with
respect to a Series of Securities may be provided by the establishment of
one or
more reserve funds for the Series. Any reserve fund for a Series may be funded
(i) by a deposit of cash, U.S. Treasury securities or instruments
evidencing entitlements to principal or interest payments, letters of credit,
demand notes, certificates of deposit or a combination of these in the aggregate
amount specified in the applicable prospectus supplement or (ii) by the
deposit from time to time of certain amounts received on or in respect of
the
related Assets, as specified in the applicable prospectus
supplement.
If
specified in the prospectus supplement, reserve funds may be established
to
provide limited protection, in an amount satisfactory to each Rating Agency,
against certain interest shortfalls arising from the timing of principal
prepayments, certain types of losses not covered by insurance policies or
other
credit support, such as losses arising from damage not covered by standard
hazard insurance policies, losses resulting from the bankruptcy of a borrower
and the application of certain provisions of the Bankruptcy Code or losses
resulting from denial of insurance coverage due to fraud or misrepresentation
in
connection with the origination of an Asset. Following each Distribution
Date
amounts in a reserve fund in excess of any required reserve fund amount may
be
released from the reserve fund under the conditions and to the extent specified
in the prospectus supplement and will not be available for further application
to the related Securities.
If
specified in the prospectus supplement, any reinvestment income or other
gain
from investments in certain investments acceptable to the applicable Rating
Agencies will be credited to the related reserve fund for the Series, and
any
loss resulting from the investments will be charged to the reserve fund.
The
reserve fund for a Series will not be a part of the Trust Fund.
Additional
information concerning any reserve fund will be set forth in the prospectus
supplement, including the initial balance of the reserve fund, the required
reserve fund balance to be maintained, the purposes for which funds in the
reserve fund may be applied to make distributions to Securityholders and
use of
investment earnings from the reserve fund, if any.
Cross
Collateralization
If
specified in the applicable prospectus supplement, the beneficial ownership
of
separate groups of Assets included in a Trust Fund may be evidenced by separate
Classes of Securities. In this case, credit support may be provided by a cross
collateralization feature which requires that distributions be made to certain
Classes from Asset payments that would otherwise be distributed to Subordinated
Securities evidencing a beneficial ownership interest in other loan groups
within the same Trust Fund. As a result, the amount of credit enhancement
available to a Class of Securities against future losses on the Assets in which
that Class represents an interest may be reduced as the result of losses on
a
group of Assets in which that Class has no interest. The applicable prospectus
supplement for a Series that includes a cross collateralization feature will
describe its specific operation.
Overcollateralization
If
specified in the related prospectus supplement, subordination provisions of
a
Series may be used to accelerate to a limited extent the amortization of one
or
more Classes of Securities relative to the amortization of the related Assets.
The accelerated amortization is achieved by the application of certain excess
interest to the payment of principal of one or more Classes of Securities.
This
acceleration feature creates, with respect to the Assets or a group of Assets,
overcollateralization which results from the excess of the aggregate principal
balance of the related Assets, or group of Assets, over the Security Balance
of
the related Class or Classes of Securities. This acceleration may continue
for
the life of the related Securities, or may have a shorter duration. In the
case
of limited acceleration, once the required level of overcollateralization is
reached, and subject to certain provisions specified in the related prospectus
supplement, this limited acceleration feature may cease, unless necessary to
maintain the required level of overcollateralization.
Excess
Interest
69
If
specified in the related prospectus supplement, the Assets in a Trust may
generate more interest than is necessary to pay the interest earned on the
Classes of Securities each month. The excess interest may be used to maintain
overcollateralization, to pay interest that was previously earned but not
paid
to certain Classes of Securities and to reimburse certain Classes of Securities
for losses and certain shortfalls that they experienced previously.
If
specified in the applicable prospectus supplement, amounts received by the
Trustee under any Cash Flow Agreement described below under “Cash Flow
Agreements” may also be used to provide credit enhancement for one or more
Classes of Securities.
CASH
FLOW AGREEMENTS
If
specified in the prospectus supplement, the Trust Fund may include cash flow
agreements consisting only of one or more guaranteed investment contracts,
swap
agreements or interest rate cap or floor agreements (also called yield
maintenance agreements), each of which agreements is intended to reduce the
effects of interest rate fluctuations on the assets or on one or more Classes
of
Securities (each, a “Cash
Flow Agreement”).
The
applicable prospectus supplement will describe the name, organizational form
and
general character of the business of the counterparty under any Cash Flow
Agreement. In addition, the prospectus supplement for the related Series
of
Securities will disclose the significance percentage, calculated in accordance
with Item 1115 of Regulation AB (17 CFR 229.1115). To the extent this percentage
is (a) 10% or more but less than 20%, the related prospectus supplement will
provide financial data required by Item 301 of Regulation S-K (17 CFR 229.301)
or (b) greater than 20%, the related prospectus supplement will provide
financial statements required by Item 1115(b)(2) of Regulation AB (17 CFR
229.1115) and, in either case, the related prospectus supplement will contain
a
description of the operation and material terms of the Cash Flow Agreement,
including, without limitation, conditions to payment or limits on the timing
or
amount of payments and material provisions relating to the termination or
substitution of the Cash Flow Agreement. Copies of the Cash Flow Agreement,
if
any, relating to a Series of Securities will be filed with the Commission
as an
exhibit to a Current Report on Form 8-K.
Guaranteed
Investment Contracts
If
specified in the related prospectus supplement, the Trustee on behalf of the
Trust may enter into one or more guaranteed investment contracts. Guaranteed
investment contracts are generally used to maximize the investment income on
funds held between Distribution Dates pending distribution to Securityholders.
Under a guaranteed investment contract, the issuer of the contract, which is
typically a highly rated financial institution, guarantees a fixed or floating
rate of interest over the life of the contract, as well as the ultimate return
of the principal. Any payments received from the issuer of the contract by
the
Trust will be distributed to the related Class or Classes of Securities as
specified in the applicable prospectus supplement.
Yield
Maintenance Agreements
If
specified in the related prospectus supplement, the Trustee on behalf of the
Trust will enter into one or more yield maintenance agreements in order to
support the yield of one or more Classes of Securities. The counterparty to
a
yield maintenance agreement will receive an upfront payment and the Trust will
have no ongoing payment obligations. Generally, if the index specified in the
applicable prospectus supplement, which index will be one-month, three-month,
six-month or one-year LIBOR, CMT, COFI, MTA or the Prime Rate, exceeds a
percentage for a particular date specified in the applicable prospectus
supplement, the counterparty to the yield maintenance agreement will be required
to pay to the Trustee an amount equal to that excess multiplied by a notional
amount or the Security Balance or Balances of one or more Classes of Securities
multiplied by one-twelfth. This amount may be adjusted to reflect the actual
number of days in the Interest Accrual Period for the related Class or Classes
of Securities and will be paid to the Class or Classes of Securities as
specified in the related prospectus supplement.
Swap
Agreements
If
specified in the related prospectus supplement, the Trustee on behalf of the
Trust will enter into a swap agreement to support the yield on one or more
Classes of Securities. Under the swap agreement, the Trust will be obligated
to
pay an amount equal to a certain percentage of a notional amount set forth
in
the related prospectus supplement to the counterparty and the Trust will be
entitled to receive an amount equal to one-month, three-month, six-month or
one-year LIBOR, CMT, COFI, MTA or the Prime Rate on the notional amount from
the
counterparty, until the swap agreement is terminated. Only the net amount of
the
two obligations will be paid by the appropriate party. In the event that the
Trust is required to make a payment to the counterparty, that payment will
be
paid on the related Distribution Date prior to distributions to Securityholders.
Generally, any payments received from the counterparty by the Trust will be
distributed to cover certain shortfalls as set forth in the applicable
prospectus supplement.
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If
specified in the related prospectus supplement, the Trustee on behalf of
the
Trust will enter into one or more swap agreements to cover any shortfalls
on one
or more Classes of Securities in the event those Securities are auctioned
to
third party investors on a date specified in the related prospectus supplement
and the proceeds from the auction are less than the outstanding Security
Balance
of the applicable Class or Classes of Securities plus any accrued and unpaid
interest. In the event the proceeds from the auction are greater than the
outstanding Security Balance or Security Balances of the applicable Class
or
Classes of Securities plus any accrued and unpaid interest, this excess will
be
paid to the counterparty or counterparties under the swap agreement(s).
See
“Risk Factors — Amounts Received from the Auction and the Swap Agreement May Be
Insufficient to Assure Completion of the Auction” and “— Mandatory Auction of
Securities” in this prospectus.
CERTAIN
LEGAL ASPECTS OF MORTGAGE LOANS
The
following discussion contains summaries, which are general in nature, of
certain
legal aspects of loans secured by single-family or multi-family residential
properties. Because these legal aspects are governed primarily by applicable
state law(which laws may differ substantially), the summaries do not purport
to
be complete nor to reflect the laws of any particular state, nor to encompass
the laws of all states in which the security for the Mortgage Loans is situated.
The summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the Mortgage Loans. See
“Description of the Trust Funds—Assets.”
General
All
of
the Mortgage Loans are loans evidenced by a note or bond and secured by
instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as “mortgages.” Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes
and
assessments and other charges imposed under governmental police
powers.
Types
of Mortgage Instruments
A
mortgage either creates a lien against or constitutes a conveyance of real
property between two parties—a mortgagor (the borrower and usually the owner of
the subject property) and a mortgagee (the lender). In contrast, a deed of
trust
is a three-party instrument, among a trustor (the equivalent of a mortgagor),
a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this prospectus,
unless the context otherwise requires, “mortgagor” includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the mortgagor grants the property, irrevocably until
the
debt is paid, in trust, generally with a power of sale as security for the
indebtedness evidenced by the related note. A deed to secure debt typically
has
two parties. By executing a deed to secure debt, the grantor conveys title
to,
as opposed to merely creating a lien upon, the subject property to the grantee
until such time as the underlying debt is repaid, generally with a power of
sale
as security for the indebtedness evidenced by the related mortgage note. In
case
the mortgagor under a mortgage is a land trust, there would be an additional
party because legal title to the property is held by a land trustee under a
land
trust agreement for the benefit of the mortgagor. At origination of a mortgage
loan involving a land trust, the mortgagor executes a separate undertaking
to
make payments on the mortgage note. The mortgagee’s authority under a mortgage,
the trustee’s authority under a deed of trust and the grantee’s authority under
a deed to secure debt are governed by the express provisions of the mortgage,
the law of the state in which the real property is located, certain federal
laws
(including, without limitation, the Relief Act) and, in some cases, in deed
of
trust transactions, the directions of the beneficiary.
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The
Mortgages that encumber Multifamily Properties may contain an assignment
of
rents and leases, pursuant to which the mortgagor assigns to the lender the
mortgagor’s right, title and interest as landlord under each lease and the
income derived therefrom, while retaining a revocable license to collect
the
rents for so long as there is no default. If the mortgagor defaults, the
license
terminates and the lender is entitled to collect the rents. Local law may
require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the
rents.
Interest
in Real Property
The
real
property covered by a mortgage, deed of trust, security deed or deed to secure
debt is most often the fee estate in land and improvements. However, such
an
instrument may encumber other interests in real property such as a tenant’s
interest in a lease of land or improvements, or both, and the leasehold estate
created by such lease. An instrument covering an interest in real property
other
than the fee estate requires special provisions in the instrument creating
such
interest or in the mortgage, deed of trust, security deed or deed to secure
debt, to protect the mortgagee against termination of such interest before
the
mortgage, deed of trust, security deed or deed to secure debt is paid. The
Depositor, the Asset Seller or other entity specified in the related prospectus
supplement will make certain representations and warranties in the applicable
Agreement or certain representations and warranties will be assigned to the
Trustee with respect to any Mortgage Loans that are secured by an interest
in a
leasehold estate. Such representation and warranties, if applicable, will
be set
forth in the prospectus supplement.
Condominiums
Certain
of the Mortgage Loans may be loans secured by condominium units. The condominium
building may be a multi-unit building or buildings, or a group of buildings
whether or not attached to each other, located on property subject to
condominium ownership. Condominium ownership is a form of ownership of real
property as to which each owner is entitled to the exclusive ownership and
possession of his or her individual condominium unit. The owner also owns a
proportionate undivided interest in all parts of the condominium building (other
than the other individual condominium units) and all areas or facilities, if
any, for the common use of the condominium units. The condominium unit owners
appoint or elect the condominium association to govern the affairs of the
condominium.
Cooperatives
Certain
of the Mortgage Loans may be cooperative loans. The Cooperative either owns
all
the real property that comprises the project, including the land and the
apartment building comprised of separate dwelling units and common areas or
leases the land generally by a long term ground lease and owns the apartment
building. The Cooperative is directly responsible for project management and,
in
most cases, payment of real estate taxes and hazard and liability insurance.
If
there is a blanket mortgage on the property and/or underlying land, as is
generally the case, the Cooperative, as project mortgagor, is also responsible
for meeting these mortgage obligations. Ordinarily, the Cooperative incurs
a
blanket mortgage in connection with the construction or purchase of the
Cooperative’s apartment building. The interest 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
in that building.
The
Cooperative is owned by tenant stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific units.
Generally, a tenant stockholder of a Cooperative must make a monthly payment
to
the Cooperative representing such tenant stockholder’s pro
rata
share of
the Cooperative’s payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share certificate and
a
counterpart of the proprietary lease or occupancy agreement, and typically
a
financing statement covering the proprietary lease or occupancy agreement and
the cooperative shares is filed in the appropriate state and local offices
to
perfect the lender’s interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant stockholder, the lender may sue
for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
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Leaseholds
Mortgage
Loans may be secured by a mortgage on a ground lease. Leasehold mortgages
are
subject to certain considerations not associated with mortgage loans secured
by
the fee estate of the mortgagor. The most significant of these consideration
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. This possibility may be minimized if the ground lease contains
certain provisions protective of the mortgagee, but the ground leases that
secure Mortgage Loans may not contain all of these protective provisions,
and
mortgages may not contain the other protection discussed in the next paragraph.
Protective ground lease provisions include the right of the leasehold mortgagee
to receive notices from the ground lessor of any defaults by the mortgagor;
the
right 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.
In
addition to the preceding protections, a leasehold mortgagee may require that
the ground lease or leasehold mortgage prohibit the ground lessee from treating
the ground lease as terminated in the event of the ground lessor’s bankruptcy
and rejection of the ground lease by the trustee for the debtor-ground lessor.
As further protection, a leasehold mortgage may provide for the assignment
of
the debtor-ground lessee’s right to reject a lease pursuant to Section 365 of
the Bankruptcy Code, although the enforceability of that clause has not been
established. Without the protections described in the preceding paragraph,
a
leasehold mortgagee may lose the collateral securing its leasehold mortgage.
In
addition, terms and conditions of a leasehold mortgage are subject to the terms
and conditions of the ground lease. Although certain rights given to a ground
lessee can be limited by the terms of a leasehold mortgage, the rights of a
ground lessee or a leasehold mortgagee with respect to, among other things,
insurance, casualty and condemnation will be governed by the provisions of
the
ground lease.
Land
Sale Contracts
Under
Land Sale Contracts the contract seller (hereinafter referred to as the
“Contract
Lender”)
retains legal title to the property and enters into an agreement with the
contract purchaser (hereinafter referred to as the “contract
borrower”)
for
the payment of the purchase price, plus interest, over the term of the Land
Sale
Contract. Only after full performance by the borrower of the contract is the
contract lender obligated to convey title to the real estate to the purchaser.
As with mortgage or deed of trust financing, during the effective period of
the
Land Sale Contract, the contract borrower is responsible for maintaining the
property in good condition and for paying real estate taxes, assessments and
hazard insurance premiums associated with the property.
The
method of enforcing the rights of the contract lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Land Sale Contracts
generally provide that upon default by the contract borrower, the borrower
loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer’s equitable interest in the property is forfeited. The contract
lender in such a situation does not have to foreclose in order to obtain title
to the property, although in some cases a quiet title action is in order if
the
contract borrower has filed the Land Sale Contract in local land records and
an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of contract borrower default during the early years of
a
Land Sale Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Land Sale Contracts from the harsh consequences of forfeiture.
Under such statues, a judicial contract may be reinstated upon full payment
of
the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a contract
borrower with significant investment in the property under a Land Sale Contract
for the sale of real estate to share the proceeds of sale of the property after
the indebtedness is repaid or may otherwise refuse to enforce the forfeiture
clause. Nevertheless, generally speaking, the contract lender’s procedures for
obtaining possession and clear title under a Land Sale Contract for the sale
of
real estate in a given state are simpler and less time consuming and costly
than
are the procedures for foreclosing and obtaining clear title to a mortgaged
property.
73
Foreclosure
General
Foreclosure
is a legal procedure that allows the mortgagee to recover its mortgage debt
by
enforcing its rights and available legal remedies under the mortgage. If
the
mortgagor defaults in payment or performance of its obligations under the
note
or mortgage, the mortgagee has the right to institute foreclosure proceedings
to
sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure
procedures with respect to the enforcement of a mortgage vary from state
to
state. Two primary methods of foreclosing a mortgage are judicial foreclosure
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. There are several other foreclosure procedures available in some
states that are either infrequently used or available only in certain limited
circumstances, such as strict foreclosure.
Judicial
Foreclosure
A
judicial foreclosure proceeding is conducted in a court having jurisdiction
over
the mortgaged property. Generally, the action is initiated by the service of
legal pleadings upon all parties having an interest of record in the real
property. Delays in completion of the foreclosure may occasionally result from
difficulties in locating defendants. When the lender’s right to foreclose is
contested, the legal proceedings can be time-consuming. Upon successful
completion of a judicial foreclosure proceeding, the court generally issues
a
judgment of foreclosure and appoints a referee or other officer to conduct
a
public sale of the mortgaged property, the proceeds of which are used to satisfy
the judgment. Such sales are made in accordance with procedures that vary from
state to state.
Equitable
Limitations on Enforceability of Certain Provisions
United
States courts have traditionally imposed general equitable principles to limit
the remedies available to a mortgagee in connection with foreclosure. These
equitable principles are generally designed to relieve the mortgagor from the
legal effect of mortgage defaults, to the extent that such effect is perceived
as harsh or unfair. Relying on such principles, a court may alter the specific
terms of a loan to the extent it considers necessary to prevent or remedy an
injustice, undue oppression or overreaching, or may require the lender to
undertake affirmative and expensive actions to determine the cause of the
mortgagor’s default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender’s and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g.,
the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns
for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
74
Non-Judicial
Foreclosure/Power of Sale
Foreclosure
of a deed of trust is generally accomplished by a non-judicial trustee’s sale
pursuant to the power of sale granted in the deed of trust. A power of sale
is
typically granted in a deed of trust. It may also be contained in any other
type
of mortgage instrument. A power of sale allows a non-judicial public sale
to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon any default by the mortgagor under the
terms
of the mortgage note or the mortgage instrument and after notice of sale
is
given in accordance with the terms of the mortgage instrument, as well as
applicable state law. In some states, prior to such sale, the trustee under
a
deed of trust must record a notice of default and notice of sale and send
a copy
to the mortgagor and to any other party who has recorded a request for a
copy of
a notice of default and notice of sale. In addition, in some states the trustee
must provide notice to any other party having an interest of record in the
real
property, including junior lienholders. A notice of sale must be posted in
a
public place and, in most states, published for a specified period of time
in
one or more newspapers. The mortgagor or junior lienholder may then have
the
right, during a reinstatement period required in some states, to cure the
default by paying the entire actual amount in arrears (without acceleration)
plus the expenses incurred in enforcing the obligation. In other states,
the
mortgagor or the junior lienholder is not provided a period to reinstate
the
loan, but has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, the procedure for public sale, the parties entitled
to notice, the method of giving notice and the applicable time periods are
governed by state law and vary among the states. Foreclosure of a deed to
secure
debt is also generally accomplished by a non-judicial sale similar to that
required by a deed of trust, except that the lender or its agent, rather
than a
trustee, is typically empowered to perform the sale in accordance with the
terms
of the deed to secure debt and applicable law.
Public
Sale
A
third
party may be unwilling to purchase a mortgaged property at a public sale
because
of the difficulty in determining the value of such property at the time of
sale,
due to, among other things, redemption rights which may exist and the
possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt
and
accrued and unpaid interest plus the expenses of foreclosure. Generally,
state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor’s right in some states to
remain in possession during a redemption period, if applicable, the lender
will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make such repairs
at
its own expense as are necessary to render the property suitable for sale.
The
lender will commonly obtain the services of a real estate broker and pay
the
broker’s commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may
not
equal the lender’s investment in the property. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys’
fees, that may be recovered by a lender.
A
junior
mortgagee may not foreclose on the property securing the junior mortgage unless
it forecloses subject to senior mortgages and any other prior liens, in which
case it may be obliged to make payments on the senior mortgages to avoid their
foreclosure. In addition, in the event that the foreclosure of a junior mortgage
triggers the enforcement of a “due-on-sale” clause contained in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgage to avoid its foreclosure. Accordingly, with respect to those
Mortgage Loans, if any, that are junior mortgage loans, if the lender purchases
the property the lender’s title will be subject to all senior mortgages, prior
liens and certain governmental liens.
The
proceeds received by the referee or trustee from the sale are applied first
to
the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds
to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
75
Rights
of Redemption
The
purposes of a foreclosure action are to enable the mortgagee to realize upon
its
security and to bar the mortgagor, and all persons who have an interest in
the
property which is subordinate to the mortgage being foreclosed, from exercise
of
their “equity of redemption.” The doctrine of equity of redemption provides
that, until the property covered by a mortgage has been sold in accordance
with
a properly conducted foreclosure and foreclosure sale, those having an interest
which is subordinate to that of the foreclosing mortgagee have an equity
of
redemption and may redeem the property by paying the entire debt with interest.
In addition, in some states, when a foreclosure action has been commenced,
the
redeeming party must pay certain costs of such action. Those having an equity
of
redemption must generally be made parties and joined in the foreclosure
proceeding in order for their equity of redemption to be cut off and
terminated.
The
equity of redemption is a common-law (non-statutory) right which exists prior
to
completion of the foreclosure, is not waivable by the mortgagor, must be
exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant
to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property
from
the foreclosure sale. In some states, statutory redemption may occur only
upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under
a
deed of trust. Consequently, the practical effect of the redemption right
is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee’s sale under a deed of trust.
Under
the
REMIC Provisions currently in effect, property acquired by foreclosure generally
must not be held for more than three calendar years following the year the
Trust
Fund acquired the property. With respect to a Series of Securities for which
an
election is made to qualify the Trust Fund or a part thereof as a REMIC, the
applicable Agreement will permit foreclosed property to be held for more than
such period of time if the IRS grants an extension of time within which to
sell
such property or independent counsel renders an opinion to the effect that
holding such property for such additional period is permissible under the REMIC
Provisions.
Cooperative
Loans
The
Cooperative shares owned by the tenant-stockholder and pledged to the lender
are, in almost all cases, subject to restrictions on transfer as set forth
in
the Cooperative’s certificate of incorporation and by-laws, as well as the
proprietary lease or occupancy agreement, and may be canceled by the Cooperative
for failure by the tenant-stockholder to pay rent or other obligations or
charges owed by such tenant-stockholder, including mechanics’ liens against the
cooperative apartment building incurred by such tenant-stockholder. The
proprietary lease or occupancy agreement generally permit the Cooperative to
terminate such lease or agreement in the event an obligor fails to make payments
or defaults in the performance of covenants required thereunder. Typically,
the
lender and the Cooperative enter into a recognition agreement which establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender
and
the tenant-stockholder.
The
recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize
the
lender’s lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative’s right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
76
Recognition
agreements also provide that in the event of a foreclosure on a Cooperative
Loan, the lender must obtain the approval or consent of the Cooperative as
required by the proprietary lease before transferring the Cooperative shares
or
assigning the proprietary lease. Generally, the lender is not limited in
any
rights it may have to dispossess the tenant-stockholders.
In
some
states, foreclosure on the Cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code
(“UCC”)
and
the security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a “commercially reasonable” manner. Whether a
foreclosure sale has been conducted in a “commercially reasonable” manner will
depend on the facts in each case. In determining commercial reasonableness,
a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according
to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article
9
of the UCC provides that the proceeds of the sale will be applied first to
pay
the costs and expenses of the sale and then to satisfy the indebtedness secured
by the lender’s security interest. The recognition agreement, however, generally
provides that the lender’s right to reimbursement is subject to the right of the
Cooperatives to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness
remains unpaid, the tenant-stockholder is generally responsible for the
deficiency.
In
the
case of foreclosure on a building which was converted from a rental building
to
a building owned by a Cooperative under a non-eviction plan, some states
require
that a purchaser at a foreclosure sale take the property subject to rent
control
and rent stabilization laws which apply to certain tenants who elected to
remain
in a building so converted.
Junior
Mortgages
Some
of
the Mortgage Loans may be secured by junior mortgages or deeds of trust, which
are subordinate to first or other senior mortgages or deeds of trust held by
other lenders. The rights of the Trust Fund as the holder of a junior deed
of
trust or a junior mortgage are subordinate in lien and in payment to those
of
the holder of the senior mortgage or deed of trust, including the prior rights
of the senior mortgagee or beneficiary to receive and apply hazard insurance
and
condemnation proceeds and, upon default of the mortgagor, to cause a foreclosure
on the property. Upon completion of the foreclosure proceedings by the holder
of
the senior mortgage or the sale pursuant to the deed of trust, the junior
mortgagee’s or junior beneficiary’s lien will be extinguished unless the junior
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See
“—Foreclosure” herein.
Furthermore,
because the terms of the junior mortgage or deed of trust are subordinate to
the
terms of the first mortgage or deed of trust, in the event of a conflict between
the terms of the first mortgage or deed of trust and the junior mortgage or
deed
of trust, the terms of the first mortgage or deed of trust will generally
govern. Upon a failure of the mortgagor or trustor to perform any of its
obligations, the senior mortgagee or beneficiary, subject to the terms of the
senior mortgage or deed of trust, may have the right to perform the obligation
itself. Generally, all sums so expended by the mortgagee or beneficiary become
part of the indebtedness secured by the mortgage or deed of trust. To the extent
a first mortgagee expends such sums, such sums will generally have priority
over
all sums due under the junior mortgage.
Rights
of Redemption
The
purposes of a foreclosure action are to enable the mortgagee to realize upon
its
security and to bar the mortgagor, and all persons who have an interest in
the
property which is subordinate to the mortgage being foreclosed, from exercise
of
their “equity of redemption.” The doctrine of equity of redemption provides
that, until the property covered by a mortgage has been sold in accordance
with
a properly conducted foreclosure and foreclosure sale, those having an interest
which is subordinate to that of the foreclosing mortgagee have an equity of
redemption and may redeem the property by paying the entire debt with interest.
In addition, in some states, when a foreclosure action has been commenced,
the
redeeming party must pay certain costs of such action. Those having an equity
of
redemption must generally be made parties and joined in the foreclosure
proceeding in order for their equity of redemption to be cut off and
terminated.
77
The
equity of redemption is a common-law (non-statutory) right which exists prior
to
completion of the foreclosure, is not waivable by the mortgagor, must be
exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant
to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property
from
the foreclosure sale. In some states, statutory redemption may occur only
upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under
a
deed of trust. Consequently, the practical effect of the redemption right
is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee’s sale under a deed of trust.
Anti-Deficiency
Legislation, the Bankruptcy Code and Other Limitations on
Lenders
Certain
states have imposed statutory prohibitions which limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain
a
deficiency judgment against the borrower following foreclosure or sale under
a
deed of trust. A deficiency judgment would be a personal judgment against
the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to
the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against
the
former borrower following a judicial sale to the excess of the outstanding
debt
over the fair market value of the property at the time of the public sale.
The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as
a
result of low or no bids at the judicial sale.
In
addition to anti-deficiency and related legislation, numerous other federal
and
state statutory provisions, including the United States Bankruptcy Code, 11
U.S.C. Sections 101 et
seq.
(the
“Bankruptcy
Code”),
and
state laws affording relief to debtors (together with the Bankruptcy Code,
the
“Insolvency
Laws”)
may
interfere with or affect the ability of a secured mortgage lender to obtain
payment of a mortgage loan, to realize upon collateral and/or enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings)
are
automatically stayed upon the filing of a bankruptcy petition, and, usually,
no
interest or principal payments are made during the course of the bankruptcy
case. Foreclosure of an interest in real property of a debtor in a case under
the Bankruptcy Code can typically occur only if the bankruptcy court vacates
the
stay; an action the court may be reluctant to take, particularly if the debtor
has the prospect of restructuring his or her debts and the mortgage collateral
is not deteriorating in value. The delay and the consequences thereof caused
by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor (a
subordinate lender secured by a mortgage on the property) may stay a senior
lender from taking action to foreclose.
A
homeowner may file for relief under the Bankruptcy Code under any of three
different chapters of the Bankruptcy Code. Under Chapter 7, the assets of the
debtor are liquidated and a lender secured by a lien may “bid in” (i.e.,
bid up
to the amount of the debt) at the sale of the asset. See
“—Foreclosure.”
A
homeowner may also file for relief under Chapter 11 of the bankruptcy code
and
reorganize his or her debts through his or her reorganization plan.
Alternatively, a homeowner may file for relief under Chapter 13 of the
Bankruptcy Code and address his or her debts in a rehabilitation plan. (Chapter
13 is often referred to as the “wage earner chapter” or “consumer chapter”
because most individuals seeking to restructure their debts file for relief
under Chapter 13 rather than under Chapter 11.)
The
Bankruptcy Code permits a mortgage loan that is secured by property that does
not consist solely of the debtor’s principal residence to be modified without
the consent of the lender provided certain substantive and procedural safeguards
are met. Under the Bankruptcy Code, the lender’s security interest may be
reduced to the then-current value of the property as determined by the court
if
the value is less than the amount due on the loan, thereby leaving the lender
as
a general unsecured creditor for the difference between the value of the
collateral and the outstanding balance of the mortgage loan. A borrower’s
unsecured indebtedness will typically be discharged in full upon payment of
a
substantially reduced amount. Other modifications to a mortgage loan may include
a reduction in the amount of each scheduled payment, which reduction may result
from a reduction in the rate of interest, an alteration of the repayment
schedule, an extension of the final maturity date, and/or a reduction in the
outstanding balance of the secured portion of the loan. In certain
circumstances, subject to the court’s approval, a debtor in a case under Chapter
11 of the Bankruptcy Code may have the power to grant liens senior to the lien
of a mortgage.
78
A
reorganization plan under Chapter 11 and a rehabilitation plan under Chapter
13
of the Bankruptcy Code may each allow a debtor to cure a default with respect
to
a mortgage loan on such debtor’s residence by paying arrearages over a period of
time and to deaccelerate and reinstate the original mortgage loan payment
schedule, even though the lender accelerated the loan and a final judgment
of
foreclosure had been entered in state court (provided no sale of the property
had yet occurred) prior to the filing of the debtor’s petition under the
Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be
accomplished within the five year maximum term permitted for repayment plans,
such term commencing when the repayment plan becomes effective, while defaults
may be cured over a longer period of time under a Chapter 11 plan of
reorganization.
Generally,
a repayment plan in a case under Chapter 13 may not modify the claim of a
mortgage lender if the borrower elects to retain the property, the property
is
the borrower’s principal residence and the property is the lender’s only
collateral. Certain courts have allowed modifications when the mortgage loan
is
secured both by the debtor’s principal residence and by collateral that is not
“inextricably bound” to the real property, such as appliances, machinery, or
furniture. Certain courts have also allowed modifications when the Mortgage
Loan
is fully unsecured at the time of bankruptcy.
The
general protection for mortgages secured only by the debtor’s principal
residence is not applicable in a case under Chapter 13 if the last payment
on
the original payment schedule is due before the final date for payment under
the
debtor’s Chapter 13 plan (which date could be up to five years after the debtor
emerges from bankruptcy). Under several recently decided cases, the terms of
such a loan can be modified in the manner described above. While these decisions
are contrary to the holding in a prior case by a senior appellate court, it
is
possible that the later decisions will become the accepted interpretation in
view of the language of the applicable statutory provision. If this
interpretation is adopted by a court considering the treatment in a Chapter
13
repayment plan of a Mortgage Loan, it is possible that the Mortgage Loan could
be modified.
State
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring
of a
mortgage loan on terms a lender would not otherwise accept.
In
a
bankruptcy or similar proceeding of a mortgagor, action may be taken seeking
the
recovery, as a preferential transfer or on other grounds, of any payments made
by the mortgagor under the related mortgage loan prior to the bankruptcy or
similar proceeding. Payments on long-term debt may be protected from recovery
as
preferences if they are payments in the ordinary course of business made on
debts incurred in the ordinary course of business or if the value of the
collateral exceeds the debt at the time of payment. Whether any particular
payment would be protected depends upon the facts specific to a particular
transaction.
A
trustee
in bankruptcy, in some cases, may be entitled to collect its costs and expenses
in preserving or selling the mortgaged property ahead of payment to the lender.
Moreover, the laws of certain states also give priority to certain tax and
mechanics liens over the lien of a mortgage. Under the Bankruptcy Code, if
the
court finds that actions of the mortgagee have been unreasonable and
inequitable, the lien of the related mortgage may be subordinated to the claims
of unsecured creditors.
The
Bankruptcy Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act,
and
related statutes. These federal laws impose specific statutory liabilities
upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the applicable laws. In some cases, this liability may affect assignees
of
the Mortgage Loans.
79
Enforceability
of Certain Provisions
Standard
forms of note, mortgage and deed of trust generally contain provisions
obligating the borrower to pay a late charge if payments are not timely made
and
in some circumstances may provide for prepayment fees or penalties if the
obligation is paid prior to maturity. In certain states, there are or may
be
specific limitations upon late charges which a lender may collect from a
borrower for delinquent payments. Certain states also limit the amounts that
a
lender may collect from a borrower as an additional charge if the loan is
prepaid.
Courts
have imposed general equitable principles upon foreclosure. These equitable
principles are generally designed to relieve the borrower from the legal
effect
of defaults under the loan documents. Examples of judicial remedies that
may be
fashioned include judicial requirements that the lender undertake affirmative
and expensive actions to determine the causes for the borrower’s default and the
likelihood that the borrower will be able to reinstate the loan. In some
cases,
courts have substituted their judgment for the lender’s judgment and have
required lenders to reinstate loans or recast payment schedules to accommodate
borrowers who are suffering from temporary financial disability. In some
cases,
courts have limited the right of lenders to foreclose if the default under
the
mortgage instrument is not monetary, such as the borrower failing to adequately
maintain the property or the borrower executing a second mortgage or deed
of
trust affecting the property. In other cases, some courts have been faced
with
the issue of whether federal or state constitutional provisions reflecting
due
process concerns for adequate notice require that borrowers under the deeds
of
trust receive notices in addition to the statutorily-prescribed minimum
requirements. For the most part, these cases have upheld the notice provisions
as being reasonable or have found that the sale by a trustee under a deed
of
trust or under a mortgage having a power of sale does not involve sufficient
state action to afford constitutional protections to the borrower.
Environmental
Considerations
A
lender
may be subject to unforeseen environmental risks when taking a security interest
in real or personal property. Property subject to such a security interest
may
be subject to federal, state, and local laws and regulations relating to
environmental protection. Such laws may regulate, among other things: emissions
of air pollutants; discharges of wastewater or storm water; generation,
transport, storage or disposal of hazardous waste or hazardous substances;
operation, closure and removal of underground storage tanks; removal and
disposal of asbestos-containing materials; management of electrical or other
equipment containing polychlorinated biphenyls (“PCBs”).
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain states,
environmental contamination on a property may give rise to a lien on the
property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a
lien
and, in some states, even prior recorded liens are subordinated to such liens
(“Superliens”).
In
the latter states, the security interest of the Trustee in a property that
is
subject to such Superlien could be adversely affected.
Under
the
federal Comprehensive Environmental Response, Compensation and Liability Act,
as
amended (“CERCLA”),
and
under state law in certain states, a secured party which takes a deed in lieu
of
foreclosure, purchases a mortgaged property at a foreclosure sale, operates
a
mortgaged property or undertakes certain types of activities that may constitute
management of the mortgaged property may become liable in certain circumstances
for the costs of remedial action (“Cleanup
Costs”)
if
hazardous wastes or hazardous substances have been released or disposed of
on
the property. Such Cleanup Costs may be substantial. CERCLA imposes strict,
as
well as joint and several liability for environmental remediation and/or damage
costs on several classes of “potentially responsible parties,” including current
“owners and/or operators” of property, irrespective of whether those owners or
operators caused or contributed to the contamination on the property. In
addition, owners and operators of properties that generate hazardous substances
that are disposed of at other “off-site” locations may be held strictly, jointly
and severally liable for environmental remediation and/or damages at those
off-site locations. Many states also have laws that are similar to CERCLA.
Liability under CERCLA or under similar state law could exceed the value of
the
property itself as well as the aggregate assets of the property
owner.
80
The
law
is unclear as to whether and under what precise circumstances cleanup costs,
or
the obligation to take remedial actions, could be imposed on a secured lender
such as the Trust Fund. Under the laws of some states and under CERCLA, a
lender
may be liable as an “owner or operator” for costs of addressing releases or
threatened releases of hazardous substances on a mortgaged property if such
lender or its agents or employees have “participated in the management” of the
operations of the borrower, even though the environmental damage or threat
was
caused by a prior owner or current owner or operator or other third party.
Excluded from CERCLA’s definition of “owner or operator” is a person “who
without participating in the management of . . . [the] facility, holds indicia
of ownership primarily to protect his security interest” (the “secured-creditor
exemption”).
This
exemption for holders of a security interest such as a secured lender applies
only to the extent that a lender seeks to protect its security interest in
the
contaminated facility or property. Thus, if a lender’s activities begin to
encroach on the actual management of such facility or property, the lender
faces
potential liability as an “owner or operator” under CERCLA. Similarly, when a
lender forecloses and takes title to a contaminated facility or property,
the
lender may incur potential CERCLA liability in various circumstances, including
among others, when it holds the facility or property as an investment (including
leasing the facility or property to a third party), fails to market the property
in a timely fashion or fails to properly address environmental conditions
at the
property or facility.
The
Resource Conservation and Recovery Act, as amended (“RCRA”),
contains a similar secured-creditor exemption for those lenders who hold
a
security interest in a petroleum underground storage tank (“UST”)
or in
real estate containing a UST, or that acquire title to a petroleum UST or
facility or property on which such a UST is located. As under CERCLA, a lender
may lose its secured-creditor exemption and be held liable under RCRA as
a UST
owner or operator if such lender or its employees or agents participate in
the
management of the UST. In addition, if the lender takes title to or possession
of the UST or the real estate containing the UST, under certain circumstances
the secured-creditor exemption may be deemed to be unavailable.
A
decision in May 1990 of the United States Court of Appeals for the Eleventh
Circuit in United States v. Fleet Factors Corp. very narrowly construed CERCLA’s
secured-creditor exemption. The court’s opinion suggested that a lender need not
have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that
the
lender had the capacity to influence the borrower’s treatment of hazardous
waste. The court added that a lender’s capacity to influence such decisions
could be inferred from the extent of its involvement in the facility’s financial
management. A subsequent decision by the United States Court of Appeals for
the
Ninth Circuit in In re Bergsoe Metal Corp., apparently disagreeing with,
but not
expressly contradicting, the Fleet Factors court, held that a secured lender
had
no liability absent “some actual management of the facility” on the part of the
lender.
Court
decisions have taken varying views of the scope of the secured-creditor
exemption, leading to administrative and legislative efforts to provide guidance
to lenders on the scope of activities that would trigger CERCLA and/or RCRA
liability. Until recently, these efforts have failed to provide substantial
guidance.
On
September 28, 1996, Congress enacted, and on September 30, 1996 the President
signed into law the Asset Conservation Lender Liability and Deposit Insurance
Protection Act of 1996 (the “Asset
Conservation Act”).
The
Asset Conservation Act was intended to clarify the scope of the secured creditor
exemption. This legislation more clearly defines the kinds of activities that
would constitute “participation in management” and that therefore would trigger
liability for secured parties under CERCLA. It also identified certain
activities that ordinarily would not trigger liability, provided, however,
that
such activities did not otherwise rise to the level of “participation in
management.” The Asset Conservation Act specifically reverses the Fleet Factors
“capacity to influence” standard. The Asset Conservation Act also provides
additional protection against liability in the event of foreclosure. However,
since the courts have not yet had the opportunity to interpret the new statutory
provisions, the scope of the additional protections offered by the Asset
Conservation Act is not fully defined. It also is important to note that the
Asset Conservation Act does not offer complete protection to lenders and that
the risk of liability remains.
If
a
secured lender does become liable, it may be entitled to bring an action for
contribution against the owner or operator who created the environmental
contamination or against some other liable party, but that person or entity
may
be bankrupt or otherwise judgment-proof. It is therefore possible that cleanup
or other environmental liability costs could become a liability of the Trust
Fund and occasion a loss to the Trust Fund and to Securityholders in certain
circumstances. The new secured creditor amendments to CERCLA, also, would not
necessarily affect the potential for liability in actions by either a state
or a
private party under other federal or state laws which may impose liability
on
“owners or operators” but do not incorporate the secured-creditor
exemption.
81
Traditionally,
residential mortgage lenders have not taken steps to evaluate whether hazardous
wastes or hazardous substances are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Neither the Depositor nor any
Servicer makes any representations or warranties or assumes any liability
with
respect to: environmental conditions of such Mortgaged Property; the absence,
presence or effect of hazardous wastes or hazardous substances on, near or
emanating from such Mortgaged Property; the impact on Securityholders of
any
environmental condition or presence of any substance on or near such Mortgaged
Property; or the compliance of any Mortgaged Property with any environmental
laws. In addition, no agent, person or entity otherwise affiliated with the
Depositor is authorized or able to make any such representation, warranty
or
assumption of liability relative to any such Mortgaged Property.
Due-on-Sale
Clauses
The
Mortgage Loans will generally contain due-on-sale clauses. These clauses
generally provide that the lender may accelerate the maturity of the loan
if the
mortgagor sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation
or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, with respect to certain loans the
Garn-St. Germain Depository Institutions Act of 1982 preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of
the
United States Federal Home Loan Bank Board, as succeeded by the Office of
Thrift
Supervision, which preempt state law restrictions on the enforcement of such
clauses. Similarly, “due-on-sale” clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The
Garn-St. Germain Act also sets forth nine specific instances in which a mortgage
lender covered by the act (including federal savings and loan associations
and
federal savings banks) may not exercise a “due-on-sale” clause, notwithstanding
the fact that a transfer of the property may have occurred. These include
intra-family transfers, certain transfers by operation of law, leases of fewer
than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St. Germain Act also prohibit the imposition of
a
prepayment charge upon the acceleration of a loan pursuant to a due-on-sale
clause. The inability to enforce a “due-on-sale” clause may result in a mortgage
that bears an interest rate below the current market rate being assumed by
a new
home buyer rather than being paid off, which may affect the average life of
the
Mortgage Loans and the number of Mortgage Loans which may extend to
maturity.
Prepayment
Charges
Some
state laws restrict the imposition of Prepayment Charges and late fees even
when
the mortgage loans expressly provide for the collection of those charges.
Although the Alternative Mortgage Transaction Parity Act of 1982 (the
“Parity
Act”),
permits the collection of Prepayment Charges and late fees in connection with
some types of eligible mortgage loans preempting any contrary state law
prohibitions, some states may not recognize the preemptive authority of the
Parity Act or have formally opted out of the Parity Act. As a result, it is
possible that Prepayment Charges and late fees may not be collected even on
loans that provide for the payment of those charges. The “OTS”,
the
agency that administers the Parity Act for unregulated, non-federally chartered
housing creditors, withdrew its favorable Parity Act regulations and Chief
Counsel Opinions that previously authorized state-chartered housing creditors
to
charge Prepayment Charges and late fees in certain circumstances notwithstanding
contrary state law, effective with respect to mortgage loans originated on
or
after July 1, 2003. However, the OTS’s ruling does not retroactively affect
mortgage loans originated by such entities before July 1, 2003.
Subordinate
Financing
82
Where
a
mortgagor encumbers mortgaged property with one or more junior liens, the
senior
lender is subjected to additional risk. First, the mortgagor may have difficulty
servicing and repaying multiple loans. In addition, if the junior loan permits
recourse to the mortgagor (as junior loans often do) and the senior loan
does
not, a mortgagor may be more likely to repay sums due on the junior loan
than
those on the senior loan. Second, acts of the senior lender that prejudice
the
junior lender or impair the junior lender’s security may create a superior
equity in favor of the junior lender. For example, if the mortgagor and the
senior lender agree to an increase in the principal amount of or the interest
rate payable on the senior loan, the senior lender may lose its priority
to the
extent any existing junior lender is harmed or the mortgagor is additionally
burdened. Third, if the mortgagor defaults on the senior loan and/or any
junior
loan or loans, the existence of junior loans and actions taken by junior
lenders
can impair the security available to the senior lender and can interfere
with or
delay the taking of action by the senior lender. Moreover, the bankruptcy
of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
Applicability
of Usury Laws
Title
V
of the Depository Institutions Deregulation and Monetary Control Act of 1980,
enacted in March 1980 (“Title
V”),
provides that state usury limitations shall not apply to certain types of
residential first mortgage loans originated by certain lenders after March
31,
1980. A similar federal statute was in effect with respect to mortgage loans
made during the first three months of 1980. The Office of Thrift Supervision
is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized any state to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal
law.
In addition, even where Title V is not so rejected, any state is authorized
by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other
charges.
The
Depositor believes that a court interpreting Title V would hold that residential
first mortgage loans that are originated on or after January 1, 1980 are subject
to federal preemption. Therefore, in a state that has not taken the requisite
action to reject application of Title V or to adopt a provision limiting
discount points or other charges prior to origination of such mortgage loans,
any such limitation under such state’s usury law would not apply to such
mortgage loans.
In
any
state in which application of Title V has been expressly rejected or a provision
limiting discount points or other charges is adopted, no mortgage loan
originated after the date of such state action will be eligible for inclusion
in
a Trust Fund unless (i) such mortgage loan provides for such interest rate,
discount points and charges as are permitted in such state or (ii) such
mortgage loan provides that the terms thereof shall be construed in accordance
with the laws of another state under which such interest rate, discount points
and charges would not be usurious and the mortgagor’s counsel has rendered an
opinion that such choice of law provision would be given effect.
Statutes
differ in their provisions as to the consequences of a usurious loan. One group
of statutes requires the lender to forfeit the interest due above the applicable
limit or impose a specified penalty. Under this statutory scheme, the mortgagor
may cancel the recorded mortgage or deed of trust upon paying its debt with
lawful interest, and the lender may foreclose, but only for the debt plus lawful
interest. A second group of statutes is more severe. A violation of this type
of
usury law results in the invalidation of the transaction, thereby permitting
the
mortgagor to cancel the recorded mortgage or deed of trust without any payment
or prohibiting the lender from foreclosing.
Alternative
Mortgage Instruments
Alternative
mortgage instruments, including adjustable rate mortgage loans and early
ownership mortgage loans, originated by non-federally chartered lenders have
historically been subject to a variety of restrictions. Such restrictions
differed from state to state, resulting in difficulties in determining whether
a
particular alternative mortgage instrument originated by a state-chartered
lender was in compliance with applicable law. These difficulties were alleviated
substantially as a result of the enactment of Title VIII of the Garn-St. Germain
Act (“Title
VIII”).
Title
VIII provides that, notwithstanding any state law to the contrary,
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency
with
respect to origination of alternative mortgage instruments by national banks;
state-chartered credit unions may originate alternative mortgage instruments
in
accordance with regulations promulgated by the National Credit Union
Administration with respect to origination of alternative mortgage instruments
by federal credit unions; and all other non-federally chartered housing
creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with
the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to
the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title
VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
83
Homeowners
Protection Act of 1998
The
Homeowners Protection Act of 1998 (“HOPA“)
provides for certain disclosure and termination requirements for primary
mortgage insurance (“PMI“).
The
termination provisions of HOPA apply only to mortgage loans relating to
single-family primary residences originated on or after July 29, 1999. Such
termination provisions govern when a mortgagor may cancel the requirement
to
maintain PMI and when the requirement to maintain PMI is automatically
terminated. In general, voluntary termination is permitted and automatic
termination occurs when the principal balance of the mortgage loan is reduced
to
80% or 78%, respectively, of the original property value. The disclosure
requirements of HOPA vary depending on whether the mortgage loan was originated
before or after July 29, 1999. Such disclosure requirements include notification
of the circumstances whereby a mortgagor may cancel PMI, the date when PMI
automatically terminates and servicer contact information. In addition, HOPA
provides that no later than 30 days after cancellation or termination of
PMI,
the servicer shall provide written notification that such PMI is terminated
and
no further payments are due or payable. Any servicer, mortgagee or mortgage
insurer that violates provisions of HOPA is subject to possible liability
which
includes, but is not limited to, actual damages, statutory damages and
reasonable attorney’s fees.
Texas
Home Equity Loans
Generally,
any “cash-out” refinance or other non-purchase money transaction (except for
rate/term refinance loans and certain other narrow exceptions) secured by a
Texas resident’s principal residence is subject to the provisions set forth in
Section 50(a)(6) of Article XVI of the Constitution of Texas and its
implementing statutes and regulations (the “Texas
Home Equity Laws“).
The
Texas Home Equity Laws provide for certain disclosure requirements, caps on
allowable fees, required loan closing procedures and other restrictions.
Failure, inadvertent or otherwise, to comply with any requirement may render
the
Mortgage Loan unenforceable and/or the lien on the Mortgaged Property voidable
unless cured within 60 days after the borrower provides notice of the defect
to
the lender. Because mortgage loans which are subject to the Texas Home Equity
Laws can be foreclosed only pursuant to court order, rather than non-judicial
foreclosure as is available for other types of mortgage loans in Texas, delays
and increased losses may result in connection with foreclosures of such loans.
If a court were to find that any requirement of the Texas Home Equity Laws
was
not complied with, the court could refuse to allow foreclosure to proceed,
declare the lien on the Mortgaged Property to be void, and/or require the
originating lender or the holder of the note to forfeit some or all principal
and interest of the related Mortgage Loan. Title insurance generally available
on such Mortgage Loans may exclude coverage for some of the risks described
in
this paragraph.
Servicemembers
Civil Relief Act
Generally,
under the terms of the Servicemembers Civil Relief Act (the “Relief
Act”),
a
mortgagor who enters military service after the origination of such mortgagor’s
Mortgage Loan, including a mortgagor who was in reserve status and is called
to
active duty after origination of the Mortgage Loan, may not be charged interest,
including fees and charges, in excess of 6% per annum during the period of
the
mortgagor’s active duty status. In addition to adjusting the interest, the
lender must forgive any such interest in excess of 6%, unless a court or
administrative agency orders otherwise upon application of the lender. Further,
the Relief Act provides broad discretion for a court to modify a mortgage loan
upon application by the mortgagor. The Relief Act applies to mortgagors who
are
members of the U.S. Armed Forces and officers of the U.S. Public Health Service
or the National Oceanic and Atmospheric Administration assigned to duty with
the
military. The California Military and Veterans Code (the “California
Military Code”)
provides protection substantially similar to that provided by the Relief Act
to
California national guard members called up to active service by the Governor,
California national guard members called up to active service by the President
and reservists called to active duty. In addition, other states have enacted
comparable legislation which may interfere with or affect the ability of the
Servicer to timely collect payments of principal and interest on, or to
foreclose on, Mortgage Loans of mortgagors in such states who are active or
reserve members of the armed services. It is possible that the Relief Act,
the
California Military Code or similar state law could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans in a Trust Fund. Any
shortfall in interest collections resulting from the application of the Relief
Act, the California Military Code or similar state law could result in losses
to
the holders of the Securities of the related Series. Further, since the Relief
Act, the California Military Code and similar state law impose limitations
which
would impair the ability of the Servicer to foreclose on an affected Mortgage
Loan during the mortgagor’s period of active duty status, in the event that such
a Mortgage Loan goes into default, there may be delays and losses occasioned
by
the inability to realize upon the Mortgaged Property in a timely
fashion.
84
Forfeiture
for Drug, RICO and Money Laundering Violations
Federal
law provides that property purchased or improved with assets derived from
criminal activity or otherwise tainted, or used in the commission of certain
offenses, can be seized and ordered forfeited to the United States of America.
The offenses which can trigger such a seizure and forfeiture include, among
others, violations of the Racketeer Influenced and Corrupt Organizations
Act,
the Bank Secrecy Act, the anti-money laundering laws and regulations, including
the USA Patriot Act of 2001 and the regulations issued thereunder, as well
as
the narcotic drug laws. In many instances, the United States may seize the
property even before a conviction occurs.
In
the
event of a forfeiture proceeding, a lender may be able to establish its interest
in the property by proving that (i) its mortgage was executed and recorded
before the commission of the illegal conduct from which the assets used to
purchase or improve the property were derived or before any other crime upon
which the forfeiture is based, or (ii) the lender, at the time of the execution
of the mortgage, “did not know or was reasonably without cause to believe that
the property was subject to forfeiture.” However, there can be no assurance that
such a defense will be successful.
CERTAIN
LEGAL ASPECTS OF THE CONTRACTS
The
following discussion contains summaries, which are general in nature, of certain
legal matters relating to the Contracts. Because such legal aspects are governed
primarily by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the Contracts is situated. The summaries are qualified in their entirety
by
reference to the appropriate laws of the states in which Contracts may be
originated.
General
As
a
result of the assignment of the Contracts to the Trustee, the Trustee will
succeed collectively to all of the rights (including the right to receive
payment on the Contracts) of the obligee under the Contracts. Each Contract
evidences both (a) the obligation of the obligor to repay the loan
evidenced thereby, and (b) the grant of a security interest in the
Manufactured Home to secure repayment of such loan. Certain aspects of both
features of the Contracts are described more fully below.
The
Contracts generally are “chattel paper” as defined in the UCC in effect in the
states in which the Manufactured Homes initially were registered. Pursuant
to
the UCC, the sale of chattel paper is treated in a manner similar to perfection
of a security interest in chattel paper. Under the applicable Agreement, the
Servicer will transfer physical possession of the Contracts to the Trustee
or
its custodian or may retain possession of the Contracts as custodian for the
Trustee. In addition, the Servicer will make an appropriate filing of a UCC-1
financing statement in the appropriate states to give notice of the Trustee’s
ownership of the Contracts. The Contracts will be stamped or marked otherwise
to
reflect their assignment from the Company to the Trustee only if provided in
the
related prospectus supplement. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of
the
Contracts without notice of such assignment, the Trustee’s interest in Contracts
could be defeated.
85
Security
Interests in the Manufactured Homes
The
Manufactured Homes securing the Contracts may be located in all 50 states
and
the District of Columbia. Security interests in manufactured homes may be
perfected either by notation of the secured party’s lien on the certificate of
title or by delivery of the required documents and payment of a fee to the
state
motor vehicle authority, depending on state law. In some nontitle states,
perfection pursuant to the provisions of the UCC is required. The Asset Seller
may effect such notation or delivery of the required documents and fees,
and
obtain possession of the certificate of title, as appropriate under the laws
of
the state in which any manufactured home securing a manufactured housing
conditional sales contract is registered. In the event the Asset Seller fails,
due to clerical error, to effect such notation or delivery, or files the
security interest under the wrong law (for example, under a motor vehicle
title
statute rather than under the UCC, in a few states), the Asset Seller may
not
have a first priority security interest in the Manufactured Home securing
a
Contract. As manufactured homes have become larger and often have been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes, under certain circumstances, may
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state
real
estate law. In order to perfect a security interest in a manufactured home
under
real estate laws, the holder of the security interest must file either a
“fixture filing” under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings
must
be made in the real estate records office of the county where the home is
located. Substantially all of the Contracts contain provisions prohibiting
the
borrower from permanently attaching the Manufactured Home to its site. So
long
as the borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the
UCC,
and the notation of the security interest on the certificate of title or
the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which is prior to the security interest originally
retained by the Asset Seller and transferred to the Depositor. With respect
to a
Series of Securities and if so described in the related prospectus supplement,
the Servicer may be required to perfect a security interest in the Manufactured
Home under applicable real estate laws. The Warranting Party will represent
that
as of the date of the sale to the Depositor it has obtained a perfected first
priority security interest by proper notation or delivery of the required
documents and fees with respect to substantially all of the Manufactured
Homes
securing the Contracts.
The
Depositor will cause the security interests in the Manufactured Homes to be
assigned to the Trustee on behalf of the Securityholders. The Depositor or
the
Trustee will amend the certificates of title (or file UCC-3 statements) to
identify the Trustee as the new secured party, and will deliver the certificates
of title to the Trustee or note thereon the interest of the Trustee only if
specified in the related prospectus supplement. Accordingly, the Asset Seller
(or other originator of the Contracts) will continue to be named as the secured
party on the certificates of title relating to the Manufactured Homes. In some
states, such assignment is an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title and
the
new secured party succeeds to Servicer’s rights as the secured party. However,
in some states, in the absence of an amendment to the certificate of title
(or
the filing of a UCC-3 statement), such assignment of the security interest
in
the Manufactured Home may not be held effective or such security interests
may
not be perfected and in the absence of such notation or delivery to the Trustee,
the assignment of the security interest in the Manufactured Home may not be
effective against creditors of the Asset Seller (or such other originator of
the
Contracts) or a trustee in bankruptcy of the Asset Seller (or such other
originator).
In
the
absence of fraud, forgery or permanent affixation of the Manufactured Home
to
its site by the Manufactured Home owner, or administrative error by state
recording officials, the notation of the lien of the Asset Seller (or other
originator of the Contracts) on the certificate of title or delivery of the
required documents and fees will be sufficient to protect the Securityholders
against the rights of subsequent purchasers of a Manufactured Home or subsequent
lenders who take a security interest in the Manufactured Home. If there are
any
Manufactured Homes as to which the security interest assigned to the Trustee
is
not perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee
as
the new secured party on the certificate of title that, through fraud or
negligence, the security interest of the Trustee could be released.
86
In
the
event that the owner of a Manufactured Home moves it to a state other than
the
state in which such Manufactured Home initially is registered, under the
laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter only if and
after
the owner re-registers the Manufactured Home in such state. If the owner
were to
relocate a Manufactured Home to another state and not re-register the
Manufactured Home in such state, and if steps are not taken to re-perfect
the
Trustee’s security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured
Home;
accordingly, the Servicer must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states which provide for notation of lien, the Asset Seller
(or
other originator) would receive notice of surrender if the security interest
in
the Manufactured Home is noted on the certificate of title. Accordingly,
the
Trustee would have the opportunity to re-perfect its security interest in
the
Manufactured Home in the state of relocation. In states which do not require
a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing contracts, the Servicer takes steps to effect such re-perfection
upon
receipt of notice of re-registration or information from the obligor as to
relocation. Similarly, when an obligor under a manufactured housing contract
sells a manufactured home, the Servicer must surrender possession of the
certificate of title or, if it is noted as lienholder on the certificate
of
title, will receive notice as a result of its lien noted thereon and accordingly
will have an opportunity to require satisfaction of the related manufactured
housing conditional sales contract before release of the lien. Under the
applicable Agreement, the Servicer is obligated to take such steps, at the
Servicer’s expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under
the
laws of most states, liens for repairs performed on a Manufactured Home and
liens for personal property taxes take priority even over a perfected security
interest. The Warranting Party will represent in the applicable Agreement
that
it has no knowledge of any such liens with respect to any Manufactured Home
securing payment on any Contract. However, such liens could arise at any
time
during the term of a Contract. No notice will be given to the Trustee or
Securityholders in the event such a lien arises.
Enforcement
of Security Interests in Manufactured Homes
The
Servicer on behalf of the Trustee, to the extent required by the applicable
Agreement, may take action to enforce the Trustee’s security interest with
respect to Contracts in default by repossession and resale of the Manufactured
Homes securing such defaulted Contracts. So long as the Manufactured Home has
not become subject to the real estate law, a creditor can repossess a
Manufactured Home securing a Contract by voluntary surrender, by “self-help”
repossession that is “peaceful” (i.e.,
without
breach of the peace) or, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, by judicial process. The holder of
a
Contract must give the debtor a number of days’ notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession.
The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states
also
requires that the debtor be given notice of any sale prior to resale of the
unit
so that the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled
to
be paid out of the sale proceeds before such proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under
the
laws applicable in most states, a creditor is entitled to obtain a deficiency
judgment from a debtor for any deficiency on repossession and resale of the
manufactured home securing such debtor’s loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a
judgment.
Certain
other statutory provisions, including Insolvency Laws and general equitable
principles, may limit or delay the ability of a lender to repossess and resell
collateral or enforce a deficiency judgment.
Servicemembers
Civil Relief Act
The
terms
of the Relief Act apply to an obligor on a Contract as described for a mortgagor
on a Mortgage Loan under “Certain Legal Aspects of Mortgage Loans—Servicemembers
Civil Relief Act.”
87
Consumer
Protection Laws
The
so-called “Holder-in-Due-Course” rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice
of
claims by the debtor thereunder. The effect of this rule is to subject
the
assignee of such a contract to all claims and defenses which the debtor
could
assert against the seller of goods. Liability under this rule is limited
to
amounts paid under a Contract; however, the obligor also may be able to
assert
the rule to set off remaining amounts due as a defense against a claim
brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal
Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting
Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and
the
Uniform Consumer Credit Code. In the case of some of these laws, the failure
to
comply with their provisions may affect the enforceability of the related
Contract.
Transfers
of Manufactured Homes; Enforceability of Due-on-Sale
Clauses
The
Contracts, in general, prohibit the sale or transfer of the related Manufactured
Homes without the consent of the Servicer and permit the acceleration of
the
maturity of the Contracts by the Servicer upon any such sale or transfer
that is
not consented to. Generally, it is expected that the Servicer will permit
most
transfers of Manufactured Homes and not accelerate the maturity of the related
Contracts. In certain cases, the transfer may be made by a delinquent obligor
in
order to avoid a repossession proceeding with respect to a Manufactured
Home.
In
the
case of a transfer of a Manufactured Home after which the Servicer desires
to
accelerate the maturity of the related Contract, the Servicer’s ability to do so
will depend on the enforceability under state law of the “due-on-sale” clause.
The Garn-St. Germain Depositary Institutions Act of 1982 preempts, subject
to
certain exceptions and conditions, state laws prohibiting enforcement of
“due-on-sale” clauses applicable to the Manufactured Homes. Consequently, in
some states the Servicer may be prohibited from enforcing a “due-on-sale” clause
in respect of certain Manufactured Homes.
Applicability
of Usury Laws
Title
V
provides that, subject to the following conditions, state usury limitations
shall not apply to any loan which is secured by a first lien on certain kinds
of
manufactured housing. The Contracts would be covered if they satisfy certain
conditions, among other things, governing the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of or foreclosure with respect
to
the related unit.
Title
V
authorized any state to reimpose limitations on interest rates and finance
charges by adopting before April 1, 1983 a law or constitutional provision
which
expressly rejects application of the federal law. Fifteen states adopted such
a
law prior to the April 1, 1983 deadline. In addition, even where Title V was
not
so rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on loans covered by Title V. The related Asset
Seller will represent that all of the Contracts comply with applicable usury
law.
FEDERAL
INCOME TAX CONSEQUENCES
General
The
following discussion is based on the advice of Hunton & Williams LLP or
Cadwalader, Wickersham & Taft LLP, as to the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Securities offered hereunder. As to any Securities offered pursuant hereto,
Hunton & Williams LLP or Cadwalader, Wickersham & Taft LLP is of the
opinion that the following discussion, as supplemented by the discussion under
the heading “Federal Income Tax Consequences,” if any, in the prospectus
supplement accompanying this prospectus with respect to those Securities, is
correct in all material respects as of the date of such prospectus supplement.
Except as specifically set forth elsewhere herein, the opinion set forth in
the
preceding sentence and any opinions specifically set forth in this discussion
or
the related prospectus supplement are the only opinions being rendered with
respect to tax matters affecting the Securities offered hereunder by Hunton
& Williams LLP or Cadwalader, Wickersham & Taft LLP. The opinion stated
above and the opinions specifically identified as such in the following
discussion and in the related prospectus supplement are the only opinions that
Hunton & Williams LLP or Cadwalader, Wickersham & Taft LLP has been
asked to render with respect to the tax consequences of the purchase, ownership
and dispositions of the Securities offered under this prospectus and the related
prospectus supplement. This discussion is directed solely to Securityholders
that hold the Securities as capital assets within the meaning of Section 1221
of
the Internal Revenue Code of 1986, as amended (the “Code”)
and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred
to
below, are based are subject to change or differing interpretations, which
could
apply retroactively. Prospective
investors should note that no rulings have been or will be sought from the
IRS
with respect to any of the federal income tax consequences discussed below,
and
no assurance can be given that the IRS will not take contrary positions.
Taxpayers and preparers of tax returns, including those filed by any REMIC
or
other issuer, should be aware that under applicable Treasury regulations a
provider of advice on specific issues of law is not considered an income tax
return preparer unless the advice (1) is given with respect to events that
have
occurred at the time the advice is rendered and is not given with respect to
the
consequences of contemplated actions, and (2) is directly relevant to the
determination of an entry on a tax return. If penalties were asserted against
purchasers of the Securities offered hereunder in respect of their treatment
of
the Securities for tax purposes, the summary of tax considerations contained,
or
the opinions stated, herein and in the prospectus supplement may not meet the
conditions necessary for purchasers’ reliance on that summary, or those
opinions, to exculpate them from the asserted penalties. Accordingly, taxpayers
should consult their own tax advisors and tax return preparers regarding the
preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed in this prospectus.
88
In
addition to the federal income tax consequences described herein, potential
investors should consider the state and local tax consequences, if any, of
the
purchase, ownership and disposition of the Securities. See
“State and Other Tax Consequences.”
Securityholders are encouraged to consult their own tax advisors concerning
the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Securities offered hereunder.
The
following discussion addresses securities of four general types:
(i) securities (“REMIC
Securities”)
representing interests in a Trust Fund, or a portion thereof, that the Trustee
will make one or more elections to have treated as a real estate mortgage
investment conduit (“REMIC”
) under
Sections 860A through 860G (the “REMIC
Provisions”)
of the
Code, (ii) securities (“Grantor
Trust Securities”)
representing interests in a Trust Fund (“Grantor
Trust Fund”)
as to
which no such election will be made, (iii) securities (“Partnership
Securities”)
representing interests in a Trust Fund (“Partnership
Trust Fund”)
which
is treated as a partnership for federal income tax purposes, and
(iv) securities (“Debt
Securities”)
representing indebtedness of a Partnership Trust Fund for federal income tax
purposes. The prospectus supplement for each Series of Securities will indicate
which of the foregoing treatments will apply to such Series and, if a REMIC
election (or elections) will be made for the related Trust Fund, will identify
all “regular interests” and “residual interests” in the REMIC. For purposes of
this tax discussion, (i) references to a “Securityholder” or a “holder” are
to the beneficial owner of a Security, (ii) references to “REMIC
Pool”
are
to
an entity or portion thereof as to which a REMIC election will be made and
(iii) references to “Mortgage Loans” include Contracts. Generally, no
REMIC election will be made with respect to Unsecured Home Improvement
Loans.
The
following discussion is based in part upon the rules governing original issue
discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in
the Treasury regulations issued thereunder (the “OID
Regulations”),
and
in part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the “REMIC
Regulations”).
The
OID Regulations do not adequately address certain issues relevant to, and in
some instances provide that they are not applicable to, securities such as
the
Securities.
Taxable
Mortgage Pools
Corporate
income tax can be imposed on the net income of certain entities issuing
non-REMIC debt obligations secured by real estate mortgages (“Taxable
Mortgage Pools”).
Any
entity other than a REMIC will be considered a Taxable Mortgage Pool if
(i) substantially all of the assets of the entity consist of debt
obligations and more than 50% of such obligations consist of “real estate
mortgages,” (ii) such entity is the obligor under debt obligations with two
or more maturities, and (iii) under the terms of the debt obligations on
which the entity is the obligor, payments on such obligations bear a
relationship to payments on the obligations held by the entity. Furthermore,
a
group of assets held by an entity can be treated as a separate Taxable Mortgage
Pool if the assets are expected to produce significant cash flow that will
support one or more of the entity’s issues of debt obligations. The Depositor
generally will structure offerings of non-REMIC Securities to avoid the
application of the Taxable Mortgage Pool rules.
89
REMICS
Classification
of REMICs
With
respect to each Series of REMIC Securities, assuming (i) the making of an
appropriate election, (ii) compliance with all provisions of the related
Pooling
and Servicing Agreement, (iii) compliance
with any changes in the law, including any amendments to the Code or applicable
Treasury regulations, the
related Trust Fund (or each applicable portion thereof) will qualify as a
REMIC
and the REMIC Securities offered with respect thereto will be considered
to
evidence ownership of “regular interests” (“Regular
Securities”)
or
“residual interests” (“Residual
Securities”)
in
that REMIC within the meaning of the REMIC Provisions.
In
order
for the REMIC Pool to qualify as a REMIC, there must be ongoing compliance
on
the part of the REMIC Pool with the requirements set forth in the Code. The
REMIC Pool must fulfill an asset test, which requires that no more than a
de
minimis
portion
of the assets of the REMIC Pool, as of the close of the third calendar month
beginning after the “Startup
Day”
(which
for purposes of this discussion is the date of issuance of the REMIC Securities)
and at all times thereafter, may consist of assets other than “qualified
mortgages” and “permitted investments.” The REMIC Regulations provide a safe
harbor pursuant to which the de
minimis
requirement will be met if at all times the aggregate adjusted basis of the
nonqualified assets is less than 1% of the aggregate adjusted basis of all
the
REMIC Pool’s assets. An entity that fails to meet the safe harbor may
nevertheless demonstrate that it holds no more than a de
minimis
amount
of nonqualified assets. A REMIC Pool also must provide “reasonable arrangements”
to prevent its residual interests from being held by “disqualified
organizations” or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. The Pooling and Servicing
Agreement with respect to each Series of REMIC Securities will contain
provisions meeting these requirements. See
“—Taxation of Owners of Residual Securities—Tax-Related Restrictions on Transfer
of Residual Securities—Disqualified Organizations.”
A
qualified mortgage is any obligation that is principally secured by an interest
in real property and that (i) is either transferred to the REMIC Pool on the
Startup Day, (ii) is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day
or
(iii) represents an increase in the principal amount of the obligation under
the
terms of such obligation described in (i) or (ii) above if such increase is
attributable to an advance made to the obligor pursuant to the original terms
of
the obligation, occurs after the Startup Day of the REMIC and is purchased
by
the REMIC pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in Tiered REMICs. The REMIC Regulations specify that loans
secured by timeshare interests, shares held by a tenant stockholder in a
cooperative housing corporation, and manufactured housing that qualifies as
a
“single family residence” under Code Section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage,
which
is any property that would have been treated as a qualified mortgage if it
were
transferred to the REMIC Pool on the Startup Day and that is received either
(i) in exchange for any qualified mortgage within a three-month period
thereafter or (ii) in exchange for a “defective obligation” within a
two-year period thereafter. A “defective obligation” includes (i) a
mortgage in default or as to which default is reasonably foreseeable,
(ii) a mortgage as to which a customary representation or warranty made at
the time of transfer to the REMIC Pool has been breached, (iii) a mortgage
that was fraudulently procured by the mortgagor, and (iv) a mortgage that
was not in fact principally secured by real property (but only if such mortgage
is disposed of within 90 days of discovery). A mortgage loan that is “defective”
as described in clause (iv) that is not sold or, if within two years of the
Startup Day, exchanged, within 90 days of discovery, ceases to be a qualified
mortgage after such 90-day period.
90
Permitted
investments include cash flow investments, qualified reserve assets, and
foreclosure property. A cash flow investment is an investment, earning a
return
in the nature of interest, of amounts received on or with respect to qualified
mortgages for a temporary period, not exceeding 13 months, until the next
scheduled distribution to holders of interests in the REMIC Pool. A qualified
reserve asset is any intangible property held for investment that is part
of any
reasonably required reserve maintained by the REMIC Pool (i) to provide for
payments of expenses of the REMIC Pool or amounts due on the regular or residual
interests in the event of defaults (including delinquencies) on the qualified
mortgages, lower than expected reinvestment returns, prepayment interest
shortfalls and certain other contingencies or (ii) to provide a source of
funding for the purchase of additional mortgage loans pursuant to a qualifying
fixed price or additional draws made by mortgagors under the terms of loans
held
by the related REMIC. The aggregate fair market of any such reserve cannot
exceed 50% of the aggregate fair market value of all assets of the REMIC
on the
Startup Day. The reserve fund will be disqualified if more than 30% of the
gross
income from the assets in such fund for the year is derived from the sale
or
other disposition of property held for less than three months, unless required
to prevent a default on the regular interests caused by a default on one
or more
qualified mortgages. A reserve fund must be reduced “promptly and appropriately”
as payments on the Mortgage Loans are received. Foreclosure property is real
property acquired by the REMIC Pool in connection with the default or imminent
default of a qualified mortgage and generally may not be held beyond the
close
of the third calendar year beginning after the taxable year of acquisition
unless an extension is granted by the IRS.
In
addition to the foregoing requirements, the various interests in a REMIC
Pool
also must meet certain requirements. All of the interests in a REMIC Pool
must
be either of the following: (i) one or more Classes of regular interests or
(ii) a single class of residual interests on which distributions, if any,
are made pro
rata.
A
regular interest is an interest in a REMIC Pool that is issued on the Startup
Day with fixed terms, is designated as a regular interest, and unconditionally
entitles the holder to receive a specified principal amount (or other similar
amount), and provides that interest payments (or other similar amounts),
if any,
at or before maturity either are payable based on a fixed rate or a qualified
variable rate, or consist of a specified, nonvarying portion of the interest
payments on qualified mortgages. A specified portion may consist of a fixed
number of basis points, a fixed percentage of the total interest, or a qualified
variable rate, inverse variable rate or difference between two fixed or
qualified variable rates on some or all of the qualified mortgages. The
specified principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest payments
on
qualified mortgages may be zero. A residual interest is an interest in a
REMIC
Pool other than a regular interest that is issued on the Startup Day and
that is
designated as a residual interest. An interest in a REMIC Pool may be treated
as
a regular interest even if payments of principal with respect to such interest
are subordinated to payments on other regular interests or the residual interest
in the REMIC Pool, and are dependent on the absence of defaults or delinquencies
on qualified mortgages or permitted investments, lower than reasonably expected
returns on permitted investments, unanticipated expenses incurred by the
REMIC
Pool or prepayment interest shortfalls. Accordingly, the Regular Securities
of a
Series will constitute one or more Classes of regular interests, and the
Residual Securities with respect to that Series will constitute a single
Class
of residual interests on which distributions are made pro
rata.
If
an
entity, such as the REMIC pool, electing to be treated as a REMIC fails to
comply with one or more of the ongoing requirements of the Code for REMIC status
during any taxable year, the Code provides that the entity will not be treated
as a REMIC for such year and thereafter. In that event, such entity may be
taxable as a corporation under Treasury regulations, and the related REMIC
Securities may not be accorded the status or given the tax treatment described
below. Although the Code authorizes the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of REMIC status,
no
such regulations have been issued. Any such relief, moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion
of
the Trust Fund’s income for the period in which the requirements for such status
are not satisfied. The Pooling and Servicing Agreement with respect to each
REMIC Pool will include provisions designed to maintain the Trust Fund’s status
as a REMIC under the REMIC Provisions. It is not anticipated that the status
of
any Trust Fund as a REMIC will be terminated.
Characterization
of Investments in REMIC Securities
In
general, the REMIC Securities will constitute “real estate assets” within the
meaning of Section 856(c)(5)(B) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
Pool underlying such Securities would be so treated. Moreover, if 95% or more
of
the assets of the REMIC Pool qualify for either of the foregoing treatments
at
all times during a calendar year, the REMIC Securities will qualify for the
corresponding status in their entirety for that calendar year. If the assets
of
the REMIC Pool include Buydown Mortgage Loans, it is possible that the
percentage of such assets constituting “loans . . . secured by an
interest in real property which is . . . residential real property”
for purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced
by
the amount of the related funds paid thereon (the “Buydown
Funds”).
Interest (including original issue discount) on the Regular Securities and
income allocated to the Class of Residual Securities will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Securities are
treated as “real estate assets” within the meaning of Section 856(c)(5)(B) of
the Code. In addition, the Regular Securities generally will be “qualified
mortgages” within the meaning of Section 860G(a)(3) of the Code if transferred
to another REMIC on its Startup Day in exchange for regular or residual
interests therein. The determination as to the percentage of the REMIC Pool’s
assets that constitute assets described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC Pool during such calendar
quarter. The REMIC will report those determinations to Securityholders in the
manner and at the times required by applicable Treasury
regulations.
91
The
assets of the REMIC Pool will include, in addition to Mortgage Loans, payments
on Mortgage Loans held pending distribution on the REMIC Securities and property
acquired by foreclosure held pending sale, and may include amounts in reserve
accounts. It is unclear whether property acquired by foreclosure held pending
sale and amounts in reserve accounts would be considered to be part of the
Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. The
REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code. Furthermore, foreclosure property generally will
qualify as “real estate assets” under Section 856(c)(4)(A) of the
Code.
Tiered
REMIC Structures
For
certain Series of REMIC Securities, two or more separate elections may be made
to treat designated portions of the related Trust Fund as REMICs (“Tiered
REMICs”)
for
federal income tax purposes. Upon the issuance of any such Series of REMIC
Securities, Hunton & Williams LLP or Cadwalader, Wickersham & Taft LLP
will deliver its opinion generally to the effect that, assuming compliance
with
all provisions of the related Pooling and Servicing Agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC Securities issued by the Tiered
REMICs will be considered to evidence ownership of Regular Securities or
Residual Securities in the related REMIC within the meaning of the REMIC
Provisions.
Solely
for purposes of determining whether the REMIC Securities will be “real estate
assets” within the meaning of Section 856(c)(5)(B) of the Code and “loans
secured by an interest in real property” under Section 7701(a)(19)(C) of the
Code, and whether the income on such Securities is interest described in Section
856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation
of Owners of Regular Securities
General
In
general, interest, original issue discount, and market discount on a Regular
Security will be treated as ordinary income to a holder of the Regular Security
(the “Regular
Securityholder”),
and
principal payments on a Regular Security will be treated as a return of capital
to the extent of the Regular Securityholder’s basis in the Regular Security
allocable thereto. Regular Securityholders must use the accrual method of
accounting with regard to Regular Securities, regardless of the method of
accounting otherwise used by such Regular Securityholder.
Original
Issue Discount
Accrual
Securities will be, and other Classes of Regular Securities may be, issued
with
“original issue discount” within the meaning of Code Section 1273(a). Holders of
any Class or subclass of Regular Securities having original issue discount
generally must include original issue discount in ordinary income for federal
income tax purposes as it accrues, in accordance with a constant yield method
that takes into account the compounding of interest, in advance of the receipt
of the cash attributable to such income. The following discussion is based
in
part on temporary and final Treasury regulations (the “OID Regulations”) under
Code Sections 1271 through 1273 and 1275 and in part on the provisions of the
1986 Act. Regular Securityholders should be aware, however, that the OID
Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Regular Securities. To the extent such issues are not
addressed the OID Regulations, the Depositor intends to apply the methodology
described in the Conference Committee Report to the 1986 Act. No assurance
can
be provided that the IRS will not take a different position as to those matters
not currently addressed by the OID Regulations. Moreover, the OID Regulations
include an anti-abuse rule allowing the IRS to apply or depart from the OID
Regulations where necessary or appropriate to ensure a reasonable tax result
in
light of the applicable statutory provisions. A tax result will not be
considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer’s tax liability. Investors
are advised to consult their own tax advisors as to the discussion therein
and
the appropriate method for reporting interest and original issue discount with
respect to the Regular Securities.
92
Each
Regular Security (except to the extent described below with respect to a
Regular
Security on which principal is distributed in a single installment or by
lots of
specified principal amounts upon the request of a Securityholder or by random
lot (a “Non-Pro
Rata Security”))
will
be treated as a single installment obligation for purposes of determining
the
original issue discount includable in a Regular Securityholder’s income. The
total amount of original issue discount on a Regular Security is the excess
of
the “stated redemption price at maturity” of the Regular Security over its
“issue price.” The issue price of a Class of Regular Securities offered pursuant
to this prospectus generally is the first price at which a substantial amount
of
such Class is sold to the public (excluding bond houses, brokers and
underwriters). Although unclear under the OID Regulations, it is anticipated
that the Trustee will treat the issue price of a Class as to which there
is no
substantial sale as of the issue date or that is retained by the Depositor
as
the fair market value of the Class as of the issue date. The issue price
of a
Regular Security also includes any amount paid by an initial Regular
Securityholder for accrued interest that relates to a period prior to the
issue
date of the Regular Security, unless the Regular Securityholder elects on
its
federal income tax return to exclude such amount from the issue price and
to
recover it on the first Distribution Date. The stated redemption price at
maturity of a Regular Security always includes the original principal amount
of
the Regular Security, but generally will not include distributions of interest
if such distributions constitute “qualified stated interest.” Under the OID
Regulations, qualified stated interest generally means interest payable at
a
single fixed rate or a qualified variable rate (as described below), provided
that such interest payments are unconditionally payable at intervals of one
year
or less during the entire term of the Regular Security. Because there is
no
penalty or default remedy in the case of nonpayment of interest with respect
to
a Regular Security, it is possible that no interest on any Class of Regular
Securities will be treated as qualified stated interest. However, except
as
provided in the following three sentences or in the applicable prospectus
supplement, because the underlying Mortgage Loans provide for remedies in
the
event of default, it is anticipated that the Trustee will treat interest
with
respect to the Regular Securities as qualified stated interest. Distributions
of
interest on an Accrual Security, or on other Regular Securities with respect
to
which deferred interest will accrue, will not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Regular
Securities includes all distributions of interest as well as principal thereon.
Likewise, it is anticipated that the Trustee will treat an interest-only
Class
or a Class on which interest is substantially disproportionate to its principal
amount (a so-called “super-premium”
Class)
as having no qualified stated interest. Where the interval between the issue
date and the first Distribution Date on a Regular Security is shorter than
the
interval between subsequent Distribution Dates, the interest attributable
to the
additional days will be included in the stated redemption price at
maturity.
Under
a
de
minimis
rule,
original issue discount on a Regular Security will be considered to be zero
if
such original issue discount is less than 0.25% of the stated redemption price
at maturity of the Regular Security multiplied by the weighted average maturity
of the Regular Security. For this purpose, the weighted average maturity of
the
Regular Security is computed as the sum of the amounts determined by multiplying
the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by
a
fraction, the numerator of which is the amount of each distribution included
in
the stated redemption price at maturity of the Regular Security and the
denominator of which is the stated redemption price at maturity of the Regular
Security. The Conference Committee Report to the 1986 Act provides that the
schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans (the “Prepayment
Assumption”)
and
the anticipated reinvestment rate, if any, relating to the Regular Securities.
The Prepayment Assumption with respect to a Series of Regular Securities will
be
set forth in the applicable prospectus supplement. Holders generally must report
de
minimis
original
issue discount pro
rata
as
principal payments are received, and such income will be capital gain if the
Regular Security is held as a capital asset. Under the OID Regulations, however,
Regular Securityholders may elect to accrue all de minimis
original
issue discount as well as market discount and market premium, under the constant
yield method. See
“—Election to Treat All Interest Under the Constant Yield
Method.”
93
A
Regular
Securityholder generally must include in gross income for any taxable year
the
sum of the “daily portions,” as defined below, of the original issue discount on
the Regular Security accrued during an accrual period for each day on which
it
holds the Regular Security, including the date of purchase but excluding
the
date of disposition. The Trustee will treat the monthly period ending on
the day
before each Distribution Date as the accrual period. For each Regular Security,
a calculation will be made of the original issue discount that accrues during
each successive full accrual period (or shorter period from the date of original
issue) that ends on the day before the related Distribution Date on the Regular
Security. The Conference Committee Report to the 1986 Act states that the
rate
of accrual of original issue discount is intended to be based on the Prepayment
Assumption. Other than as discussed below for a Non-Pro Rata Security, the
original issue discount accruing in a full accrual period would be the excess,
if any, of (i) the sum of (a) the present value of all of the
remaining distributions to be made on the Regular Security as of the end
of that
accrual period, and (b) the distributions made on the Regular Security
during the accrual period that are included in the Regular Security’s stated
redemption price at maturity, over (ii) the adjusted issue price of the
Regular Security at the beginning of the accrual period. The present value
of
the remaining distributions referred to in the preceding sentence is calculated
based on (i) the yield to maturity of the Regular Security at the issue
date, (ii) events (including actual prepayments) that have occurred prior
to the end of the accrual period, and (iii) the Prepayment Assumption. For
these purposes, the adjusted issue price of a Regular Security at the beginning
of any accrual period equals the issue price of the Regular Security, increased
by the aggregate amount of original issue discount with respect to the Regular
Security that accrued in all prior accrual periods and reduced by the amount
of
distributions included in the Regular Security’s stated redemption price at
maturity that were made on the Regular Security in such prior periods. The
original issue discount accruing during any accrual period (as determined
in
this paragraph) will then be divided by the number of days in the period
to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under
the
method described above, the daily portions of original issue discount required
to be included in income by a Regular Securityholder generally will increase
to
take into account prepayments on the Regular Securities as a result of
prepayments on the Mortgage Loans that exceed the Prepayment Assumption, and
generally will decrease (but not below zero for any period) if the prepayments
are slower than the Prepayment Assumption. An increase in prepayments on the
Mortgage Loans with respect to a Series of Regular Securities can result in
both
a change in the priority of principal payments with respect to certain Classes
of Regular Securities and either an increase or decrease in the daily portions
of original issue discount with respect to such Regular Securities.
In
the
case of a Non-Pro Rata Security, it is anticipated that the Trustee will
determine the yield to maturity of such Security based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment Assumption.
In general, the original issue discount accruing on each Non-Pro Rata Security
in a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with
the
preceding paragraph. However, in the case of a distribution in retirement of
the
entire unpaid principal balance of any Non-Pro Rata Security (or portion of
such
unpaid principal balance), (a) the remaining unaccrued original issue
discount allocable to such Security (or to such portion) will accrue at the
time
of such distribution, and (b) the accrual of original issue discount
allocable to each remaining Security of such Class (or the remaining unpaid
principal balance of a partially redeemed Non-Pro Rata Security after a
distribution of principal has been received) will be adjusted by reducing the
present value of the remaining payments on such Class and the adjusted issue
price of such Class to the extent attributable to the portion of the unpaid
principal balance thereof that was distributed. The Depositor believes that
the
foregoing treatment is consistent with the “pro rata prepayment” rules of the
OID Regulations, but with the rate of accrual of original issue discount
determined based on the Prepayment Assumption for the Class as a whole.
Investors are advised to consult their tax advisors as to this
treatment.
94
The
Treasury Department proposed regulations on August 24, 2004 that create a
special rule for accruing original issue discount on Regular Securities
providing for a delay between record dates and Distribution Dates. Under
the
proposed regulations, the period over which original issue discount accrues
would coincide with the period over which the right of Regular Securityholders
to interest payments accrues under the pooling and servicing agreement for
a
series or indenture for a series rather than over the period between
Distribution Dates. If the proposed regulations are adopted in the same form
as
proposed, Regular Securityholders would be required to accrue interest from
the
closing date of the series to the first record date for such series, but
would
not be required to accrue interest after the last record date for such series.
The proposed regulations are limited to Regular Securities with delayed payment
for periods of fewer than 32 days. The proposed regulations are proposed
to
apply to any Regular Security issued after the date the final regulations
are
published in the Federal Register.
Acquisition
Premium
A
purchaser of a Regular Security having original issue discount at a price
greater than its adjusted issue price but less than its stated redemption
price
at maturity will be required to include in gross income the daily portions
of
the original issue discount on the Regular Security reduced pro
rata
by a
fraction, the numerator of which is the excess of its purchase price over
such
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading “—Election
to Treat All Interest Under the Constant Yield Method.”
Variable
Rate Regular Securities
Regular
Securities may provide for interest based on a variable rate. Under the OID
Regulations, interest is treated as payable at a variable rate if, generally,
(i) the issue price does not exceed the original principal balance by more
than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more “qualified floating
rates,” (b) a single fixed rate and one or more qualified floating rates,
(c) a single “objective rate,” or (d) a single fixed rate and a single
objective rate that is a “qualified inverse floating rate.” A floating rate is a
qualified floating rate if variations can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds. A multiple
of a
qualified floating rate is considered a qualified floating rate only if the
rate
is equal to either (a) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35 or (b) the
product of a qualified floating rate and a fixed multiple that is greater
that
0.65 but not more than 1.35, increased or decreased by a fixed rate. Such
rate
may also be increased or decreased by a fixed spread or subject to a fixed
cap
or floor, or a cap or floor that is not reasonably expected as of the issue
date
to affect the yield of the instrument significantly. An objective rate is
any
rate (other than a qualified floating rate) that is determined using a single
fixed formula and that is based on objective financial or economic information,
provided that such information is not (i) within the control of the issuer
or a related party or (ii) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed
rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate
that is
not a qualified inverse floating rate may nevertheless be an objective rate.
A
Class of Regular Securities may be issued under this prospectus that does
not
have a variable rate under the foregoing rules, for example, a Class that
bears
different rates at different times during the period it is outstanding such
that
it is considered significantly “front-loaded” or “back-loaded” within the
meaning of the OID Regulations. It is possible that such a Class may be
considered to bear “contingent interest” within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Securities. However,
if
final regulations dealing with contingent interest with respect to Regular
Securities apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion that would be the case under
the OID Regulations for non-contingent debt instruments. Furthermore,
application of such principles could lead to the characterization of gain
on the
sale of contingent interest Regular Securities as ordinary income. Investors
should consult their tax advisors regarding the appropriate treatment of
any
Regular Security that does not pay interest at a fixed rate or variable rate
as
described in this paragraph.
Under
the
REMIC Regulations, a Regular Security (i) bearing interest at a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one
or
more financial institutions), or a positive or negative multiple of such a
rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such
a
rate that is subject to one or more caps or floors, or (ii) bearing one or
more such variable rates for one or more periods, or one or more fixed rates
for
one or more periods, and a different variable rate or fixed rate for other
periods, qualifies as a regular interest in a REMIC. Accordingly, it is
anticipated that the Trustee will treat Regular Securities that qualify as
regular interests under this rule in the same manner as obligations bearing
a
variable rate for original issue discount reporting purposes.
95
The
amount of original issue discount with respect to a Regular Security bearing
a
variable rate of interest will accrue in the manner described above under
“Original Issue Discount,” with the yield to maturity and future payments on
such Regular Security generally to be determined by assuming that interest
will
be payable for the life of the Regular Security based on the initial rate
(or,
if different, the value of the applicable variable rate as of the pricing
date)
for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the Trustee will treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class, which will be treated as non-qualified
stated interest includable in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes
in
the applicable interest rate index.
Although
unclear under the OID Regulations, unless required otherwise by applicable
final
regulations, the Seller intends to treat Regular Securities bearing an interest
rate that is a weighted average of the net interest rates on Mortgage Loans
as
having qualified stated interest, except to the extent that initial “teaser”
rates cause sufficiently “back-loaded” interest to create more than de
minimis
original
issue discount. The yield on such Regular Securities for purposes of accruing
original issue discount will be a hypothetical fixed rate based on the fixed
rates, in the case of fixed-rate Mortgage Loans, and initial “teaser rates”
followed by fully indexed rates, in the case of adjustable-rate Mortgage
Loans.
In the case of adjustable-rate Mortgage Loans, the applicable index used
to
compute interest on the Mortgage Loans in effect on the pricing date (or
possibly the issue date) will be deemed to be in effect beginning with the
period in which the first weighted average adjustment date occurring after
the
issue date occurs. Adjustments will be made in each accrual period either
increasing or decreasing the amount of ordinary income reportable to reflect
the
actual Pass-Through Rate on the Regular Securities.
Market
Discount
A
subsequent purchaser of a Regular Security also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and
the
principles applied by the OID Regulations in the context of original issue
discount, “market discount” is the amount by which the purchaser’s original
basis in the Regular Security (i) is exceeded by the remaining outstanding
principal payments and interest payments other than qualified stated interest
payments due on a Regular Security, or (ii) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue
price
of such Regular Security at the time of purchase. Such purchaser generally
will
be required to recognize ordinary income to the extent of accrued market
discount on such Regular Security as distributions includable in the stated
redemption price at maturity thereof are received, in an amount not exceeding
any such distribution. Such market discount would accrue in a manner to be
provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
such regulations are issued, such market discount would accrue either
(i) on the basis of a constant interest rate, or (ii) in the ratio of
stated interest allocable to the relevant period to the sum of the interest
for
such period plus the remaining interest as of the end of such period, or in
the
case of a Regular Security issued with original issue discount, in the ratio
of
original issue discount accrued for the relevant period to the sum of the
original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally
will
be required to treat a portion of any gain on a sale or exchange of the Regular
Security as ordinary income to the extent of the market discount accrued to
the
date of disposition under one of the foregoing methods, less any accrued market
discount previously reported as ordinary income as partial distributions in
reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer deduction of a portion of the excess of
the
interest paid or accrued on indebtedness incurred to purchase or carry a Regular
Security over the interest distributable thereon. The deferred portion of such
interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Security for such year. Any such deferred
interest expense is, in general, allowed as a deduction not later than the
year
in which the related market discount income is recognized or the Regular
Security is disposed of. As an alternative to the inclusion of market discount
in income on the foregoing basis, the Regular Securityholder may elect to
include market discount in income currently as it accrues on all market discount
instruments acquired by such Regular Securityholder in that taxable year or
thereafter, in which case the interest deferral rule will not apply. See
“—Election
to Treat All Interest Under the Constant Yield Method”
below
regarding an alternative manner in which such election may be deemed to be
made.
A person who purchases a Regular Security at a price lower than the remaining
amounts includable in the stated redemption price at maturity of the security,
but higher than its adjusted issue price, does not acquire the Regular Security
with market discount, but will be required to report original issue discount,
appropriately adjusted to reflect the excess of the price paid over the adjusted
issue price.
96
By
analogy to the OID Regulations, market discount with respect to a Regular
Security will be considered to be zero if such market discount is less than
0.25% of the remaining stated redemption price at maturity of such Regular
Security (or, in the case of a Regular Security having original issue discount,
the adjusted issue price of such Regular Security) multiplied by the weighted
average maturity of the Regular Security (determined as described above in
the
third paragraph under “—Original
Issue Discount”) remaining after the date of purchase. It appears that
de
minimis
market
discount would be reported in a manner similar to de
minimis
original
issue discount. See
“—Original Issue Discount”above.
Under
provisions of the OID Regulations relating to contingent payment obligations,
a
secondary purchaser of a Regular Security that has “contingent interest” at a
discount generally would continue to accrue interest and determine adjustments
on the Regular Security based on the original projected payment schedule
devised
by the issuer of the Security. The holder of such a Regular Security would
be
required, however, to allocate the difference between the adjusted issue
price
of the Regular Security and its basis in the Regular Security as positive
adjustments to the accruals or projected payments on the Regular Security
over
the remaining term of the Regular Security in a manner that is reasonable
(e.g.,
based
on a constant yield to maturity).
Treasury
regulations implementing the market discount rules have not yet been issued,
and
uncertainty exists with respect to many aspects of those rules. Due to the
substantial lack of regulatory guidance with respect to the market discount
rules, it is unclear how those rules will affect any secondary market that
develops for a given Class of Regular Securities. Prospective investors in
Regular Securities should consult their own tax advisors regarding the
application of the market discount rules to the Regular Securities. Investors
should also consult Revenue Procedure 92-67 concerning the elections to include
market discount in income currently and to accrue market discount on the basis
of the constant yield method.
Amortizable
Premium
A
Regular
Security purchased at a cost greater than its remaining stated redemption price
at maturity generally is considered to be purchased at a premium. If the Regular
Securityholder holds such Regular Security as a “capital asset” within the
meaning of Code Section 1221, the Regular Securityholder may elect under Code
Section 171 to amortize such premium under a constant yield method that reflects
compounding based on the interval between payments on the Regular Security.
Such
election will apply to all taxable debt obligations (including REMIC regular
interests) acquired by the Regular Securityholder at a premium held in that
taxable year or thereafter, unless revoked with the permission of the IRS.
Final
Treasury regulations have been issued with respect to amortizable bond premiums
which do not by their terms apply to prepayable debt instruments such as the
Regular Securities. However, the Conference Committee Report to the 1986 Act
indicates a Congressional intent that the same rules that apply to the accrual
of market discount on installment obligations will also apply to amortizing
bond
premium under Code Section 171 on installment obligations such as the Regular
Securities, although it is unclear whether the alternatives to the constant
interest method described above under “—Market Discount” are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deduction. See
“—Election to Treat All Interest Under the Constant Yield Method”below
regarding an alternative manner in which the Code Section 171 election may
be
deemed to be made.
Amortizable
premium on a Regular Security that is subject to redemption at the option of
the
issuer generally must be amortized as if the optional redemption price and
date
were the Security’s principal amount and maturity date if doing so would result
in a smaller amount of premium amortization during the period ending with the
optional redemption date. Thus, a holder of a Regular Security would not be
able
to amortize any premium on a Regular Security that is subject to optional
redemption at a price equal to or greater than the Securityholder’s acquisition
price unless and until the redemption option expires. A Regular Security subject
to redemption at the option of the issuer described in the preceding sentence
will be treated as having matured on the redemption date for the redemption
price and then as having been reissued on that date for that price. Any premium
remaining on the Regular Security at the time of the deemed reissuance will
be
amortized on the basis of (i) the original principal amount and maturity
date or (ii) the price and date of any succeeding optional redemption,
under the principles described above.
97
Election
to Treat All Interest Under the Constant Yield Method
A
holder
of a debt instrument such as a Regular Security may elect to treat all interest
that accrues on the instrument using the constant yield method, with none of
the
interest being treated as qualified stated interest. For purposes of applying
the constant yield method to a debt instrument subject to such an election,
(i) “interest” includes stated interest, original issue discount,
de
minimis
original
issue discount, market discount and de
minimis
market
discount, as adjusted by any amortizable bond premium or acquisition premium
and
(ii) the debt instrument is treated as if the instrument were issued on the
holder’s acquisition date in the amount of the holder’s adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder’s acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or
for
a Class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or
with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder’s federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the IRS. Investors should consult their own tax advisors regarding
the advisability of making such an election.
Treatment
of Losses
Regular
Securityholders will be required to report income with respect to Regular
Securities on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on
the
Mortgage Loans, except to the extent it can be established that such losses
are
uncollectable. Accordingly, the holder of a Regular Security, particularly
a
Subordinated Security, may have income, or may incur a diminution in cash flow
as a result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a subsequent
taxable year. In this regard, investors are cautioned that while they may
generally cease to accrue interest income if it reasonably appears that the
interest will be uncollectable, the IRS may take the position that original
issue discount must continue to be accrued in spite of its uncollectibility
until the debt instrument is disposed of in a taxable transaction or becomes
worthless in accordance with the rules of Code Section 166. Under Code Section
166, it appears that Regular Securityholders that are corporations or that
otherwise hold the Regular Securities in connection with a trade or business
should in general be allowed to deduct as an ordinary loss such loss with
respect to principal sustained during the taxable year on account of any such
Regular Securities becoming wholly or partially worthless, and that, in general,
Regular Securityholders that are not corporations and do not hold the Regular
Securities in connection with a trade or business should be allowed to deduct
as
a short-term capital loss any loss sustained during the taxable year on account
of a portion of any such Regular Securities becoming wholly worthless. Although
the matter is not free from doubt, such non-corporate Regular Securityholders
should be allowed a bad debt deduction at such time as the principal balance
of
such Regular Securities is reduced to reflect losses resulting from any
liquidated Mortgage Loans. The IRS, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect such
losses only after all the Mortgage Loans remaining in the Trust Fund have been
liquidated or the applicable Class of Regular Securities has been otherwise
retired. The IRS could also assert that losses on the Regular Securities are
deductible based on some other method that may defer such deductions for all
holders, such as reducing future cashflow for purposes of computing original
issue discount. This may have the effect of creating “negative” original issue
discount which would be deductible only against future positive original issue
discount or otherwise upon termination of the Class. Regular Securityholders
are
urged to consult their own tax advisors regarding the appropriate timing, amount
and character of any loss sustained with respect to such Regular Securities.
While losses attributable to interest previously reported as income should
be
deductible as ordinary losses by both corporate and non-corporate holders,
the
IRS may take the position that losses attributable to accrued original issue
discount may only be deducted as capital losses in the case of non-corporate
holders who do not hold the Regular Securities in connection with a trade or
business. Special loss rules are applicable to banks and thrift institutions,
including rules regarding reserves for bad debts. Such taxpayers are advised
to
consult their tax advisors regarding the treatment of losses on Regular
Securities.
98
Sale
or
Exchange of Regular Securities
If
a
Regular Securityholder sells or exchanges a Regular Security, the Regular
Securityholder will recognize gain or loss equal to the difference, if any,
between the amount received and its adjusted basis in the Regular Security.
The
adjusted basis of a Regular Security generally will equal the original cost
of
the Regular Security to the seller, increased by any original issue discount
or
market discount previously included in the seller’s gross income with respect to
the Regular Security and reduced by amounts included in the stated redemption
price at maturity of the Regular Security that were previously received by
the
seller, by any amortized premium, and by any recognized losses.
Except
as
described above with respect to market discount, and except as provided in
this
paragraph, any gain or loss on the sale or exchange of a Regular Security
realized by an investor who holds the Regular Security as a capital asset
will
be capital gain or loss and will be long-term or short-term depending on
whether
the Regular Security has been held for the long-term capital gain holding
period
(currently, more than one year). Such gain will be treated as ordinary income
(i) if a Regular Security is held as part of a “conversion transaction” as
defined in Code Section 1258(c), up to the amount of interest that would
have
accrued on the Regular Securityholder’s net investment in the conversion
transaction at 120% of the appropriate applicable Federal rate under Code
Section 1274(d) in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any
prior
disposition of property that was held as part of such transaction, (ii) in
the case of a non-corporate taxpayer, to the extent such taxpayer has made
an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that
such gain does not exceed the excess, if any, of (a) the amount that would
have been includable in the gross income of the holder if its yield on such
Regular Security were 110% of the applicable Federal rate as of the date
of
purchase, over (b) the amount of income actually includable in the gross
income of such holder with respect to such Regular Security. In addition,
gain
or loss recognized from the sale of a Regular Security by certain banks or
thrift institutions will be treated as ordinary income or loss pursuant to
Code
Section 582(c). Long-term capital gains of certain noncorporate taxpayers
generally are subject to a lower maximum tax rate than ordinary income or
short-term capital gains of such taxpayers for property held for more than
one
year. Currently, the maximum tax rate for corporations is the same with respect
to both ordinary income and capital gains.
Taxation
of Owners of Residual Securities
Taxation
of REMIC Income
Generally,
the “daily portions” of REMIC taxable income or net loss will be includable as
ordinary income or loss in determining the federal taxable income of holders
of
Residual Securities (“Residual
Holders”),
and
will not be taxed separately to the REMIC Pool. The daily portions of REMIC
taxable income or net loss of a Residual Holder are determined by allocating
the
REMIC Pool’s taxable income or net loss for each calendar quarter ratably to
each day in such quarter and by allocating such daily portion among the Residual
Holders in proportion to their respective holdings of Residual Securities in
the
REMIC Pool on such day. REMIC taxable income is generally determined in the
same
manner as the taxable income of an individual using the accrual method of
accounting, except that, in addition to certain other adjustments, (i) the
limitations on deductibility of investment interest expense and expenses for
the
production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of
interest and expenses related to tax-exempt income will apply. The REMIC Pool’s
gross income includes interest, original issue discount income and market
discount income, if any, on the Mortgage Loans, reduced by amortization of
any
premium on the Mortgage Loans, plus income from amortization of issue premium,
if any, on the Regular Securities, plus income on reinvestment of cash flows
and
reserve assets, plus any cancellation of indebtedness income upon allocation
of
realized losses to the Regular Securities. The REMIC Pool’s deductions include
interest and original issue discount expense on the Regular Securities,
servicing fees on the Mortgage Loans, other administrative expenses of the
REMIC
Pool and realized losses on the Mortgage Loans. The requirement that Residual
Holders report their pro
rata
share of
taxable income or net loss of the REMIC Pool will continue until there are
no
Securities of any Class of the related Series outstanding.
99
The
taxable income recognized by a Residual Holder in any taxable year will be
affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income
or
amortization of premium with respect to the Mortgage Loans, on the one hand,
and
the timing of deductions for interest (including original issue discount)
or
income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired
by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the Residual Holder may recognize taxable income without being entitled to
receive a corresponding amount of cash because the prepayment may be used
in
whole or in part to make distributions in reduction of principal on the Regular
Securities, and (ii) the discount on the Mortgage Loans which is includable
in income may exceed the deduction allowed upon such distributions on those
Regular Securities on account of any unaccrued original issue discount relating
to those Regular Securities. When there is more than one Class of Regular
Securities that distribute principal sequentially, this mismatching of income
and deductions is particularly likely to occur in the early years following
issuance of the Regular Securities when distributions in reduction of principal
are being made in respect of earlier Classes of Regular Securities to the
extent
that such Classes are not issued with substantial discount or are issued
at a
premium. If taxable income attributable to such a mismatching is realized,
in
general, losses would be allowed in later years as distributions on the later
maturing Classes of Regular Securities are made. Taxable income may also
be
greater in earlier years than in later years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a Series of Regular Securities, may increase over
time
as distributions in reduction of principal are made on the lower yielding
Classes of Regular Securities, whereas, to the extent the REMIC Pool consists
of
fixed rate Mortgage Loans, interest income with respect to any given Mortgage
Loan will remain constant over time as a percentage of the outstanding principal
amount of that loan. Consequently, Residual Holders must have sufficient
other
sources of cash to pay any federal, state, or local income taxes due as a
result
of such mismatching or unrelated deductions against which to offset such
income,
subject to the discussion of “excess inclusions” below under “—Limitations
on Offset or Exemption of REMIC Income.”
The
timing of such mismatching of income and deductions described in this paragraph,
if present with respect to a Series of Securities, may have a significant
adverse effect upon a Residual Holder’s after-tax rate of return.
A
portion
of the income of a Residual Securityholder may be treated unfavorably in three
contexts: (i) it may not be offset by current or net operating loss
deductions; (ii) it will be considered unrelated business taxable income to
tax-exempt entities; and (iii) it is ineligible for any statutory or treaty
reduction in the 30% withholding tax otherwise available to a foreign Residual
Securityholder. See
“—Limitations on Offset or Exemption of REMIC Income”below.
In
addition, a Residual Holder’s taxable income during certain periods may exceed
the income reflected by such Residual Holders for such periods in accordance
with generally accepted accounting principles. Investors should consult their
own accountants concerning the accounting treatment of their investment in
Residual Securities.
Basis
and
Losses
The
amount of any net loss of the REMIC Pool that may be taken into account by
the
Residual Holder is limited to the adjusted basis of the Residual Security as
of
the close of the quarter (or time of disposition of the Residual Security if
earlier), determined without taking into account the net loss for the quarter.
The initial adjusted basis of a purchaser of a Residual Security is the amount
paid for such Residual Security. Such adjusted basis will be increased by the
amount of taxable income of the REMIC Pool reportable by the Residual Holder
and
will be decreased (but not below zero), first, by a cash distribution from
the
REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by
the Residual Holder. Any loss that is disallowed on account of this limitation
may be carried over indefinitely with respect to the Residual Holder as to
whom
such loss was disallowed and may be used by such Residual Holder only to offset
any income generated by the same REMIC Pool.
A
Residual Holder will not be permitted to amortize directly the cost of its
Residual Security as an offset to its share of the taxable income of the related
REMIC Pool. However, the taxable income will not include cash received by the
REMIC Pool that represents a recovery of the REMIC Pool’s basis in its assets.
Although the law is unclear in certain respects, such recovery of basis by
the
REMIC Pool will have the effect of amortization of the issue price of the
Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under
“—Taxation
of REMIC Income,”
the
period of time over which such issue price is effectively amortized may be
longer than the economic life of the Residual Securities.
100
A
Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash
flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool’s basis in its assets. Regulations have been issued addressing
the federal income tax treatment of “inducement fees” received by transferees of
noneconomic residual interests. The regulations require inducement fees to
be
included in income over a period reasonably related to the period in which
a
Residual Security is expected to generate taxable income or net loss to its
holder. Under two safe harbor methods, inducement fees are permitted to be
included in income: (i) in the same amounts and over the same period that
the
holder uses for financial reporting purposes, provided that such period is
not
shorter than the period the related REMIC is expected to generate taxable
income
or (ii) ratably over the remaining anticipated weighted average life of all
the
regular and residual interests issued by the related REMIC, determined based
on
actual distributions projected as remaining to be made on such interests
under
the applicable prepayment assumption. If a Residual Holder sells or otherwise
disposes of the residual interest, any unrecognized portion of the inducement
fee is required to be taken into account at the time of the sale or disposition.
A prospective purchase of a Residual Security should consult with its tax
counsel regarding the effect of these conditions.
Further,
to the extent that the initial adjusted basis of a Residual Holder (other
than
an original holder) in the Residual Security is greater than the corresponding
portion of the REMIC Pool’s basis in the Mortgage Loans, the Residual Holder
will not recover a portion of such basis until termination of the REMIC Pool
unless future Treasury regulations provide for periodic adjustments to the
REMIC
income otherwise reportable by such holder. The REMIC Regulations currently
in
effect do not so provide. See
“—Treatment of Certain Items of REMIC Income and Expense—Market Discount”below
regarding the basis of Mortgage Loans to the REMIC Pool and “—Sale
or Exchange of a Residual Security”below
regarding possible treatment of a loss upon termination of the REMIC Pool
as a
capital loss.
Treatment
of Certain Items of REMIC Income and Expense
Although
it is anticipated that the Trustee will compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
differing interpretations. The Depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original
Issue Discount and Premium.
Generally, the REMIC Pool’s deductions for original issue discount and income
from amortization of premium will be determined in the same manner as original
issue discount income on Regular Securities as described above under
“—Taxation
of Owners of Regular Securities—Original Issue Discount”
and
“—Variable
Rate Regular Securities,”
without
regard to the de
minimis
rule
described therein, and “—Taxation
of Owners of Regular Securities—Amortizable Premium.”
Market
Discount.
The
REMIC Pool will have market discount income in respect of Mortgage Loans if,
in
general, the basis of the REMIC Pool in such Mortgage Loans is exceeded by
their
unpaid principal balances. The REMIC Pool’s basis in such Mortgage Loans is
generally the fair market value of the Mortgage Loans immediately after the
transfer thereof to the REMIC Pool. The REMIC Regulations provide that such
basis is equal in the aggregate to the issue prices of all regular and residual
interests in the REMIC Pool. The accrued portion of such market discount would
be recognized currently as an item of ordinary income in a manner similar to
original issue discount. Market discount income generally should accrue in
the
manner described above under “—Taxation
of Owners of Regular Securities—Market Discount.”
Premium.
Generally, if the basis of the REMIC Pool in the Mortgage Loans exceeds the
unpaid principal balances thereof, the REMIC Pool will be considered to have
acquired such Mortgage Loans at a premium equal to the amount of such excess.
As
stated above, the REMIC Pool’s basis in Mortgage Loans is the fair market value
of the Mortgage Loans, based on the aggregate of the issue prices of the regular
and residual interests in the REMIC Pool immediately after the transfer thereof
to the REMIC Pool. In a manner analogous to the discussion above under
“—Taxation
of Owners of Regular Securities—Amortizable
Premium,” a person that holds a Mortgage Loan as a capital asset under Code
Section 1221 may elect under Code Section 171 to amortize premium on Mortgage
Loans originated after September 27, 1985 under the constant yield method.
Amortizable bond premium will be treated as an offset to interest income on
the
Mortgage Loans, rather than as a separate deduction item. Because substantially
all of the mortgagors on the Mortgage Loans are expected to be individuals,
Code
Section 171 will not be available for premium on Mortgage Loans originated
on or
prior to September 27, 1985. Premium with respect to such Mortgage Loans may
be
deductible in accordance with a reasonable method regularly employed by the
holder thereof. The allocation of such premium pro
rata
among
principal payments should be considered a reasonable method; however, the IRS
may argue that such premium should be allocated in a different manner, such
as
allocating such premium entirely to the final payment of principal.
101
Limitations
on Offset or Exemption of REMIC Income
A
portion
(or all) of the REMIC taxable income includable in determining the federal
income tax liability of a Residual Holder will be subject to special treatment.
That portion, referred to as the “excess inclusion,” is equal to the excess of
REMIC taxable income for the calendar quarter allocable to a Residual Security
over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable Federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual
Security at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Security at the beginning of a quarter
is the
issue price of the Residual Security, plus the amount of such daily accruals
of
REMIC income described in this paragraph for all prior quarters, decreased
by
any distributions made with respect to such Residual Security prior to the
beginning of such quarterly period. Accordingly, the portion of the REMIC
Pool’s
taxable income that will be treated as excess inclusions will be a larger
portion of such income as the adjusted issue price of the Residual Securities
diminishes.
The
portion of a Residual Holder’s REMIC taxable income consisting of the excess
inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder’s return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax
on
unrelated business income imposed by Code Section 511, the Residual Holder’s
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who
are
not U.S. Persons (as defined below under “—Tax-Related
Restrictions on Transfer of Residual Securities—Foreign
Investors”),
and
the portion thereof attributable to excess inclusions is not eligible for any
reduction in the rate of withholding tax (by treaty or otherwise). See
“—Taxation of Certain Foreign Investors—Residual Securities”below.
Finally, if a real estate investment trust or a regulated investment company
owns a Residual Security, a portion (allocated under Treasury regulations yet
to
be issued) of dividends paid by the real estate investment trust or regulated
investment company could not be offset by net operating losses of its
shareholders, would constitute unrelated business taxable income for tax-exempt
shareholders, and would be ineligible for reduction of withholding to certain
persons who are not U.S. Persons.
There
are
three rules for determining the effect of excess inclusions on the alternative
minimum taxable income of a Residual Holder. First, alternative minimum taxable
income for a Residual Holder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions.
Second, a Residual Holder’s alternative minimum taxable income for a taxable
year cannot be less than the excess inclusions for the year. Third, the amount
of any alternative minimum tax net operating loss deduction must be computed
without regard to any excess inclusions.
Tax-Related
Restrictions on Transfer of Residual Securities
Disqualified
Organizations.
If any
legal or beneficial interest in a Residual Security is transferred to a
Disqualified Organization (as defined below), a tax would be imposed in an
amount equal to the product of (i) the present value of the total
anticipated excess inclusions with respect to such Residual Security for periods
after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The REMIC Regulations provide that the anticipated
excess inclusions are based on actual prepayment experience to the date of
the
transfer and projected payments based on the Prepayment Assumption. The present
value rate equals the applicable Federal rate under Code Section 1274(d) as
of
the date of the transfer for a term ending with the last calendar quarter in
which excess inclusions are expected to accrue. Such rate is applied to the
anticipated excess inclusions from the end of the remaining calendar quarters
in
which they arise to the date of the transfer. Such a tax generally would be
imposed on the transferor of the Residual Security, except that where such
transfer is through an agent (including a broker, nominee, or other middleman)
for a Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Security would in no event be liable for
such tax with respect to a transfer if the transferee furnished to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that such affidavit is false. The tax also may be waived by
the
IRS if the Disqualified Organization promptly disposes of the Residual Security
and the transferor pays income tax at the highest corporate rate on the excess
inclusion for the period the Residual Security is actually held by the
Disqualified Organization.
102
In
addition, if a Pass-Through Entity (as defined below) has excess inclusion
income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of
(i) the amount of excess inclusions that are allocable to the interest in
the Pass-Through Entity during the period such interest is held by such
Disqualified Organization, and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income
of
the Pass-Through Entity for the taxable year. The Pass-Through Entity would
not
be liable for such tax if it has received an affidavit from such record holder
that it is not a Disqualified Organization or stating such holder’s taxpayer
identification number and, during the period such person is the record holder
of
the Residual Security, the Pass-Through Entity does not have actual knowledge
that such affidavit is false.
If
an
“electing large partnership” holds a Residual Security, all interests in the
electing large partnership are treated as held by Disqualified Organizations
for
purposes of the tax imposed upon a Pass-Through Entity by section 860E(c) of
the
Code. An exception to this tax, otherwise available to a Pass-Through Entity
that is furnished certain affidavits by record holders of interests in the
entity and that does not know such affidavits are false, is not available to
an
electing large partnership.
For
these
purposes, (i) ”Disqualified
Organization”
means
the United States, any state or political subdivision thereof, any foreign
government, any international organization, any agency or instrumentality of
any
of the foregoing (provided, that such term does not include an instrumentality
if all of its activities are subject to tax and a majority of its board of
directors in not selected by any such governmental entity), any cooperative
organization furnishing electric energy or providing telephone service or
persons in rural areas as described in Code Section 1381(a)(2)(C), and any
organization (other than a farmers’ cooperative described in Code Section 531)
that is exempt from taxation under the Code unless such organization is subject
to the tax on unrelated business income imposed by Code Section 511,
(ii) ”Pass-Through
Entity”
means
any regulated investment company, real estate investment trust, common trust
fund, partnership, trust or estate and certain corporations operating on a
cooperative basis, and (iii) an “electing
large partnership”
means
any partnership having more than 100 members during the preceding tax year
(other than certain service partnerships and commodity pools), which elect
to
apply simplified reporting provisions under the Code. Except as may be provided
in Treasury regulations, any person holding an interest in a Pass-Through Entity
as a nominee for another will, with respect to such interest, be treated as
a
Pass-Through Entity.
The
Pooling and Servicing Agreement with respect to a Series will provide that
no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (i) the proposed transferee furnished to the transferor
and the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing such Residual
Security on behalf of a Disqualified Organization (i.e.,
as a
broker, nominee or middleman thereof) and (ii) the transferor provides a
statement in writing to the Trustee that it has no actual knowledge that such
affidavit is false. Moreover, the Pooling and Servicing Agreement will provide
that any attempted or purported transfer in violation of these transfer
restrictions will be null and void and will vest no rights in any purported
transferee. Each Residual Security with respect to a Series will bear a legend
referring to such restrictions on transfer, and each Residual Holder will be
deemed to have agreed, as a condition of ownership thereof, to any amendments
to
the related Pooling and Servicing Agreement required under the Code or
applicable Treasury regulations to effectuate the foregoing restrictions.
Information necessary to compute an applicable excise tax must be furnished
to
the IRS and to the requesting party within 60 days of the request, and the
Depositor or the Trustee may charge a fee for computing and providing such
information.
103
Noneconomic
Residual Interests.
The
REMIC Regulations would disregard certain transfers of Residual Securities,
in
which case the transferor would continue to be treated as the owner of the
Residual Securities and thus would continue to be subject to tax on its
allocable portion of the net income of the REMIC Pool. Under the REMIC
Regulations, a transfer of a “noneconomic residual interest” (as defined below)
to a Residual Holder (other than a Residual Holder who is not a U.S. Person
as
defined below under “—Foreign Investors”) is disregarded for all federal income
tax purposes if a significant purpose of the transfer is to impede the
assessment or collection of tax. A residual interest in a REMIC (including
a
residual interest with a positive value at issuance) is a “noneconomic residual
interest” unless, at the time of the transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest federal corporate income tax rate in effect for the year in which
the
transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time
at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as
set
forth above under “—Disqualified Organizations.” The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax
exists
if the transferor, at the time of the transfer, either knew or should have
known
that the transferee would be unwilling or unable to pay taxes due on its
share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation
of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts
as
they came due in the future, (ii) the transferee represents to the
transferor that it understands that, as the holder of the non-economic residual
interest, the transferee may incur liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due and (iii)
the
transferee represents to the transferor that it will not cause income from
the
Residual Security to be attributable to a foreign permanent establishment
or
fixed base (within the meaning of an applicable income tax treaty) of the
transferee or any other person. The Pooling and Servicing Agreement with
respect
to each Series of Certificates will require the transferee of a Residual
Security to certify to the matters in the preceding sentence as part of the
affidavit described above under the heading “Disqualified
Organizations.”
In
addition to the three conditions set forth above for the transferor of a
noneconomic residual interest to be presumed not to have knowledge that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC, the REMIC Regulations contain a fourth condition
for the transferor to be presumed to lack such knowledge. This fourth condition
requires that one of the two following tests be satisfied: Either
(a) the
present value of the anticipated tax liabilities associated with holding the
noneconomic residual interest not exceed the sum of:
(i) the
present value of any consideration given to the transferee to acquire the
interest;
(ii) the
present value of the expected future distributions on the interest;
and
(iii) the
present value of the anticipated tax savings associated with holding the
interest as the REMIC generates losses.
For
purposes of the computations in class (a), the transferee is assumed to pay
tax
at the highest corporate rate of tax specified in the Code or, in certain
circumstances, the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term Federal
rate set forth in Section 1274(d) of the Code for the month of the transfer
and
the compounding period used by the transferee; or
(b)
(i)
the
transferee must be a domestic “C” corporation (other than a corporation exempt
from taxation or a regulated investment company or real estate investment trust)
that meets certain asset tests; Generally $100 million of gross assets and
$10
million of net assets for the current year and the two preceding fiscal years);
(ii) the transferee must agree in writing that any subsequent transfer of the
residual interest would be to an eligible “C” corporation and would meet the
requirements for a safe harbor transfer; and (iii) the facts and circumstances
known to the transferor on or before the date of the transfer must not
reasonably indicate that the taxes associated with ownership of the residual
interest will not be paid by the transferee.
104
The
Pooling and Servicing Agreement will not require that transfers of the Residual
Securities meet the fourth requirement above. Consequently, those transfers
may
not meet the safe harbor. Persons considering the purchase of the Residual
Securities should consult their advisors regarding the advisability of meeting
the safe harbor in any transfer of the Residual Securities.
Foreign
Investors.
The
REMIC Regulations provide that the transfer of a Residual Security that has
“tax
avoidance potential” to a “foreign person” will be disregarded for all federal
tax purposes. This rule appears intended to apply to a transferee who is
not a
“U.S. Person” (as defined below) and may apply to United States Partnerships
that have any non-U.S. Person as Partners, unless such transferee’s or non-U.S.
Person Partner income is effectively connected with the conduct of a trade
or
business within the United States. A Residual Security is deemed to have
tax
avoidance potential unless, at the time of the transfer, (i) the future
value of expected distributions equals at least 30% of the anticipated excess
inclusions after the transfer, and (ii) the transferor reasonably expects
that the transferee will receive sufficient distributions from the REMIC
Pool at
or after the time at which the excess inclusions accrue and prior to the
end of
the next succeeding taxable year for the accumulated withholding tax liability
to be paid. If the non-U.S. Person transfers the Residual Security back to
a
U.S. Person, the transfer will be disregarded and the foreign transferor
will
continue to be treated as the owner unless arrangements are made so that
the
transfer does not have the effect of allowing the transferor to avoid tax
on
accrued excess inclusions.
The
prospectus supplement relating to the Securities of a Series may provide that
a
Residual Security may not be purchased by or transferred to any person that
is
not a U.S. Person or may describe the circumstances and restrictions pursuant
to
which such a transfer may be made. The term “U.S.
Person”
means
a
citizens or resident of the United States, a corporation or partnership (unless,
in the case of a partnership, Treasury regulations are adopted that provide
otherwise) created or organized in or under the laws of the United States,
any
state thereof or the District of Columbia, including an entity treated as a
corporation or partnership for federal income tax purposes, an estate that
is
subject to U.S. federal income tax regardless of the source of its income,
or a
trust if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more such U.S.
Persons have the authority to control all substantial decisions of such trust
(or, to the extent provided in applicable Treasury regulations, certain trusts
in existence on August 20, 1996 which are eligible to elect to be treated as
U.S. Persons).
Sale
or
Exchange of a Residual Security
Upon
the
sale or exchange of a Residual Security, the Residual Holder will recognize
gain
or loss equal to the excess, if any, of the amount realized over the adjusted
basis (as described above under “—Taxation of Owners of Residual
Securities—Basis and Losses”) of such Residual Holder in such Residual Security
at the time of the sale or exchange. In addition to reporting the taxable income
of the REMIC Pool, a Residual Holder will have taxable income to the extent
that
any cash distribution to it from the REMIC Pool exceeds such adjusted basis
on
that Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Holder’s Residual Security. It is possible that the
termination of the REMIC pool may be treated as a sale of a Residual Holder’s
Residual Securities in which case, if the Residual Holder has an adjusted basis
in its Residual Security remaining when its interest in the REMIC Pool
terminates, and if it holds such Residual Security as a capital asset under
Code
Section 1221, then it will recognize a capital loss at that time in the amount
of such remaining adjusted basis.
Any
gain
on the sale of a Residual Security will be treated as ordinary income
(i) if a Residual Security is held as part of a “conversion transaction” as
defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder’s net investment in the conversion transaction at
120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was
held
as a part of such transaction or (ii) in the case of a non-corporate
taxpayer, to the extent such taxpayer has made an election under Code Section
163(d)(4) to have net capital gains taxed as investment income at ordinary
income rates. In addition, gain or loss recognized from the sale of a Residual
Security by certain banks or thrift institutions will be treated as ordinary
income or loss pursuant to Code Section 582(c).
105
The
Conference Committee Report to the 1986 Act provides that, except as provided
in
Treasury regulations yet to be issued, the wash sale rules of Code Section
1091
will apply to dispositions of Residual Securities where the seller of the
Residual Security, during the period beginning six months before the sale
or
disposition of the Residual Security and ending six months after such sale
or
disposition, acquires (or enters into any other transaction that results
in the
application of Code Section 1091) any residual interest in any REMIC or any
interest in a “taxable mortgage pool” (such as a non-REMIC owner trust) that is
economically comparable to a Residual Security.
Mark
to
Market Regulations
The
IRS
has issued final regulations (the “Mark
to Market Regulations”)
under
Code Section 475 relating to the requirement that a securities dealer mark
to
market securities held for sale to customers. This mark-to-market requirement
applies to all securities of a dealer, except to the extent that the dealer
has
specifically identified a security as held for investment. The Mark to Market
Regulations provide that, for purposes of this mark to market requirement,
a
Residual Security is not treated as a security and thus may not be marked
to
market.
Taxes
That May Be Imposed on the REMIC Pool
Prohibited
Transactions
Income
from certain transaction by the REMIC Pool, called prohibited transactions,
will
not be part of the calculation of income or loss includable in the federal
income tax returns of Residual Holders, but rather will be taxed directly to
the
REMIC Pool at a 100% rate. Prohibited transactions generally include
(i) the disposition of a qualified mortgages other than for
(a) substitution within two years of the Startup Day for a defective
(including a defaulted) obligation (or repurchase in lieu of substitution of
a
defective (including a defaulted) obligation at any time) or for any qualified
mortgage within three months of the Startup Day, (b) foreclosure, default,
or imminent default of a qualified mortgage, (c) bankruptcy or insolvency
of the REMIC Pool, or (d) a qualified (complete) liquidation, (ii) the
receipt of income from assets that are not the type of mortgages or investments
that the REMIC Pool is permitted to hold, (iii) the receipt of compensation
for services, or (iv) the receipt of gain from disposition of cash flow
investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv), it is not a prohibited transaction to sell REMIC Pool
property to prevent a default on Regular Securities as a result of a default
on
qualified mortgages or to facilitate a clean-up call (generally, an optional
termination to save administrative costs when no more than a small percentage
of
the Securities is outstanding). The REMIC Regulations indicate that the
modification of a qualified mortgage generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the Mortgage Loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a mortgagor
pursuant to the terms of a convertible adjustable rate Mortgage
Loan.
Contributions
to the REMIC Pool After the Startup Day
In
general, the REMIC Pool will be subject to a tax at a 100% rate on the value
of
any property contributed to the REMIC Pool after the Startup Day. Exceptions
are
provided for cash contributions to the REMIC Pool (i) during the three
months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted in Treasury regulations yet to be issued. It is not anticipated that
there will be any contributions to the REMIC Pool after the Startup
Day.
Net
Income from Foreclosure Property
The
REMIC
Pool will be subject of federal income tax at the highest corporate rate on
“net
income from foreclosure property,” determined by reference to the rules
applicable to real estate investment trusts. Generally, property acquired by
deed in lieu of foreclosure would be treated as “foreclosure property” for a
period ending with the close of the third calendar year beginning after the
year
in which the REMIC Pool acquires such property, with a possible extension.
Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income
for
a real estate investment trust. It is not anticipated that the REMIC Pool will
have any taxable net income from foreclosure property.
106
Liquidation
of the REMIC Pool
If
a
REMIC Pool adopts a plan of complete liquidation, within the meaning of Code
Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC
Pool’s final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning
on
such date, the REMIC Pool will not be subject to the prohibited transaction
rules on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other
than
amounts retained to meet claims) to holders of Regular Securities and Residual
Holders within the 90-day period.
Administrative
Matters
The
REMIC
Pool will be required to maintain its books on a calendar year basis and
to file
federal income tax returns for federal income tax purposes in a manner similar
to a partnership. The form for such income tax return is Form 1066, U.S.
Real
Estate Mortgage Investment Conduit Income Tax Return. The Trustee will be
required to sign the REMIC Pool’s returns. Treasury regulations provide that,
except where there is a single Residual Holder for an entire taxable year,
the
REMIC Pool will be subject to the procedural and administrative rules of
the
Code applicable to partnerships, including the determination by the IRS of
any
adjustments to, among other things, items of REMIC income, gain, loss,
deduction, or credit in a unified administrative proceeding. The Master Servicer
will be obligated to act as “tax matters person,” as defined in applicable
Treasury regulations, with respect to the REMIC Pool as agent of the Residual
Holders holding the largest percentage interest in the Residual Securities.
If
the Code or applicable Treasury regulations do not permit the Master Servicer
to
act as tax matters person in its capacity as agent of such Residual Holder,
such
Residual Holder or such other person specified pursuant to Treasury regulations
will be required to act as tax matters person. The tax matters person generally
has responsibility for overseeing and providing notice to the other Residual
Holders of certain administrative and judicial proceedings regarding the
REMIC
Pool’s tax affairs, although other holders of the Residual Securities of the
same Series would be able to participate in such proceedings in appropriate
circumstances.
Limitations
on Deduction of Certain Expenses
An
investor who is an individual, estate, or trust will be subject to limitation
with respect to certain itemized deductions described in Code Section 67, to
the
extent that such itemized deductions, in the aggregate, do not exceed 2% of
the
investor’s adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of (i) 3% of the excess, if any, of
adjusted gross income over a statutory threshold amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such year. Under
current law, the applicable Code Section 68 reduction is reduced by one third
for taxable years beginning in 2006 and 2007, and by two thirds in taxable
years
beginning in 2008 and 2009. For taxable years beginning after December 31,2009
the overall limitation on itemized deductions is repealed. In
the
case of a REMIC Pool, such deductions may include deductions under Code Section
212 for the Servicing Fee and all administrative and other expenses relating
to
the REMIC Pool, or any similar expenses allocated to the REMIC Pool with respect
to a regular interest it holds in another REMIC. Investors who hold REMIC
Securities either directly or indirectly through certain pass-through entities
may have their pro
rata
share of
such expenses allocated to them as additional gross income, but may be subject
to such limitation on deductions. In addition, such expenses are not deductible
at all for purposes of computing the alternative minimum tax, and may cause
such
investors to be subject to significant additional tax liability. Temporary
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Securities in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. With respect to
a
REMIC Pool that would be classified as an investment trust in the absence of
a
REMIC election or that is substantially similar to an investment trust, any
holder of a Regular Security that is an individual, trust, estate, or
pass-through entity also will be allocated its pro
rata
share of
such expenses and a corresponding amount of income and will be subject to the
limitations or deductions imposed by Code Sections 67 and 68, as described
above. All such expenses will be allocable to the Residual Securities. In
general, such allocable portion will be determined based on the ratio that
a
REMIC Securityholder’s income, determined on a daily basis, bears to the income
of all holders of Regular Securities and Residual Securities with respect to
a
REMIC Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or certain other pass-through entities described in the
foregoing temporary Treasury regulations) may have taxable income in excess
of
the interest income at the pass-through rate on Regular Securities that are
issued in a single Class or otherwise consistently with fixed investment trust
status or in excess of cash distributions for the related period on Residual
Securities.
107
Taxation
of Certain Foreign Investors
Regular
Securities
Interest,
including original issue discount, distributable to Regular Securityholders
who
are non-resident aliens, foreign corporations, or other non-U.S. Persons,
generally will be considered “portfolio interest” and, therefore, generally will
not be subject to 30% United States withholding tax, provided that (i) such
interest is not effectively connected with the conduct of a trade or business
in
the United States of the Securityholder, (ii) such non-U.S. Person is not a
“10-percent shareholder” within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section
881(c)(3)(C).
To avoid
withholding tax, such Securityholders must provide certain documentation.
The
appropriate documentation includes IRS Form W-8BEN, if the non-U.S. Person
is a
corporation or individual eligible for the benefits of the portfolio interest
exemption or an exemption based on a treaty; IRS Form W-8ECI if the non-U.S.
Person is eligible for an exemption on the basis of its income from the Regular
Security being effectively connected to a United States trade or business;
IRS
Form W-8BEN or IRS Form W-8IMY, if the non-U.S. Person is a trust, depending
on
whether such trust is classified as the beneficial owner of the Regular
Security; and IRS Form W-8IMY, with supporting documentation as specified
in the
Treasury regulations, required to substantiate exemptions from withholding,
on
behalf of its partners, if the non-U.S. Person
is
a partnership. An intermediary (other than a partnership) must provide IRS
Form
W-8IMY, revealing all required information, including its name, address,
taxpayer identification number, the country under the laws of which it is
created, and certification that it is not acting for its own account. A
“qualified intermediary” must certify that it has provided, or will provide, a
withholding statement as required under Treasury regulations Section
1.1441-1(e)(5)(v), but need not disclose the identity of its account holders
on
its Form W-8IMY, and may certify its account holders’ status without including
each beneficial owner’s certificate. A non-”qualified intermediary” must
additionally certify that it has provided, or will provide, a withholding
statement that is associated with the appropriate IRS Forms W-8 and W-9 required
to substantiate exemptions from withholding on behalf of its beneficial owners.
If such statement, or any other required statement, is not provided, 30%
withholding will apply unless reduced or eliminated pursuant to an applicable
tax treaty or unless the interest on the Regular Security is effectively
connected with the conduct of a trade or business within the United States
by
such non-U.S. Person. In the latter case, such non-U.S. Person will be subject
to United States federal income tax at regular rates. Investors who are non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a Regular Security. The term “intermediary” means
a person acting as a custodian, a broker, nominee or otherwise as an agent
for
the beneficial owner of a Regular Security. A “qualified intermediary” is
generally a foreign
financial institution or clearing organization or a non-U.S. branch or office
of
a U.S. financial institution or clearing organization that is a party to
a
withholding agreement with the IRS.
Residual
Securities
The
Conference Committee Report to the 1986 Act indicates that amounts paid to
Residual Holders who are non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as “portfolio interest,” subject to the conditions
described in “—Regular Securities” above, but only to the extent that
(i) the Mortgage Loans were issued after July 18, 1984 and (ii) the
Trust Fund or segregated pool of assets therein (as to which a separate REMIC
election will be made), to which the Residual Security relates, consists of
obligations issued in “registered form” within the meaning of Code Section
163(f)(1). Generally, Mortgage Loans will not be, but regular interests in
another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, Residual Holders will not be entitled to any exemption from the
30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an “excess inclusion.”See
“—Taxation of Owners of Residual Securities—Limitations on Offset or Exemption
of REMIC Income.”
If the
amounts paid to Residual Holders who are non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States
by
such non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account
for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
“—Taxation of Owners of Residual Securities—Tax-Related Restrictions on Transfer
of Residual Securities—Foreign Investors”above
concerning the disregard of certain transfers having “tax avoidance potential.”
Investors who are non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning Residual Securities.
108
The
Internal Revenue Service issued temporary regulations on August 1, 2006 (the
“Temporary
Regulations”)
modifying the general rule that excess inclusions from a REMIC residual interest
are not includible in the income of a foreign person (or subject to withholding
tax) until paid or distributed. The Temporary Regulations are effective
generally for interests in a REMIC residual interest first acquired on or
after
August 1, 2006, and accelerate the time both for reporting of, and withholding
tax on, excess inclusions allocated to the foreign equity holders of
partnerships and certain other pass-through entities. The Temporary Regulations
also provide that excess inclusions are United States source
income.
In
the
case of REMIC residual interests held by a foreign person through a partnership,
the Temporary Regulations deem the amount of excess inclusion income allocated
to the foreign partner to be received by the foreign partner on the last
day of
the partnership’s taxable year, except to the extent that the excess inclusion
was required to be taken into account by the foreign partner at an earlier
time
under section 860G(b) of the Code as a result of a distribution by the
partnership to the foreign partner or a disposition in whole or in part of
the
foreign partner’s indirect interest in the REMIC residual interest. A
disposition in whole or in part of the foreign partner's indirect interest
in
the REMIC residual interest may occur as a result of a termination of the
REMIC,
a disposition of the partnership’s residual interest in the REMIC, a disposition
of the foreign partner’s interest in the partnership, or any other reduction in
the foreign partner's allocable share of the portion of the REMIC net income
or
deduction allocated to the partnership.
In
the
case of a residual interest held by a foreign person as a shareholder of a
real
estate investment trust or regulated investment company, as a participant in
a
common trust fund or as a patron in an organization subject to part I of
subchapter T (cooperatives), the foreign person must include in income the
amount of excess inclusion allocated to it at the same time that other income
from the trust, company, fund, or organization would be taken into
account.
The
Temporary Regulations also expressly make subject to withholding tax excess
inclusions allocated to a foreign person (whether as a partner or holder of
an
interest in a pass-through entity). In addition, in the case of excess
inclusions allocable to a foreign person as a partner, the Temporary Regulations
eliminate an important exception to the withholding requirements under which
a
withholding agent unrelated to a payee is obligated to withhold on a payment
only to the extent that the withholding agent has control over the payee's
money
or property and knows the facts giving rise to the payment.
Investors
who are Non-U.S. Persons should consult their tax advisors regarding the
specific tax consequences
to them of owning Residual Securities.
Backup
Withholding
Distributions
made on the Regular Securities, and proceeds from the sale of the Regular
Securities to or through certain brokers, may be subject to a “backup”
withholding tax under Code Section 3406 of 28%
(increasing to 31% after 2010) on
“reportable payments” (including interest distributions, original issue
discount, and, under certain circumstances, principal distributions) unless
the
Regular Holder is
a U.S.
Person and provides IRS Form W-9 with the correct taxpayer identification
number; is a non-U.S. Person and provides IRS Form W-8BEN identifying the
non-U.S. Person and stating that the beneficial owner is not a U.S. Person;
or
can be treated as an exempt recipient within the meaning of Treasury regulations
Section 1.6049-4(c)(1)(ii). Any amounts to be withheld from distribution on
the
Regular Securities would be refunded by the IRS or allowed as a credit against
the Regular Securityholder’s federal income tax liability. Information reporting
requirements may also apply regardless of whether withholding is required.
Prospective investors are encouraged to consult their own tax advisors regarding
the application to them of information reporting.
109
Reporting
Requirements
Reports
of accrued interest, original issue discount and information necessary to
compute the accrual of market discount will be made annually to the IRS and
to
individuals, estates, non-exempt and non-charitable trusts, and partnerships
who
are either holders of record of Regular Securities or beneficial owners who
own
Regular Securities through a broker or middleman as nominee. All brokers,
nominees and all other non-exempt holders of record of Regular Securities
(including corporations, non-calendar year taxpayers, securities or commodities
dealers, real estate investment trusts, investment companies, common trust
funds, thrift institutions and charitable trusts) may request such information
for any calendar quarter by telephone or in writing by contacting the person
designated in Internal Revenue Service Publication 938 with respect to a
particular Series of Regular Securities. Holders through nominees must request
such information from the nominee.
The
IRS’s
Form 1066 has an accompanying Schedule Q, Quarterly Notice to Residual Interest
Holders of REMIC Taxable Income or Net Loss Allocation. Treasury regulations
require that Schedule Q be furnished by the REMIC Pool to each Residual Holder
by the end of the month following the close of each calendar quarter (41
days
after the end of a quarter under proposed Treasury regulations) in which
the
REMIC Pool is in existence). Treasury regulations require that, in addition
to
the foregoing requirements, information must be furnished quarterly to Residual
Holders, furnished annually, if applicable, to holders of Regular Securities,
and filed annually with the IRS concerning Code Section 67 expenses
(see
“—Taxes That May Be Imposed on the REMIC Pool—Limitations on Deduction of
Certain Expenses”above)
allocable to such holders. Furthermore, under such regulations, information
must
be furnished quarterly to Residual Holders, furnished annually to holders
of
Regular Securities, and filed annually with the IRS concerning the percentage
of
the REMIC Pool’s assets meeting the qualified asset tests described above under
“Characterization of Investments in REMIC Securities.”
Residual
Holders should be aware that their responsibilities as holders of the residual
interest in a REMIC Pool, including the duty to account for their shares of
the
REMIC Pool’s income or loss on their returns, continue for the life of the REMIC
Pool, even after the principal and interest on their Residual Securities have
been paid in full.
Treasury
regulations provide that a Residual Holder is not required to treat items on
its
return consistently with their treatment on the REMIC Pool’s return if the
Holder owns 100% of the Residual Securities for the entire calendar year.
Otherwise, each Residual Holder is required to treat items on its returns
consistently with their treatment on the REMIC Pool’s return, unless the Holder
either files a statement identifying the inconsistency or establishes that
the
inconsistency resulted from incorrect information received from the REMIC Pool.
The IRS may assess a deficiency resulting from a failure to comply with the
consistency requirement without instituting an administrative proceeding at
the
REMIC Pool level. Any person that holds a Residual Security as a nominee for
another person may be required to furnish the related REMIC Pool, in a manner
to
be provided in Treasury regulations, with the name and address of such person
and other specified information.
110
Grantor
Trust Funds
Classification
of Grantor Trust Funds
With
respect to each Series of Grantor Trust Securities, assuming compliance with
all
provisions of the applicable Agreement, the related Grantor Trust Fund will
be
classified as a grantor trust under subpart E, part I of subchapter J of
the
Code and not as a partnership, an association taxable as a corporation, or
a
“taxable mortgage pool” within the meaning of Code Section 7701(i). Accordingly,
each holder of a Grantor Trust Security (other than a stripped security)
generally will be treated as the beneficial owner of an undivided interest
in
the Mortgage Loans included in the Grantor Trust Fund.
Standard
Securities
General
Where
there is no Retained Interest or “excess” servicing with respect to the Mortgage
Loans underlying the Securities of a Series, and where such Securities are
not
designated as “Stripped Securities,” the holder of each such Security in such
Series (referred to herein as “Standard
Securities”)
will
be treated as the owner of a pro
rata
undivided interest in the ordinary income and corpus portions of the Grantor
Trust Fund represented by its Standard Security and will be considered the
beneficial owner of a pro
rata
undivided interest in each of the Mortgage Loans, subject to the discussion
below under “—Recharacterization
of Servicing Fees.”Accordingly,
the holder of a Standard Security of a particular Series will be required
to
report on its federal income tax return its pro
rata
share of
the entire income from the Mortgage Loans represented by its Standard Security,
including interest at the coupon rate on such Mortgage Loans, original issue
discount (if any), prepayment fees, assumption fees, and late payment charges
received by the Servicer, in accordance with such Securityholder’s method of
accounting. A Securityholder generally will be able to deduct its share of
the
Servicing Fee and all administrative and other expenses of the Trust Fund
in
accordance with its method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Grantor Trust Fund.
However, investors who are individuals, estates or trusts who own Securities,
either directly or indirectly through certain pass-through entities, will
be
subject to limitations with respect to certain itemized deductions described
in
Code Section 67, including deductions under Code Section 212 for the Servicing
Fee and all such administrative and other expenses of the Grantor Trust Fund,
to
the extent that such deductions, in the aggregate, do not exceed two percent
of
an investor’s adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of (i) 3% of the excess, if any, of
adjusted gross income over a statutory threshold amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such year. These
limitations will be phased out and eliminated by 2010. As a result, such
investors holding Standard Securities, directly or indirectly through a
pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Standard Securities with respect
to
interest at the pass-through rate or as discount income on such Standard
Securities. In addition, such expenses are not deductible at all for purposes
of
computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Moreover, where there is
Retained Interest with respect to the Mortgage Loans underlying a Series
of
Securities or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
“stripped bond” and “stripped coupon” rules of the Code, as described below
under “—Stripped
Securities”and
“—Recharacterization
of Servicing Fees,”respectively.
Holders
of Standard Securities, particularly any Class of a Series which is a
Subordinated Security, may incur losses of interest or principal with respect
to
the Mortgage Loans. Such losses would be deductible generally only as described
above under “—REMICs—Taxation
of Owners of Regular Securities—Treatment of Losses,”except
that Securityholders on the cash method of accounting would not be required
to
report qualified stated interest as income until actual receipt.
Tax
Status
With
respect to a Series, Hunton & Williams LLP or Cadwalader, Wickersham &
Taft LLP has advised the Depositor that, except with respect to a Trust Fund
consisting of Unsecured Home Improvement Loans:
111
·
A
Standard Security owned by a “domestic building and loan association” within the
meaning of Code Section 7701(a)(19) will be considered to represent
“loans . . . secured by an interest in real property which
is . . . residential real property” within the meaning of
Code Section 7701(a)(19)(C)(v), provided that the real property securing
the
Mortgage Loans represented by that Standard Security is of the type described
in
such section of the Code.
·
A
Standard Security owned by a real estate investment trust will be considered
to
represent “real estate assets” within the meaning of Code Section 856(c)(4)(A)
to the extent that the assets of the related Grantor Trust Fund consist of
qualified assets, and interest income on such assets will be considered
“interest on obligations secured by mortgages on real property” to such extent
within the meaning of Code Section 856(c)(3)(B).
·
A
Standard Security owned by a REMIC will be considered to represent an
“obligation (including any participation or certificate of beneficial ownership
therein) which is principally secured by an interest in real property” within
the meaning of Code Section 860G(a)(3)(A) to the extent that the assets of
the
related Grantor Trust Fund consist of “qualified mortgages” within the meaning
of Code Section 860G(a)(3).
An
issue
arises as to whether Buydown Mortgage Loans may be characterized in their
entirety under the Code provisions cited in the first two bullet points above
or
whether the amount qualifying for such treatment must be reduced by the amount
of the Buydown Funds. There is indirect authority supporting treatment of
an
investment in a Buydown Mortgage Loan as entirely secured by real property
if
the fair market value of the real property securing the loan exceeds the
principal amount of the loan at the time of issuance or acquisition, as the
case
may be. There is no assurance that the treatment described above is proper.
Accordingly, Securityholders are urged to consult their own tax advisors
concerning the effects of such arrangements on the characterization of such
Securityholder’s investment for federal income tax purposes.
Premium
and Discount
Securityholders
are advised to consult with their tax advisors as to the federal income tax
treatment of premium and discount arising either upon initial acquisition
of
Standard Securities or thereafter.
Premium.
The
treatment of premium incurred upon the purchase of a Standard Security will
be
determined generally as described above under “—REMICs—Taxation
of Owners of Residual Securities—Premium.”
Original
Issue Discount.
The
original issue discount rules of Code Section 1271 through 1275 will be
applicable to a Securityholder’s interest in those Mortgage Loans as to which
the conditions for the application of those sections are met. Rules regarding
periodic inclusion of original issue discount income generally are applicable
to
mortgages originated after March 2, 1984. Under the OID Regulations, original
issue discount could arise by the charging of points by the originator of
the
mortgages in an amount greater than the statutory de
minimis
exception, including a payment of points that is currently deductible by
the
borrower under applicable Code provisions or, under certain circumstances,
by
the presence of “teaser” rates on the Mortgage Loans. See
“—Stripped Securities”below
regarding original issue discount on Stripped Securities.
Original
issue discount generally must be reported as ordinary gross income as it accrues
under a constant interest method that takes into account the compounding of
interest, in advance of the cash attributable to such income. Generally no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includable in the income of a holder of an obligation that acquires
the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Loans acquired by
a
Securityholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e.,
points)
will be includable by such holder.
112
Market
Discount.
Securityholders also will be subject to the market discount rules to the
extent
that the conditions for application of those sections are met. Market discount
on the Mortgage Loans will be determined and will be reported as ordinary
income
generally in the manner described above under “—REMICs—Taxation of Owners of
Regular Securities—Market Discount,” except that the ratable accrual methods
described therein will not apply. Rather, the holder will accrue market discount
pro
rata
over the
life of the Mortgage Loans, unless the constant yield method is elected.
Generally no prepayment assumption will be assumed for purposes of such
accrual.
Recharacterization
of Servicing Fees
If
the
servicing fees paid to a Servicer were deemed to exceed reasonable servicing
compensation, the amount of such excess would represent neither income nor
a
deduction to Securityholders. In this regard, there are no authoritative
guidelines for federal income tax purposes as to either the maximum amount
of
servicing compensation that may be considered reasonable in the context of
this
or similar transactions or whether, in the case of Standard Securities, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that such amount would exceed reasonable servicing compensation
as to
some of the Mortgage Loans would be increased. IRS guidance indicates that
a
servicing fee in excess of reasonable compensation (“excess
servicing”)
will
cause the Mortgage Loans to be treated under the “stripped bond” rules. Such
guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess
of
such amounts is not greater than the value of the services
provided.
Accordingly,
if the IRS’s approach is upheld, a Servicer who receives a servicing fee in
excess of such amounts would be viewed as retaining an ownership interest
in a
portion of the interest payments on the Mortgage Loans. Under the rules of
Code
Section 1286, the separation of ownership of the right to receive some or
all of
the interest payments on an obligation from the right to receive some or
all of
the principal payments on the obligation would result in treatment of such
Mortgage Loans as “stripped coupons” and “stripped bonds.” Subject to the
de
minimis
rule
discussed below under “Stripped Securities,” each stripped bond or stripped
coupon could be considered for this purpose as a non-interest bearing obligation
issued on the date of issue of the Standard Securities, and the original
issue
discount rules of the Code would apply to the holder thereof. While
Securityholders would still be treated as owners of beneficial interests
in a
grantor trust for federal income tax purposes, the corpus of such trust could
be
viewed as excluding the portion of the Mortgage Loans the ownership of which
is
attributed to the Servicer, or as including such portion as a second Class
of
equitable interest. Applicable Treasury regulations treat such an arrangement
as
a fixed investment trust, since the multiple Classes of trust interests should
be treated as merely facilitating direct investments in the trust assets
and the
existence of multiple Classes of ownership interests is incidental to that
purpose. In general, such a recharacterization should not have any significant
effect upon the timing or amount of income reported by a Securityholder,
except
that the income reported by a cash method holder may be slightly accelerated.
See
“—Stripped Securities”
below
for a further description of the federal income tax treatment of stripped
bonds
and stripped coupons.
Sale
or
Exchange of Standard Securities
Upon
sale
or exchange of a Standard Securities, a Securityholder will recognize gain
or
loss equal to the difference between the amount realized on the sale and its
aggregate adjusted basis in the Mortgage Loans and other assets represented
by
the Security. In general, the aggregate adjusted basis will equal the
Securityholder’s cost for the Standard Security, exclusive of accrued interest,
increased by the amount of any income previously reported with respect to the
Standard Security and decreased by the amount of any losses previously reported
with respect to the Standard Security and the amount of any distributions (other
than accrued interest) received thereon. Except as provided above with respect
to market discount on any Mortgage Loans, and except for certain financial
institutions subject to the provisions of Code Section 582(c), any such gain
or
loss generally would be capital gain or loss if the Standard Security was held
as a capital asset. However, gain on the sale of a Standard Security will be
treated as ordinary income (i) if a Standard Security is held as part of a
“conversion transaction” as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Securityholder’s net investment in the
conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition
of
property that was held as part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income
at
ordinary income rates. Long-term capital gains of certain noncorporate taxpayers
generally are subject to a lower maximum tax rate than ordinary income or
short-term capital gains of such taxpayers for property held for more than
one
year. The maximum tax rate for corporations currently is the same with respect
to both ordinary income and capital gains.
113
Stripped
Securities
General
Pursuant
to Code Section 1286, the separation of ownership of the right to receive
some
or all of the principal payments on an obligation from ownership of the right
to
receive some or all of the interest payments results in the creation of
“stripped bonds” with respect to principal payments and “stripped coupons” with
respect to interest payments. For purposes of this discussion, Securities
that
are subject to those rules will be referred to as “Stripped
Securities.”
The
Securities will be subject to those rules if (i) the Depositor or any of
its affiliates retains (for its own account or for purposes of resale), in
the
form of Retained Interest or otherwise, an ownership interest in a portion
of
the payments on the Mortgage Loans, (ii) the Depositor or any of its
affiliates is treated as having an ownership interest in the Mortgage Loans
to
the extent it is paid (or retains) servicing compensation in an amount greater
than reasonable consideration for servicing the Mortgage Loans (see
“—Standard Securities—Recharacterization of Servicing Fees”
above),
and
(iii) a Class of Securities are issued in two or more Classes or subclasses
representing the right to non-pro-rata percentages of the interest and principal
payments on the Mortgage Loans.
In
general, a holder of a Stripped Security will be considered to own “stripped
bonds” with respect to its pro rata
share of
all or a portion of the principal payments on each Mortgage Loan and/or
“stripped coupons” with respect to its pro
rata
share of
all or a portion of the interest payments on each Mortgage Loan, including
the
Stripped Security’s allocable share of the servicing fees paid to a Servicer, to
the extent that such fees represent reasonable compensation for services
rendered. See the discussion above under “—Standard
Securities—Recharacterization of Servicing Fees.”
Although
not free from doubt, for purposes of reporting to Stripped Securityholders,
the
servicing fees will be allocated to the Classes of Stripped Securities in
proportion to the distributions to such Classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to
a
deduction each year in respect of the servicing fees, as described above
under
“—Standard Securities—General,” subject to the limitation described
therein.
Code
Section 1286 treats a stripped bond or a stripped coupon generally as an
obligation issued at an original issue discount on the date that such stripped
interest is purchased. Although the treatment of Stripped Securities for
federal
income tax purposes is not clear in certain respects, particularly where
such
Stripped Securities are issued with respect to a Mortgage Pool containing
variable-rate Mortgage Loans, the Depositor has been advised by counsel that
(i) the Grantor Trust Fund will be treated as a grantor trust under subpart
E, part I of subchapter J of the Code and not as an association taxable as
a
corporation or a “taxable mortgage pool” within the meaning of Code Section
7701(i), and (ii) each Stripped Security should be treated as a single
installment obligation for purposes of calculating original issue discount
and
gain or loss on disposition. This treatment is based on the interrelationship
of
Code Section 1286, Code Sections 1272 through 1275, and the OID Regulations.
Although it is possible that computations with respect to Stripped Securities
could be made in one of the ways described below under Possible Alternative
Characterizations,” the OID Regulations state, in general, that two or more debt
instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument. Accordingly, for
original issue discount purposes, all payments on any Stripped Securities
should
be aggregated and treated as though they were made on a single debt instrument.
The Pooling and Servicing Agreement will require that the Trustee make and
report all computations described below using this aggregate approach, unless
substantial legal authority requires otherwise.
Furthermore,
Treasury regulations provide for treatment of a Stripped Security as a single
debt instrument issued on the date it is purchased for purposes of calculating
any original issue discount. In addition, under such regulations, a Stripped
Security that represents a right to payments of both interest and principal
may
be viewed either as issued with original issue discount or market discount
(as
described below), at a de
minimis
original
issue discount, or, presumably, at a premium. This treatment indicates that
the
interest component of such a Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that
the
purchaser of such a Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either
(i) the initial discount with respect to the Stripped Security was treated
as zero under the de
minimis
rule, or
(ii) no more than 100 basis points in excess of reasonable servicing is
stripped off the related Mortgage Loans. Any such market discount would be
reportable as described above under “—REMICs—Taxation
of Owners of Regular Securities—Market Discount,”without
regard to the de
minimis
rule
therein, assuming that a prepayment assumption is employed in such
computation.
114
The
holder of a Stripped Security will be treated as owning an interest in each
of
the Mortgage Loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the Mortgage
Loans.
Accordingly, an individual, trust or estate that holds a Stripped Security
directly or through a pass-through entity will be subject to the limitations
on
deductions imposed by Code Sections 67 and 68.
A
holder
of a Stripped Security, particularly any Class of a Series which is a
Subordinated Security, may deduct losses incurred with respect to the Stripped
Security as described above under “—Standard
Securities—General.”
Status
of Stripped Securities
No
specific legal authority exists as to whether the character of the Stripped
Securities, for federal income tax purposes, will be the same as that of
the
Mortgage Loans. Specifically, it is not clear whether Stripped Certificates
will
be treated as assets described in Section 7701(a)(19)(C) of the Code, as
“obligation[s] . . . principally secured by an interest in real property” under
Section 860G(a)(3)(A) or as “real estate assets” under Section 856(c)(5)(B) of
the Code. In addition, it is not clear whether the interest or Original Issue
Discount derived from the Stripped Certificates will be interest on obligations
secured by interests in real property for purposes of Section 856(c)(3) of
the
Code. Accordingly, Stripped Certificates may not be a suitable investment
for
inclusion in a REMIC or for an investor intending to qualify as a REIT or
a
domestic building and loan association. Prospective purchasers are encouraged
to
consult their tax advisors regarding the characterization of the Stripped
Certificates and the income therefrom.
Taxation
of Stripped Securities
Original
Issue Discount.
Except
as described above under “—General,” each Stripped Security will be considered
to have been issued at an original issue discount for federal income tax
purposes. Original issue discount with respect to a Stripped Security must
be
included in ordinary income as it accrues, in accordance with a constant
yield
method that takes into account the compounding of interest, which may be
prior
to the receipt of the cash attributable to such income. Based in part on
the
issue discount required to be included in the income of a holder of a Stripped
Security (referred to in this discussion as a “Stripped
Securityholder”)
in any
taxable year likely will be computed generally as described above under
“—REMICs—Taxation
of Owner of Regular Securities—Original Issue Discount”
and
“—Variable
Rate Regular Securities.”However,
with the apparent exception of a Stripped Security qualifying as a market
discount obligation as described above under “—General,”the
issue
price of a Stripped Security will be the purchase price paid by each holder
thereof, and the stated redemption price at maturity will include the aggregate
amount of the payments, other than qualified stated interest, to be made
on the
Stripped Security to such Securityholder, presumably under the Prepayment
Assumption.
If
the
Mortgage Loans prepay at a rate either faster or slower than that under the
Prepayment Assumption, a Securityholder’s recognition of original issue discount
will be either accelerated or decelerated and the amount of such original issue
discount will be either increased or decreased depending on the relative
interests in principal and interest on each Mortgage Loan represented by such
Securityholder’s Stripped Security. While the matter is not free from doubt, the
holder of a Stripped Security should be entitled in the year that it becomes
certain (assuming no further prepayments) that the holder will not recover
a
portion of its adjusted basis in such Stripped Security to recognize a loss
(which may be a capital loss) equal to such portion of unrecoverable
basis.
As
an
alternative to the method described above, the fact that some or all of the
interest payments with respect to the Stripped Securities will not be made
if
the Mortgage Loans are prepaid could lead to the interpretation that such
interest payments are “contingent” within the meaning of the OID Regulations.
The OID Regulations, as they relate to the treatment of contingent interest,
are
by their terms not applicable to prepayable securities such as the Stripped
Securities. However, if final regulations dealing with contingent interest
with
respect to the Stripped Securities apply the same principles as the OID
Regulations, such regulations may lead to different timing of income inclusion
that would be the case under the OID Regulations. Furthermore, application
of
such principles could lead to the characterization of gain on the sale of
contingent interest Stripped Securities as ordinary income. Investors should
consult their tax advisors regarding the appropriate tax treatment of Stripped
Securities.
115
Sale
or Exchange of Stripped Securities.
Sale or
exchange of a Stripped Security prior to its maturity will result in gain
or
loss equal to the difference, if any, between the amount received and the
Securityholder’s adjusted basis in such Stripped Security, as described above
under “—REMICs—Taxation
of Owners of Regular Securities—Sale or Exchange of Regular Securities.”Gain
or
loss from the sale or exchange of a Stripped Security generally will be capital
gain or loss to the Securityholder if the Stripped Security is held as a
“capital asset” within the meaning of Code Section 1221, and will be long-term
or short-term depending on whether the Stripped Security has been held for
the
long-term capital gain holding period (currently, more than one year). To
the
extent that a subsequent purchaser’s purchase price is exceeded by the remaining
payments on the Stripped Securities, such subsequent purchaser will be required
for federal income tax purposes to accrue and report such excess as if it
were
original issue discount in the manner described above. It is not clear for
this
purpose whether the assumed prepayment rate that is to be used in the case
of a
Securityholder other than an original Securityholder should be the Prepayment
Assumption or a new rate based on the circumstances at the date of subsequent
purchase.
Purchase
of More Than One Class of Stripped Securities.
When an
investor purchases more than one Class of Stripped Securities, it is currently
unclear whether for federal income tax purposes such Classes of Stripped
Securities should be treated separately or aggregated for purposes of the
rules
described above.
Possible
Alternative Characterization.
The
characterizations of the Stripped Securities discussed above are not the
only
possible interpretations of the applicable Code provisions. For example,
the
Securityholder may be treated as the owner of (i) one installment
obligation consisting of such Stripped Security’s pro
rata
share of
the payments attributable to principal on each Mortgage Loan and a second
installment obligation consisting of such Stripped Security’s pro
rata
share of
the payments attributable to interest on each Mortgage Loan, (ii) as many
stripped bonds or stripped coupons as there are scheduled payments of principal
and/or interest on each Mortgage Loan, or (iii) a separate installment
obligation for each Mortgage Loan, representing the Stripped Security’s
pro
rata
share of
payments of principal and/or interest to be made with respect thereto.
Alternatively, the holder of one or more Classes of Stripped Securities may
be
treated as the owner of a pro
rata
fractional undivided interest in each Mortgage Loan to the extent that such
Stripped Security, or Classes of Stripped Securities in the aggregate, represent
the same pro
rata
portion
of principal and interest on each such Mortgage Loan, and a stripped bond
or
stripped coupon (as the case may be), treated as an installment obligation
or
contingent payment obligation, as to the remainder. Treasury regulations
regarding original issue discount on stripped obligations make the foregoing
interpretations less likely to be applicable. The preamble to such regulations
states that they are premised on the assumption that an aggregation approach
is
appropriate for determining whether original issue discount on a stripped
bond
or stripped coupon is de
minimis,
and
solicits comments on appropriate rules for aggregating stripped bonds and
stripped coupons under Code Section 1286.
Because
of these possible varying characterizations of Stripped Securities and the
resultant differing treatment of income recognition, Securityholders are urged
to consult their own tax advisors regarding the proper treatment of Stripped
Securities for federal income tax purposes.
Reporting
Requirements and Backup Withholding
The
Trustee will furnish, within a reasonable time after the end of each calendar
year, to each Securityholder at any time during such year, such information
(prepared on the basis described above) as is necessary to enable such
Securityholder to prepare its federal income tax returns. Such information
will
include the amount of original issue discount accrued on Securities held by
persons other than Securityholders exempted from the reporting requirements.
However, the amount required to be reported by the Trustee may not be equal
to
the proper amount of original issue discount required to be reported as taxable
income by a Securityholder, other than an original Securityholder that purchased
at the issue price. In particular, in the case of Stripped Securities, such
reporting will be based upon a representative initial offering price of each
Class of Stripped Securities. The Trustee will also file such original issue
discount information with the IRS. If a Securityholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Securityholder has not reported all interest and dividend
income required to be shown on his federal income tax return, backup withholding
may be required in respect of any reportable payments, as described above under
“—REMICs—Taxation
of Certain Foreign Investors—Backup Withholding.”
116
On
January 24, 2006, the Internal Revenue Service published final regulations
which
establish a reporting framework for interests in “widely held fixed investment
trusts” and place the responsibility of reporting on the person in the ownership
chain who holds an interest for a beneficial owner. A widely held fixed
investment trust is defined as an arrangement classified as a “trust” under
Treasury Regulation Section 301.7701-4(c) which is a U.S. Person and in which
any interest is held by a middleman, which includes, but is not limited to
(i) a
custodian of a person’s account, (ii) a nominee and (iii) a broker holding an
interest for a customer in street name. The Trustee, or its designated agent,
will be required to calculate and provide information to requesting persons
with
respect to the related Trust in accordance with these new regulations beginning
with respect to the 2007 calendar year. The Trustee (or its designated agent),
or the applicable middleman (in the case of interests held through a middleman),
will be required to file information returns with the IRS and provide tax
information statements to Certificateholders in accordance with these new
regulations after December 31, 2007.
Taxation
of Certain Foreign Investors
To
the
extent that a Security evidences ownership in Mortgage Loans that are issued
on
or before July 18, 1984, interest or original issue discount paid by the
person
required to withhold tax under Code Section 1441 or 1442 to nonresident aliens,
foreign corporations, or other non-U.S. Persons generally will be subject
to 30%
United States withholding tax, or such lower rate as may be provided for
interest by an applicable tax treaty. Accrued original issue discount recognized
by the Securityholder on the sale or exchange of such a Security also will
be
subject to federal income tax at the same rate.
Treasury
regulations provide that interest or original issue discount paid by the
Trustee
or other withholding agent to a non-U.S. Person evidencing ownership interest
in
Mortgage Loans issued after July 18, 1984 will be “portfolio interest” and will
be treated in the manner, and such persons will be subject to the same
certification requirements, described above under “—REMICs—Taxation
of Certain Foreign Investors—Regular Securities.”
Partnership
Trust Funds
Classification
of Partnership Trust Funds
With
respect to each Series of Partnership Securities or Debt Securities, Hunton
& Williams LLP or Cadwalader, Wickersham & Taft LLP will deliver its
opinion that the Trust Fund will not be a taxable mortgage pool or an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the applicable Agreement and related documents will be complied
with, and on counsel’s conclusion that the nature of the income of the Trust
Fund will exempt it from the rule that certain publicly traded partnerships
are
taxable as corporations.
Characterization
of Investments in Partnership Securities and Debt Securities
For
federal income tax purposes, (i) Partnership Securities and Debt Securities
held by a thrift institution taxed as a domestic building and loan association
will not constitute “loans . . . secured by an interest in real property which
is . . . residential real property” within the meaning of Code Section
7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real
estate investment trust will not be treated as “interest on obligations secured
by mortgages on real property or on interests in real property” within the
meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real estate
investment trust will not constitute “real estate assets” within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust’s proportionate interest in the assets of the Partnership
Trust Fund qualifying for such treatments based on capital
accounts.
117
Taxation
of Debt Securityholders
Treatment
of the Debt Securities as Indebtedness
The
Depositor will agree, and the Securityholders will agree by their purchase
of
Debt Securities, to treat the Debt Securities as debt for federal income
tax
purposes. No regulations, published rulings, or judicial decisions exist
that
discuss the characterization for federal income tax purposes of securities
with
terms substantially the same as the Debt Securities. However, with respect
to
each Series of Debt Securities, Hunton & Williams LLP or Cadwalader,
Wickersham & Taft LLP will deliver its opinion that the Debt Securities will
be classified as indebtedness for federal income tax purposes. The discussion
below assumes this characterization of the Debt Securities is
correct.
If,
contrary to the opinion of counsel, the IRS successfully asserted that the
Debt
Securities were not debt for federal income tax purposes, the Debt Securities
might be treated as equity interests in the Partnership Trust, and the timing
and amount of income allocable to holders of such Debt Securities may be
different than as described in the following paragraph.
Debt
Securities generally will be subject to the same rules of taxation as Regular
Securities issued by a REMIC, as described above, except that (i) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (ii) the
special rule treating a portion of the gain on sale or exchange of a Regular
Security as ordinary income is inapplicable to Debt Securities. See
“—REMICs—Taxation
of Owners of Regular Securities” and “—Sale or Exchange of Regular
Securities.”
Taxation
of Owners of Partnership Securities
Treatment
of the Partnership Trust Fund as a Partnership
If
so
specified in the applicable prospectus supplement, the Depositor will agree,
and
the Securityholders will agree by their purchase of Securities, to treat
the
Partnership Trust Fund as a partnership for purposes of federal and state
income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Partnership
Trust Fund, the partners of the partnership being the Securityholders (including
the Depositor), and the Debt Securities (if any) being debt of the partnership.
However, the proper characterization of the arrangement involving the
Partnership Trust Fund, the Partnership Securities, the Debt Securities,
and the
Depositor is not clear, because there is no authority on transactions closely
comparable to that contemplated herein.
A
variety
of alternative characterizations are possible. For example, because one or
more
of the Classes of Partnership Securities have certain features characteristic
of
debt, the Partnership Securities might be considered debt of the Depositor
or
the Partnership Trust Fund. Any such characterization would not result in
materially adverse tax consequences to Securityholders as compared to the
consequences from treatment of the Partnership Securities as equity in a
partnership, described below. The following discussion assumes that the
Partnership Securities represent equity interests in a partnership.
Partnership
Taxation
As
a
partnership, the Partnership Trust Fund will not be subject to federal income
tax. Rather, each Securityholder will be required to separately take into
account such holder’s allocated share of income, gains, losses, deductions and
credits of the Partnership Trust Fund. It is anticipated that the Partnership
Trust Fund’s income will consist primarily of interest earned on the Mortgage
Loans (including appropriate adjustments for market discount, original issue
discount and bond premium) as described above under “—Grantor Trust Funds—
Standard Securities—General” and “—Premium and Discount”) and any gain upon
collection or disposition of Mortgage Loans. The Partnership Trust Fund’s
deductions will consist primarily of interest accruing with respect to the
Debt
Securities, servicing and other fees, and losses or deductions upon collection
or disposition of Debt Securities.
118
The
tax
items of a partnership are allocable to the partners in accordance with the
Code, Treasury regulations and the partnership agreement (here, the Agreements
and related documents). The applicable Agreement will provide, in general,
that
the Securityholders will be allocated taxable income of the Partnership Trust
Fund for each Collection Period equal to the sum of (i) the interest that
accrues on the Partnership Securities in accordance with their terms for
such
Collection Period, including interest accruing at the applicable pass-through
rate for such Collection Period and interest on amounts previously due on
the
Partnership Securities but not yet distributed; (ii) any Partnership Trust
Fund income attributable to discount on the Mortgage Loans that corresponds
to
any excess of the principal amount of the Partnership Securities over their
initial issue price; and (iii) any other amounts of income payable to the
Securityholders for such Collection Period. Such allocation will be reduced
by
any amortization by the Partnership Trust Fund of premium on Mortgage Loans
that
corresponds to any excess of the issue price of Partnership Securities over
their principal amount. All remaining taxable income of the Partnership Trust
Fund will be allocated to the Depositor. Based on the economic arrangement
of
the parties, this approach for allocating Partnership Trust Fund income should
be permissible under applicable Treasury regulations, although no assurance
can
be given that the IRS would not require a greater amount of income to be
allocated to Securityholders. Moreover, even under the foregoing method of
allocation, Securityholders may be allocated income equal to the entire
pass-through rate plus the other items described above even though the Trust
Fund might not have sufficient cash to make current cash distributions of
such
amount. Thus, cash basis holders will in effect be required to report income
from the Partnership Securities on the accrual basis and Securityholders
may
become liable for taxes on Partnership Trust Fund income even if they have
not
received cash from the Partnership Trust Fund to pay such taxes.
Part
or
all of the taxable income allocated to a Securityholder that is a pension,
profit sharing or employee benefit plan or other tax-exempt entity (including
an
individual retirement account) may constitute “unrelated business taxable
income” generally taxable to such a holder under the Code.
A
share
of expenses of the Partnership Trust Fund (including fees of the Master Servicer
but not interest expense) allocable to an individual, estate or trust
Securityholder would be miscellaneous itemized deductions subject to the
limitations described above under “—Grantor Trust Funds—Standard
Securities—General”. Accordingly, such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed
on an
amount of income that exceeds the amount of cash actually distributed to
such
holder over the life of the Partnership Trust Fund.
Discount
income or premium amortization with respect to each Mortgage Loan would be
calculated in a manner similar to the description above under “—Grantor Trust
Funds—Standard Securities—General” and “—Premium and Discount.” Notwithstanding
such description, it is intended that the Partnership Trust Fund will make
all
tax calculations relating to income and allocations to Securityholders on
an
aggregate basis with respect to all Mortgage Loans held by the Partnership
Trust
Fund rather than on a Mortgage Loan-by-Mortgage Loan basis. If the IRS were
to
require that such calculations be made separately for each Mortgage Loan,
the
Partnership Trust Fund might be required to incur additional expense, but
it is
believed that there would not be a material adverse effect on
Securityholders.
Discount
and Premium
It
is not
anticipated that the Mortgage Loans will have been issued with original issue
discount and, therefore, the Partnership Trust Fund should not have original
issue discount income. However, the purchase price paid by the Partnership
Trust
Fund for the Mortgage Loans may be greater or less than the remaining principal
balance of the Mortgage Loans at the time of purchase. If so, the Mortgage
Loans
will have been acquired at a premium or discount, as the case may be.
See
“—Grantor Trust Funds—Standard Securities—Premium and
Discount.”
(As
indicated above, the Partnership Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a Mortgage
Loan-by-Mortgage Loan basis).
If
the
Partnership Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Partnership Trust Fund will elect to include any such discount
in
income currently as it accrues over the life of the Mortgage Loans or to offset
any such premium against interest income on the Mortgage Loans. As indicated
above, a portion of such market discount income or premium deduction may be
allocated to Securityholders.
119
Section
708 Termination
Under
Section 708 of the Code, the Partnership Trust Fund will be deemed to terminate
for federal income tax purposes if 50% or more of the capital and profits
interests in the Partnership Trust Fund are sold or exchanged within a 12-month
period. If such a termination occurs, it would cause a deemed contribution
of
the assets of a Partnership Trust Fund (the “old
partnership”)
to a
new Partnership Trust Fund (the “new
partnership”)
in
exchange for interests in the new partnership. Such interests would be deemed
distributed to the partners of the old partnership in liquidation thereof,
which
would not constitute a sale or exchange. The Partnership Trust Fund will
not
comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Partnership Trust Fund
may be
subject to certain tax penalties and may incur additional expenses if it
is
required to comply with those requirements. Furthermore, the Partnership
Trust
Fund might not be able to comply due to lack of data.
Disposition
of Securities
Generally,
capital gain or loss will be recognized on a sale of Partnership Securities
in
an amount equal to the difference between the amount realized and the seller’s
tax basis in the Partnership Securities sold. A Securityholder’s tax basis in an
Partnership Security will generally equal the holder’s cost increased by the
holder’s share of Partnership Trust Fund income (includable in income) and
decreased by any distributions received with respect to such Partnership
Security. In addition, both the tax basis in the Partnership Securities and
the
amount realized on a sale of an Partnership Security would include the holder’s
share of the Debt Securities and other liabilities of the Partnership Trust
Fund. A holder acquiring Partnership Securities at different prices may be
required to maintain a single aggregate adjusted tax basis in such Partnership
Securities, and, upon sale or other disposition of some of the Partnership
Securities, allocate a portion of such aggregate tax basis to the Partnership
Securities sold (rather than maintaining a separate tax basis in each
Partnership Security for purposes of computing gain or loss on a sale of
that
Partnership Security).
Any
gain
on the sale of a Partnership Security attributable to the holder’s share of
unrecognized accrued market discount on the Mortgage Loans would generally
be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Partnership Trust Fund does not expect to have
any
other assets that would give rise to such special reporting considerations.
Thus, to avoid those special reporting requirements, the Partnership Trust
Fund
will elect to include market discount in income as it accrues.
If
a
Securityholder is required to recognize an aggregate amount of income (not
including income attributable to disallowed itemized deductions described above)
over the life of the Partnership Securities that exceeds the aggregate cash
distributions with respect thereto, such excess will generally give rise to
a
capital loss upon the retirement of the Partnership Securities.
Allocations
Between Transferors and Transferees
In
general, the Partnership Trust Fund’s taxable income and losses will be
determined each Collection Period and the tax items for a particular Collection
Period will be apportioned among the Securityholders in proportion to the
principal amount of Partnership Securities owned by them as of the close of
the
last day of such Collection Period. As a result, a holder purchasing Partnership
Securities may be allocated tax items (which will affect its tax liability
and
tax basis) attributable to periods before the actual transaction.
The
use
of such a Collection Period convention may not be permitted by existing
regulations. If a Collection Period convention is not allowed (or only applies
to transfers of less than all of the partner’s interest), taxable income or
losses of the Partnership Trust Fund might be reallocated among the
Securityholders. The Depositor will be authorized to revise the Partnership
Trust Fund’s method of allocation between transferors and transferees to conform
to a method permitted by future regulations.
120
Section
731 Distributions
In
the
case of any distribution to a Securityholder, no gain will be recognized
to that
Securityholder to the extent that the amount of any money distributed with
respect to such Security does not exceed the adjusted basis of such
Securityholder’s interest in the Security. To the extent that the amount of
money distributed exceeds such Securityholder’s adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder,
no
loss will be recognized except upon a distribution in liquidation of a
Securityholder’s interest. Any gain or loss recognized by a Securityholder will
be capital gain or loss.
Section
754 Election
In
the
event that a Securityholder sells its Partnership Securities at a profit
(loss),
the purchasing Securityholder will have a higher (lower) basis in the
Partnership Securities than the selling Securityholder had. The tax basis
of the
Partnership Trust Fund’s assets would not be adjusted to reflect that higher (or
lower) basis unless the Partnership Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities
that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Partnership Trust Fund will
not
make such an election. As a result, a Securityholder might be allocated a
greater or lesser amount of Partnership Trust Fund income than would be
appropriate based on its own purchase price for Partnership
Securities.
Administrative
Matters
The
Trustee is required to keep or have kept complete and accurate books of the
Partnership Trust Fund. Such books will be maintained for financial reporting
and tax purposes on an accrual basis and the fiscal year of the Partnership
Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of
the
Partnership Trust Fund and will report each Securityholder’s allocable share of
items of Partnership Trust Fund income and expense to holders and the IRS
on
Schedule K-1. The Trustee will provide the Schedule K-1 information to nominees
that fail to provide the Partnership Trust Fund with the information statement
described below and such nominees will be required to forward such information
to the beneficial owners of the Partnership Securities. Generally, holders
must
file tax returns that are consistent with the information return filed by
the
Partnership Trust Fund or be subject to penalties unless the holder notifies
the
IRS of all such inconsistencies.
Under
Section 6031 of the Code, any person that holds Partnership Securities as
a
nominee at any time during a calendar year is required to furnish the
Partnership Trust Fund with a statement containing certain information on
the
nominee, the beneficial owners and the Partnership Securities so held. Such
information includes (i) the name, address and taxpayer identification
number of the nominee and (ii) as to each beneficial owner (x) the
name, address and identification number of such person, (y) whether such
person is a United States person, a tax-exempt entity or a foreign government,
an international organization, or any wholly-owned agency or instrumentality
of
either of the foregoing, and (z) certain information on Partnership
Securities that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Partnership
Securities through a nominee are required to furnish directly to the Trustee
information as to themselves and their ownership of Partnership Securities.
A
clearing agency registered under Section 17A of the Exchange Act is not required
to furnish any such information statement to the Partnership Trust Fund.
The
information referred to above for any calendar year must be furnished to
the
Partnership Trust Fund on or before the following January 31. Nominees, brokers
and financial institutions that fail to provide the Partnership Trust Fund
with
the information described above may be subject to penalties.
The
Depositor will be designated as the tax matters partner in the Pooling and
Servicing Agreement and, as such, will be responsible for representing the
Securityholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which
the
partnership information return is filed. Any adverse determination following
an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the Securityholders,
and, under certain circumstances, a Securityholder may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Securityholder’s
returns and adjustments of items not related to the income and losses of the
Partnership Trust Fund.
121
Tax
Consequences to Foreign Securityholders
It
is not
clear whether the Partnership Trust Fund would be considered to be engaged
in a
trade or business in the United States for purposes of federal withholding
taxes
with respect to non-U.S. Persons, because there is no clear authority dealing
with that issue under facts substantially similar to those described herein.
Although it is not expected that the Partnership Trust Fund would be engaged
in
a trade or business in the United States for such purposes, if so specified
in
the applicable prospectus supplement, the Partnership Trust Fund may withhold
as
if it were so engaged in order to protect the Partnership Trust Fund from
possible adverse consequences of a failure to withhold. The Partnership Trust
Fund may withhold on the portion of its taxable income that is allocable
to
Securityholders who are non-U.S. Persons pursuant to Section 1446 of the
Code,
as if such income were effectively connected to a U.S. trade or business,
at the
maximum tax rate for corporations or individuals, as applicable. Amounts
withheld will be deemed distributed to the non-U.S. Person Securityholders.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures. In determining a holder’s withholding status, the
Partnership Trust Fund may rely on IRS Form W-8BEN, IRS Form W-9 or the holder’s
certification of nonforeign status signed under penalties of
perjury.
To
the
extent specified in the applicable prospectus supplement, (i) each non-U.S.
Person holder might be required to file a U.S. individual or corporate income
tax return (including, in the case of a corporation, the branch profits tax)
on
its share of the Partnership Trust Fund’s income; (ii) each non-U.S. Person
holder must obtain a taxpayer identification number from the IRS and submit
that
number to the Partnership Trust Fund on Form W-8BEN in order to assure
appropriate crediting of the taxes withheld; and (iii) a non-U.S. Person
holder generally would be entitled to file with the IRS a claim for refund
with
respect to taxes withheld by the Partnership Trust Fund, taking the position
that no taxes were due because the Partnership Trust Fund was not engaged
in a
U.S. trade or business. Notwithstanding the foregoing, interest payments
made
(or accrued) to a Securityholder who is a non-U.S. Person may be considered
guaranteed payments to the extent such payments are determined without regard
to
the income of the Partnership Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest may not
be
considered “portfolio interest.” As a result, Securityholders who are non-U.S.
Persons may be subject to United States federal income tax and withholding
tax
at a rate of 30 percent, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a non-U.S. Person holder would only be entitled to
claim a
refund for that portion of the taxes in excess of the taxes that should be
withheld with respect to the guaranteed payments.
Backup
Withholding
Distributions
made on the Partnership Securities and proceeds from the sale of the Partnership
Securities will be subject to a “backup” withholding tax of 28%
(increasing to 31% after 2010) if,
in
general, the Securityholder fails to comply with certain identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code.
PROSPECTIVE
INVESTORS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING ANY POSSIBLE TAX RETURN
DISCLOSURE OBLIGATION WITH RESPECT TO THE SECURITIES DISCUSSED HEREIN. THE
FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL INFORMATION
ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER’S PARTICULAR TAX
SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT
TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF
REMIC SECURITIES, GRANTOR TRUST SECURITIES, PARTNERSHIP SECURITIES AND DEBT
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND
OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX
LAWS.
STATE
AND OTHER TAX CONSEQUENCES
122
In
addition to the federal income tax consequences described in “Federal Income Tax
Consequences,” potential investors should consider the state and local tax
consequences of the acquisition, ownership, and disposition of the Securities
offered hereunder. State tax law may differ substantially from the corresponding
federal tax law, and the discussion above does not purport to describe any
aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their own tax advisors with respect
to the
various tax consequences of investments in the Securities offered
hereunder.
ERISA
CONSIDERATIONS
The
Employee Retirement Income Security Act of 1974, as amended (“ERISA”
) and
the Code impose certain requirements on employee benefit plans and on certain
other retirement plans and arrangements, including individual retirement
accounts, individual retirement annuities, Keogh plans and collective investment
funds and separate accounts in which such plans, accounts or arrangements
are
invested, that are subject to Title I of ERISA and Section 4975 of the Code
(“Plans”)
and on
persons who are fiduciaries with respect to such Plans in connection with
the
investment of Plan assets. Certain employee benefit plans, such as governmental
plans (as defined in ERISA Section 3(32)), and, if no election has been made
under Section 410(d) of the Code, church plans (as defined in Section 3(33)
of
ERISA) are not subject to ERISA requirements. However, such plans may be
subject
to the provisions of other applicable federal, state and local law
(“Similar
Law”)
materially similar to the foregoing provisions of ERISA and the Code. Any
such
plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules
set
forth in Section 503 of the Code.
ERISA
generally imposes on Plan fiduciaries certain general fiduciary requirements,
including those of investment prudence and diversification and the requirement
that a Plan’s investments be made in accordance with the documents governing the
Plan. In addition, ERISA and the Code prohibit a broad range of transactions
involving assets of a Plan and persons (“Parties
in Interest”
as
defined in Section 3(14) of ERISA or “Disqualified
Persons”
as
defined in Section 4975(3)(2) of the Code) who have certain specified
relationships to the Plan unless a statutory or administrative exemption
is
available. Certain Parties in Interest or Disqualified Persons that participate
in a prohibited transaction may be subject to an excise tax imposed pursuant
to
Section 4975 of the Code, unless a statutory or administrative exemption
is
available. These prohibited transactions generally are set forth in Sections
406
and 407 of ERISA and Section 4975 of the Code.
A
Plan’s
investment in Securities may cause the Mortgage Loans, Contracts, Unsecured
Home
Improvement Loans and other assets included in a related Trust Fund to be
deemed
assets of such Plan. Section 2510.3-101 of the regulations of the United
States
Department of Labor (“DOL”),
as
modified by Section 3(42) of ERISA, provides that when a Plan acquires an
equity
interest in an entity, the Plan’s assets include both such equity interest and
an undivided interest in each of the underlying assets of the entity, unless
certain exceptions not applicable here apply, or unless the equity participation
in the entity by “benefit plan investors” (i.e.,
Plans
and entities that include assets of Plans by reason of such Plan’s investment in
such entity) is not “significant”, both as defined therein. For this purpose, in
general, equity participation by benefit plan investors will be “significant” on
any date if 25% or more of the value of any Class of equity interests in
the
entity is held by benefit plan investors. To the extent the Securities are
treated as equity interests for purposes of DOL regulations section 2510.3-101,
as modified by Section 3(42) of ERISA, equity participation in a Trust Fund
will
be significant on any date if immediately after the most recent acquisition
of
any Security, 25% or more of any Class of Securities is held by benefit plan
investors.
Any
person who has discretionary authority or control respecting the management
or
disposition of Plan assets, and any person who provides investment advice with
respect to such assets for a fee, is a fiduciary of the investing Plan. If
the
Mortgage Loans, Contracts, Unsecured Home Improvement Loans and other assets
included in a Trust Fund constitute Plan assets, then any party exercising
management or discretionary control regarding those assets, such as the Servicer
or Master Servicer, may be deemed to be a Plan “fiduciary” and thus subject to
the fiduciary responsibility provisions and prohibited transaction provisions
of
ERISA and the Code with respect to the investing Plan. In addition, if the
Mortgage Loans, Contracts, Unsecured Home Improvement Loans and other assets
included in a Trust Fund constitute Plan assets, the purchase of Securities
by a
Plan, as well as the operation of the Trust Fund, may constitute or involve
a
prohibited transaction under ERISA and the Code.
123
On
May14, 1993, the DOL granted to NationsBank Corporation, the predecessor to
Bank of
America Corporation, the corporate parent of Banc of America Securities LLC,
an
individual administrative exemption, Prohibited Transaction Exemption
(“PTE“)
93-31,
as amended by PTE 97-34, PTE 2000-58, PTE 2002-41 and PTE 2007-05 (the
“Exemption”),
which
generally exempts from the application of the prohibited transaction provisions
of Sections 406(a) and 407 of ERISA, and the excise taxes imposed on such
prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain
transactions, among others, relating to the servicing and operation of mortgage
pools and the purchase, sale and holding of Securities underwritten by an
Underwriter (as hereinafter defined), that (a) represent a beneficial
ownership interest in the assets of a Trust Fund and entitle the holder the
pass-through payments of principal, interest and/or other payments made with
respect to the assets of the Trust Fund or (b) are denominated as a debt
instrument and represent an interest in a REMIC or certain other specified
entities, provided that certain conditions set forth in the Exemption are
satisfied. For purposes of this Section “ERISA Considerations,” the term
“Underwriter”
shall
include (a) Bank of America Corporation, (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by
or
under common control with Bank of America Corporation, including Banc of
America
Securities LLC, and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager
with
respect to a Class of Securities.
The
Exemption sets forth five general conditions which must be satisfied for
a
transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder. First, the acquisition of Securities
by a Plan must be on terms that are at least as favorable to the Plan as
they
would be in an arm’s-length transaction with an unrelated party. Second, the
Securities at the time of acquisition by the Plan must be rated in one of
the
four highest generic rating categories by Standard & Poor’s, a division of
The McGraw-Hill Companies, Inc. (“S&P”),
Moody’s Investors Service, Inc. (“Moody’s”),
Fitch
Ratings (“Fitch”)
or
DBRS. Third, the Trustee cannot be an affiliate of any member of the Restricted
Group other than an Underwriter; the “Restricted
Group”
consists of the Underwriter, the Depositor, the Trustee, the Master Servicer,
any Servicer, any insurer and any obligor with respect to Assets constituting
more than 5% of the aggregate unamortized principal balance of the Assets
in the
related Trust Fund as of the date of initial issuance of the Securities.
Fourth,
the sum of all payments made to and retained by the Underwriter(s) must
represent not more than reasonable compensation for underwriting the Securities;
the sum of all payments made to and retained by the Depositor pursuant to
the
assignment of the Assets to the related Trust Fund must represent not more
than
the fair market value of such obligations; and the sum of all payments made
to
and retained by the Servicer must represent not more than reasonable
compensation for such person’s services under the applicable Agreement and
reimbursement of such person’s reasonable expenses in connection therewith.
Fifth, the investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities Act of 1933,
as
amended. In addition, the Trust Fund must meet the following requirements:
(i) the assets of the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) securities
evidencing interests in such other investment pools must have been rated
in one
of the four highest generic rating categories by S&P, Moody’s, Fitch or DBRS
for at least one year prior to the Plan’s acquisition of the securities; and
(iii) securities evidencing interests in such other investment pools must
have been purchased by investors other than Plans for at least one year prior
to
any Plan’s acquisition of the Securities.
A
fiduciary of a Plan contemplating purchasing a Security must make its own
determination that the general conditions set forth above will be satisfied
with
respect to such Security. In addition, any Securities representing a beneficial
ownership interest in Unsecured Home Improvement Loans or Revolving Credit
Line
Loans will not satisfy the general conditions of the Exemption.
If
the
general conditions of the Exemption are satisfied, the Exemption may provide
an
exemption from the restrictions imposed by Sections 406(a) and 407 of ERISA
(as
well as the excise taxes imposed by Sections 4975(a) and (b) of the Code by
reason of Sections 4975(c)(1)(A) through (D) of the Code) in connection with
the
direct or indirect sale, exchange, transfer, holding or the direct or indirect
acquisition or disposition in the secondary market of Securities by Plans.
However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of
a
Security on behalf of an “Excluded
Plan”
by
any
person who has discretionary authority or renders investment advice with respect
to the assets of such Excluded Plan. For purposes of the Securities, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
124
If
certain specific conditions of the Exemption are also satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(b)(1)
and
(b)(2) of ERISA and the taxes imposed by Sections 4975(a) and (b) of the
Code by
reason of Section 4975(c)(1)(E) of the Code in connection with (1) the
direct or indirect sale, exchange or transfer of Securities in the initial
issuance of Securities between the Depositor or an Underwriter and a Plan
when
the person who has discretionary authority or renders investment advice with
respect to the investment of Plan assets in the Securities is (a) an
obligor with respect to 5% or less of the fair market value of the Assets
or
(b) an affiliate of such a person, (2) the direct or indirect
acquisition or disposition in the secondary market of Securities by a Plan
and
(3) the holding of Securities by a Plan.
Further,
if certain specific conditions of the Exemption are satisfied, the Exemption
may
provide an exemption from the restrictions imposed by Sections 406(a), 406(b)
and 407 of ERISA, and the taxes imposed by Sections 4975(a) and (b) of the
Code
by reason of Section 4975(c) of the Code for transactions in connection with
the
servicing, management and operation of the Trust Fund. The Depositor expects
that the specific conditions of the Exemption required for this purpose will
be
satisfied with respect to the Securities so that the Exemption would provide
an
exemption from the restrictions imposed by Sections 406(a) and (b) of ERISA
(as
well as the excise taxes imposed by Sections 4975(a) and (b) of the Code
by
reason of Section 4975(c) of the Code) for transactions in connection with
the
servicing, management and operation of the Mortgage Pools, provided that
the
general conditions of the Exemption are satisfied.
The
Exemption also may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the
Code
if such restrictions are deemed to otherwise apply merely because a person
is
deemed to be a “party in interest” (within the meaning of Section 3(14) of
ERISA) or a “disqualified person” (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan by virtue of providing services
to
the Plan (or by virtue of having certain specified relationships to such
a
person) solely as a result of the Plan’s ownership of Securities.
The
Exemption was amended by PTE 97-34, 62 Fed. Reg. 39021 (July 21, 1997), which,
among other changes, permits the inclusion of a pre-funding account in a
trust
fund, provided that the following conditions are met: (a) the pre-funding
account may not exceed 25% of the total amount of certificates being offered;
(b) additional obligations purchased generally must meet the same terms and
conditions as those of the original obligations used to create the trust
fund;
(c) the transfer of additional obligations to the trust during the
pre-funding period must not result in the certificates receiving a lower
rating
at the termination of the pre-funding period than the rating that was obtained
at the time of the initial issuance of the certificates; (d) the weighted
average interest rate for all of the obligations in the trust at the end
of the
pre-funding period must not be more than 100 basis points less than the weighted
average interest rate for the obligations which were transferred to the trust
on
the closing date; (e) the characteristics of the additional obligations
must be monitored to confirm that they are substantially similar to those
which
were acquired as of the closing date either by a credit support provider
or
insurance provider independent of the sponsor or by an independent accountant
retained by the sponsor that confirms such conformance in writing; (f) the
pre-funding period must be described in the prospectus or private placement
memorandum provided to investing plans; and (g) the trustee of the trust
must be a substantial financial institution or trust company experienced
in
trust activities and familiar with its duties, responsibilities and liabilities
as a fiduciary under ERISA.
Further,
the pre-funding period must be a period beginning on the closing date and ending
no later than the earliest to occur of (x) the date the amount on deposit
in the pre-funding account is less than the minimum dollar amount specified
in
the pooling and servicing agreement; (y) the date on which an event of
default occurs under the pooling and servicing agreement; or (z) the date
which is the later of three months or 90 days after the closing date. It is
expected that the Pre-Funding Account will meet all of these
requirements.
To
the
extent the Securities are not treated as equity interests for purposes of DOL
regulations section 2510.3-101, as modified by Section 3(42) of ERISA, a Plan’s
investment in such Securities (“Non-Equity
Securities”)
would
not cause the assets included in a related Trust Fund to be deemed Plan assets.
However, the Depositor, the Servicer, the Trustee, or Underwriter may be the
sponsor of or investment advisor with respect to one or more Plans. Because
such
parties may receive certain benefits in connection with the sale of Non-Equity
Securities, the purchase of Non-Equity Securities using Plan assets over which
any such parties has investment authority might be deemed to be a violation
of
the prohibited transaction rules of ERISA and the Code for which no exemption
may be available. Accordingly, Non-Equity Securities may not be purchased using
the assets of any Plan if any of the Depositor, the Servicer, the Master
Servicer, the Trustee or Underwriter has investment authority with respect
to
such assets.
125
In
addition, certain affiliates of the Depositor might be considered or might
become Parties in Interest or Disqualified Persons with respect to a Plan.
Also,
any holder of Securities, because of its activities or the activities of
its
respective affiliates, may be deemed to be a Party in Interest or Disqualified
Person with respect to certain Plans, including but not limited to Plans
sponsored by such holder. In either case, the acquisition or holding of
Non-Equity Securities by or on behalf of such a Plan could be considered
to give
rise to an indirect prohibited transaction within the meaning of ERISA and
the
Code, unless it is subject to one or more statutory or administrative exemptions
such as Prohibited Transaction Class Exemption (“PTCE”)
84-14,
which exempts certain transactions effected on behalf of a Plan by a “qualified
professional asset manager”, PTCE 90-1, which exempts certain transactions
involving insurance company pooled separate accounts, PTCE 91-38, which exempts
certain transactions involving bank collective investment funds, PTCE 95-60,
which exempts certain transactions involving insurance company general accounts,
or PTCE 96-23, which exempts certain transactions effected on behalf of a
Plan
by certain “in-house” asset managers. In addition, Section 408(b)(17) of ERISA
may provide a statutory exemption for prohibited transactions between a Plan
and
certain service providers provided that that there is adequate consideration.
It
should be noted, however, that even if the conditions specified in one or
more
of these exemptions are met, the scope of relief provided by these exemptions
may not necessarily cover all acts that might be construed as prohibited
transactions.
Any
Plan
fiduciary which proposes to cause a Plan to purchase Securities should consult
with its counsel with respect to the potential applicability of ERISA and
the
Code to such investment, the availability of the exemptive relief provided
in
the Exemption and the potential applicability of any other prohibited
transaction exemption in connection therewith. In particular, a Plan fiduciary
which proposes to cause a Plan to purchase Securities representing a beneficial
ownership interest in a pool of single-family residential first mortgage
loans,
a Plan fiduciary should consider the applicability of PTCE 83-1, which provides
exemptive relief for certain transactions involving mortgage pool investment
trusts. The prospectus supplement with respect to a Series of Securities
may
contain additional information regarding the application of the Exemption,
PTCE
83-1 or any other exemption, with respect to the Securities offered thereby.
In
addition, any Plan fiduciary that proposes to cause a Plan to purchase Strip
Securities should consider the federal income tax consequences of such
investment.
Fiduciaries of plans not subject to ERISA or the Code, such as governmental
plans or church plans, should consider the application of any applicable
Similar
Law, as well as the need for and the availability of exemptive relief under
such
Similar Law.
Any
Plan
fiduciary considering whether to purchase a Security on behalf of a Plan
should
consult with its counsel regarding the applicability of the fiduciary
responsibility and prohibited transaction provisions of ERISA and the Code
to
such investment.
The
sale
of Securities to a Plan is in no respect a representation by the Depositor
or
the Underwriter that this investment meets all relevant legal requirements
with
respect to investments by Plans generally or any particular Plan, or that this
investment is appropriate for Plans generally or any particular
Plan.
LEGAL
INVESTMENT
As
will
be specified in the applicable prospectus supplement, certain Classes of the
Securities will constitute “mortgage related securities “ for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended (“SMMEA”),
so
long as (i) they are rated in one of the two highest rating categories by at
least one Rating Agency and (ii) are part of a Series representing interests
in
a Trust Fund consisting of Mortgage Loans originated by certain types of
originators specified in SMMEA and secured by first liens on real estate. The
appropriate characterization of those Securities not qualifying as “mortgage
related securities” for purposes of SMMEA (“Non-SMMEA
Securities”)
under
various legal investment restrictions, and thus the ability of investors subject
to these restrictions to purchase such Securities, may be subject to significant
interpretive uncertainties. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements, or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the Non-SMMEA
Securities constitute legal investments for them.
126
Classes
which qualify as “mortgage related securities” will constitute legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including but not limited to depository institutions,
insurance companies and pension funds) created pursuant to or existing under
the
laws of the United States or of any state (including the District of Columbia
and Puerto Rico) whose authorized investments are subject to state regulation,
to the same extent that, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any agency
or
instrumentality thereof constitute legal investments for such entities. Pursuant
to SMMEA, a number of states enacted legislation, on or before the October
3,
1991 cut-off for such enactments, limiting to varying extents the ability
of
certain entities (in particular, insurance companies) to invest in “mortgage
related securities” secured by loans on residential, or mixed residential and
commercial properties, in most cases by requiring the affected investors
to rely
solely upon existing state law, and not SMMEA. Pursuant to Section 347 of
the
Riegle Community Development and Regulatory Improvement Act of 1994, which
amended the definition of “mortgage related security” to include, in relevant
part, Securities satisfying the rating and qualified originator requirements
for
“mortgage related securities,” but evidencing interests in a Trust Fund
consisting, in whole or in part, of first liens on one or more parcels of
real
estate upon which are located one or more commercial structures, states were
authorized to enact legislation, on or before September 23, 2001, specifically
referring to Section 347 and prohibiting or restricting the purchase, holding
or
investment by state-regulated entities in those types of Securities.
Accordingly, the investors affected by such legislation will be authorized
to
invest in the Offered Securities only to the extent provided in such
legislation.
SMMEA
also amended the legal investment authority of federally-chartered depository
institutions as follows: federal savings and loan associations and federal
savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national
banks
may purchase mortgage related securities for their own account without regard
to
the limitations generally applicable to investment securities set forth in
12 U.
S. C. §24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, the OCC has
amended 12 C. F. R. Part 1 to authorize national banks to purchase and sell
for
their own account, without limitation as to a percentage of the bank’s capital
and surplus (but subject to compliance with certain general standards in
12 C.
F. R. §1.5 concerning “safety and soundness” and retention of credit
information), certain “Type IV securities,” defined in 12 C. F. R. §1.2(m) to
include certain “residential mortgage-related securities.” As so defined,
“residential mortgage-related security” means, in relevant part, “mortgage
related security” within the meaning of SMMEA. The National Credit Union
Administration (“NCUA”
) has
adopted rules, codified at 12 C.F.R. Part 703, which permit federal credit
unions to invest in “mortgage related securities,” other than stripped mortgage
related securities (unless the credit union complies with the requirements
of 12
C.F.R. § 703.16(e) for investing in those securities), residual interests in
mortgage related securities and commercial mortgage related
securities,
subject
to compliance with general rules governing investment policies and practices;
however, credit unions approved for the NCUA’s “investment pilot program” under
12 C.F.R. § 703.19 may be able to invest in those prohibited forms of
securities.
The OTS
has issued Thrift Bulletin 13a (December 1, 1998), “ Management of Interest Rate
Risk, Investment Securities, and Derivative Activities” and
Thrift Bulletin 73a (December 18, 2001), “Investing in Complex Securities,”
which
thrift institutions subject to the jurisdiction of the OTS should consider
before investing in any of the Offered Securities.
All
depository institutions considering an investment in the Offered Securities
should review the “Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities” of the Federal Financial Institutions
Examination Council, which has been adopted by the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the OCC
and
the OTS, effective May 26, 1998, and by the NCUA, effective October 1, 1998.
This policy statement sets forth general guidelines which depository
institutions must follow in managing risks (including market, credit, liquidity,
operational (transaction), and legal risks) applicable to all securities
(including mortgage pass-through securities and mortgage-derivative products)
used for investment purposes.
Investors
whose investment activities are subject to regulation by federal or state
authorities should review rules, policies, and guidelines adopted from time
to
time by those authorities before purchasing any Class of the Offered Securities,
as certain Classes may be deemed unsuitable investments, or may otherwise be
restricted, under those rules, policies, or guidelines (in certain instances
irrespective of SMMEA).
127
The
foregoing does not take into consideration the applicability of statutes,
rules,
regulations, orders, guidelines, or agreements generally governing investments
made by a particular investor, including, but not limited to, “prudent investor”
provisions, percentage-of-assets limits, provisions which may restrict or
prohibit investment in securities which are not “interest-bearing” or
“income-paying,” and, with regard to any Class of Offered Securities issued in
book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Except
as
to the status of certain Classes of Offered Securities as “mortgage related
securities,” no representations are made as to the proper characterization of
the Offered Securities for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase any Offered Securities under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity
of
the Offered Securities.
Accordingly,
all investors whose investment activities are subject to legal investment
laws
and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their legal advisors in determining whether
and
to what extent the Offered Securities of any Class constitute legal investments
or are subject to investment, capital or other restrictions and, if applicable,
whether SMMEA has been overridden in any jurisdiction relevant to such
investor.
METHODS
OF DISTRIBUTION
The
Securities offered hereby and by the supplements to this prospectus will
be
offered in Series. The distribution of the Securities may be effected from
time
to time in one or more transactions, including negotiated transactions, at
a
fixed public offering price or at varying prices to be determined at the
time of
sale or at the time of commitment therefor. If so specified in the related
prospectus supplement, the Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Banc of America Securities LLC (“Banc
of America Securities”)
acting
as underwriter with other underwriters, if any, named therein. In such event,
the prospectus supplement may also specify that the underwriters will not
be
obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Depositor. In connection
with
the sale of the Securities, underwriters may receive compensation from the
Depositor or from purchasers of the Securities in the form of discounts,
concessions or commissions. The prospectus supplement will describe any such
compensation paid by the Depositor.
Alternatively,
the prospectus supplement may specify that the Securities will be distributed
by
Banc of America Securities acting as agent or in some cases as principal
with
respect to Securities which it has previously purchased or agreed to purchase.
If Banc of America Securities acts as agent in the sale of Securities, Banc
of
America Securities will receive a selling commission with respect to each
Series
of Securities, depending on market conditions, expressed as a percentage
of the
aggregate principal balance of the related Assets as of the Cut-off Date.
The
exact percentage for each Series of Securities will be disclosed in the related
prospectus supplement. To the extent that Banc of America Securities elects
to
purchase Securities as principal, Banc of America Securities may realize
losses
or profits based upon the difference between its purchase price and the sales
price.
In
addition, the prospectus supplement may specify that the Securities may be
offered by direct placements by the Depositor with investors, in which event
the
Depositor will be an underwriter with respect to the Securities, or by inclusion
as underlying securities backing another series of asset-backed securities
issued by an entity of which the Depositor or an affiliate of the Depositor
may
act as the depositor. In the event that the Depositor or an affiliate of the
Depositor acts as depositor with respect to the other series of asset-backed
securities, the Depositor or its affiliate will be an underwriter with respect
to the underlying securities.
The
prospectus supplement with respect to any Series offered other than through
underwriters will contain information regarding the nature of such offering
and
any agreements to be entered into between the Depositor and purchasers of
Securities of such Series.
128
The
Depositor will indemnify Banc of America Securities and any underwriters
against
certain civil liabilities, including liabilities under the Securities Act
of
1933, or will contribute to payments Banc of America Securities and any
underwriters may be required to make in respect thereof.
In
the
ordinary course of business, Banc of America Securities and the Depositor
may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor’s mortgage loans
pending the sale of such mortgage loans or interests therein, including the
Securities.
The
Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be “underwriters”
within the meaning of the Securities Act of 1933 in connection with reoffers
and
sales by them of Securities. Securityholders should consult with their legal
advisors in this regard prior to any such reoffer or sale.
As
to
each Series of Securities, only those Classes rated in one of the four highest
rating categories by any Rating Agency will be offered hereby. Any unrated
Class
may be initially retained by the Depositor, and may be sold by the Depositor
at
any time to one or more institutional investors.
LEGAL
MATTERS
The
legality of, including the federal income tax matters related to the Securities
of a Series, will be passed upon for the Depositor by Hunton & Williams LLP,
New York, New York or Cadwalader, Wickersham & Taft LLP, New York, New
York.
FINANCIAL
INFORMATION
A
new
Trust Fund will be formed with respect to each Series of Securities and no
Trust
Fund will engage in any business activities or have any assets or obligations
prior to the issuance of the related Series of Securities. Accordingly, no
financial statements with respect to any Trust Fund will be included in this
prospectus or in the related prospectus supplement.
RATING
It
is a
condition to the issuance of any Class of Offered Securities that they shall
have been rated not lower than investment grade, that is, in one of the four
highest rating categories, by at least one nationally recognized statistical
rating organization (“Rating
Agency“).
Ratings
on mortgage pass-through securities address the likelihood of receipt by
Securityholders of all distributions on the underlying mortgage loans. These
ratings address the structural, legal and issuer-related aspects associated
with
such securities, the nature of the underlying assets and the credit quality
of
the guarantor, if any. Ratings on mortgage pass-through securities and other
asset-backed securities do not represent any assessment of the likelihood
of
principal prepayments by borrowers or of the degree by which such prepayments
might differ from those originally anticipated. As a result, securityholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped interest securities in extreme cases might fail to recoup their
initial
investments.
A
security rating is not a recommendation to buy, sell or hold securities and
may
be subject to revision or withdrawal at any time by the assigning rating
organization.
REPORTS
TO SECURITYHOLDERS
The
Trustee will prepare and forward to the Securityholders of each Series
statements containing information with respect to principal and interest
payments and the related Trust Fund, as described under “Description of the
Securities—Reports to Securityholders.” Copies of these statements will be filed
with the Commission through its EDGAR system located at “http://www.sec.gov”
under the name of the Issuing Entity as an exhibit to the Issuing Entity’s
monthly distribution reports on Form 10-D for each Series of Securities for
so
long as the Issuing Entity is subject to the reporting requirement of the
Securities Exchange Act of 1934, as amended. In addition, each party to the
servicing function for a Series of Securities (generally the Trustee and the
Servicer (and any Master Servicer)) will furnish to the Trustee or Master
Servicer, as applicable, the compliance statements, Assessments of Compliance
and Attestation Reports detailed under “Description of the Agreements—Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements—Evidence as to Compliance.” Copies of these statements and reports
will be filed with the Commission under the name of the Issuing Entity as an
exhibit to the Issuing Entity’s annual statement on Form 10-K for each Series of
Securities.
129
WHERE
YOU CAN FIND MORE INFORMATION
The
Depositor filed a registration statement (the “Registration
Statement”)
relating to the Securities with the Securities and Exchange Commission (the
“Commission”).
This
prospectus is part of the Registration Statement, but the Registration Statement
includes additional information.
Copies
of
the Registration Statement and any other materials the Depositor files with
the
Commission, including distribution reports on Form 10-D, annual reports on
Form
10-K, current reports on Form 8-K and amendments to these reports (collectively,
“Periodic
Reports”)
may be
read and copied at the Commission’s Public Reference Room at 100 F Street N.E.,
Washington, D.C. 20549. Information concerning the operation of the Commission’s
Public Reference Room may be obtained by calling the Commission at (800)
SEC-0330. The Commission also maintains a site on the World Wide Web at
“http://www.sec.gov” at which you can view and download copies of reports, proxy
and information statements and other information filed electronically through
the EDGAR system. The Depositor has filed the Registration Statement, including
all exhibits, and will file Periodic Reports through the EDGAR system and
therefore such materials should be available by logging onto the Commission’s
Web site. Copies of any documents incorporated to this prospectus by reference
will be provided at no cost to each person, including any beneficial owner,
to
whom a prospectus is delivered upon written or oral request directed to Asset
Backed Funding Corporation, 214 North Tryon Street, Charlotte, North Carolina28255, telephone number (704) 386-2400.
Copies
of
filed Periodic Reports relating to an Issuing Entity will also be available
on
the applicable Trustee’s website on the same day they are filed through the
EDGAR system as described under “Reports to Certificateholders” or “Reports to
Noteholders,” as the case may be, in the related prospectus
supplement.
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
The
Commission allows the Depositor to “incorporate by reference” information it
files with the Commission, which means that the Depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Information that the Depositor files later with the Commission will
automatically update the information in this prospectus. In all cases, you
should rely on the later information rather than on any different information
included in this prospectus or the accompanying prospectus supplement. The
Depositor incorporates by reference any future monthly distribution reports
on
Form 10-D and any current reports on Form 8-K filed by or on behalf of the
Issuing Entity until the termination of the offering of the related Series
of
Securities.
Copies
of
any documents incorporated to this prospectus by reference will be provided
at
no cost to each person, including any beneficial owner, to whom a prospectus
is
delivered upon written or oral request directed to Asset Backed Funding
Corporation, 214 North Tryon Street, Charlotte, North Carolina28255, telephone
number (704) 386-2400.
130
INDEX
OF PROSPECTUS DEFINITIONS
Terms
Page
Accrual
Securities
30
Accrued
Security Interest
32
Adjustable
Rate Assets
18
Agreement
47
ARM
Contracts
22
ARM
Loans
20
ARM
Unsecured Home Improvement Loans
21
Assessment
of Compliance
58
Asset
Conservation Act
81
Asset
Group
30
Asset
Seller
18
Assets
18
Attestation
Report
59
Auction
Administrator
47
Auction
Distribution Date
46
Auction
Securities
46
Available
Distribution Amount
31
Balloon
Payment Assets
18
Banc
of America Securities
128
Bank
of America
29
Bankruptcy
Code
78
Bankruptcy
Loss
65
Bankruptcy
Loss Amount
65
Beneficial
Owners
40
Bi-weekly
Assets
18
Book-Entry
Securities
30
Buy
Down Assets
18
Buydown
Funds
92
Buydown
Mortgage Loans
26
Buydown
Period
26
California
Military Code
84
Capitalized
Interest Account
23
Cash
Flow Agreement
70
CERCLA
80
Certificates
30
Class
30
Cleanup
Costs
80
Closing
Date
2
Code
89
Collection
Account
51
Collection
Period
31
Combined
Loan-to-Value Ratio
19
Commission
130
Companion
Class
35
Component
33
contract
borrower
73
Contract
Lender
73
Contract
Rate
22
Contracts
18
Convertible
Assets
18
Cooperatives
19
CPR
25
Cut-off
Date
20
Cut-off
Date
2
Debt
Securities
89
Definitive
Securities
30
Deposit
Trust Agreement
47
Depositor
2
Determination
Date
30
Disqualified
Organization
103
Disqualified
Persons
123
Distribution
Account
51
Distribution
Date
24
DOL
123
DTC
41
electing
large partnership
103
ERISA
123
Euroclear
Operator
42
European
Depositaries
40
Excess
Bankruptcy Losses
66
Excess
Fraud Losses
65
excess
servicing
113
Excess
Special Hazard Losses
65
Exchange
Act
41
Excluded
Plan
124
Exemption
124
Financial
Intermediary
40
Fitch
124
Fraud
Loss
65
Fraud
Loss Amount
65
GEM
Assets
18
GPM
Assets
18
Grantor
Trust Fund
89
Grantor
Trust Securities
89
Home
Equity Loans
19
Home
Improvement Contracts
19
HOPA
84
Increasing
Payment Assets
18
Indenture
47
Indenture
Servicing Agreement
47
Indenture
Trustee
48
Indirect
Participants
40
Insolvency
Laws
78
Insurance
Proceeds
31
Interest
Accrual Period
24
Interest
Reduction Assets
18
IRS
55
Issuing
Entity
2
Land
Sale Contracts
19
Level
Payment Assets
18
Liquidation
Proceeds
31
Lock-out
Date
21
Lock-out
Period
21
Manufactured
Home
22
131
Mark
to Market Regulations
106
Master
Servicer
48
MERS
49
Moody’s
124
Mortgage
Interest Rate
20
Mortgage
Loans
18
Mortgage
Notes
19
Mortgaged
Properties.
19
Mortgages
19
Multifamily
Mortgage Loan
19
Multifamily
Property
19
National
Housing Act
20
NCUA
127
new
partnership
120
Non-Equity
Securities
125
Non-Pro
Rata Security
93
Nonrecoverable
Advance
37
Non-SMMEA
Securities
126
Non-U.S.
Holder
45
Notes
30
OCC
29
Offered
Securities
30
OID
Regulations
89
old
partnership
120
Originator
19
OTS
82
PAC
34
PAC
I
34
PAC
II
34
Par
Price
47
Parity
Act
82
Participants
40
Parties
in Interest
123
Partnership
Securities
89
Partnership
Trust Fund
89
Pass-Through
Entity
103
Pass-Through
Rate
32
PCBs
80
Periodic
Reports
130
Plans
123
PMI
84
Pooling
and Servicing Agreement
47
Pre-Funded
Amount
23
Pre-Funding
Account
23
Pre-Funding
Period
23
Prepayment
Assumption
93
Prepayment
Charge
21
PTCE
126
PTE
124
Purchase
Price
49
Qualified
Intermediary
45
Rating
Agency
129
RCRA
81
Record
Date
30
Registration
Statement
130
Regular
Securities
90
Regular
Securityholder
92
Related
Proceeds
37
Relevant
Depositary
40
Relief
Act
84
REMIC
89
REMIC
Pool
89
REMIC
Provisions
89
REMIC
Regulations
89
REMIC
Securities
89
REO
Property
38
Residual
Holders
99
Residual
Securities
90
Restricted
Group
124
Retained
Interest
58
Revolving
Credit Line Loans
21
Rules
40
S&P
124
secured-creditor
exemption
81
Securities
30
Security
48
Security
Balance
25
Securityholder
23
Senior
Certificates
30
Senior
Notes
30
Senior
Securities
30
Series
30
Servicer
2
Servicers
48
Servicing
Standard
53
Similar
Law
123
Single
Family Mortgage Loan
19
Single
Family Property
19
SMMEA
126
Special
Hazard Loss
65
Special
Hazard Loss Amount
65
Special
Servicer
60
Sponsor
2
Standard
Securities
111
Startup
Day
90
Step-up
Rate Assets
18
Strip
Securities
30
Stripped
Securities.
114
Stripped
Securityholder
115
Subordinated
Certificates
30
Subordinated
Securities
30
Subsequent
Assets
23
Superliens
80
super-premium
93
TAC
35
Taxable
Mortgage Pools
89
Temporary
Regulations
109
Texas
Home Equity Laws
84
Tiered
REMICs
92
Title
V
83
Title
VIII
83
Trust
30
132
Trust
Fund
30
Trustee
48
U.S.
Person
105
U.S.
Withholding Agent
45
UCC
77
Underlying
Servicing Agreement
47
Underwriter
124
Unsecured
Home Improvement Loans
18
UST
81
Value
19
Voting
Rights
60
Warranting
Party
50
133
$342,014,000
(Approximate)
Asset
Backed Funding Corporation
Depositor
C-BASS
2007-CB5 Trust
Issuing
Entity
Credit-Based
Asset Servicing and Securitization LLC
Sponsor
Litton
Loan Servicing LP
Servicer
C-BASS
Mortgage Loan Asset-Backed Certificates, Series 2007-CB5
PROSPECTUS
SUPPLEMENT
Banc
of America Securities LLC
Barclays
Capital
(Sole
Lead Manager)
(Co-Manager)
We
are
not offering the Offered Certificates in any state where the offer is not
permitted.
We
do not
claim that the information in this prospectus supplement and prospectus is
accurate as of any date other than the dates stated on the respective
covers.
Upon
request, dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the Offered Certificates and with respect to their unsold
allotments or subscriptions. Such delivery obligation may be satisfied by filing
the prospectus supplement and prospectus with the Securities and Exchange
Commission. In addition, upon request, all dealers selling the Offered
Certificates will be required to deliver a prospectus supplement and prospectus
for ninety days following the date of this prospectus supplement.
